COMMODITIES 2025: Demand for avoidance carbon credits set to remain muted

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

Demand for avoidance carbon credits, including renewable energy, methane collection, and industrial pollutants, is projected to remain subdued in 2025, with market participants not expecting an increase in prices in the secondary market.

The Platts Renewable Energy Current Year price dropped 39% between Jan. 2, when it was first assessed in 2024, and Dec. 20, when Platts assessed the price at $1.10/mtCO2e. This decline is attributed to ongoing integrity concerns plaguing the wider voluntary carbon market, leading to substantial reductions in renewable energy prices. Platts is part of S&P Global Commodity Insights.

A Europe-based trader told Commodity Insights that "it would be good if these credits slowly moved out of the market." They emphasized that, given the current oversupply, new project registrations should be limited to small-scale initiatives in countries recognized as least developed by the UN.

In India, where a significant number of renewable energy carbon projects are located, traders do not foresee an increase in demand for these credits in 2025. This outlook follows the Ministry of Environment, Forest and Climate Change's earlier decision in 2023 to exclude these credits from trading under Article 6.2 of the Paris Agreement.

However, one trader said that low prices might encourage corporations to purchase these credits to offset their Scope 3 emissions. The source added that prices for Gold Standard certified renewable energy carbon credits from India could fall to as low as 65-70 cents/mtCO2e for batches of 100,000 mt in the coming year.

ICVCM move dents trading activity for renewable credits

The Integrity Council for Voluntary Carbon Market decided in August not to grant the high-integrity Core Carbon Principles label to renewable methodologies due to concerns about additionality. This decision further diminished demand for these credits and exacerbated the existing oversupply.

Market participants echoed this sentiment in the fourth quarter of 2024, indicating that they do not expect an increase in demand for renewable credits in 2025. Some expressed cautious optimism regarding the approval of the Article 6.2 and 6.4 frameworks during the 29th UN Climate Conference in Baku. A developer/broker based in Turkey mentioned that this approval might support VCM prices moving forward, while another developer noted that progress in compliance markets could positively influence prices in the secondary market.

An India-based developer suggested that the future of renewable energy credits would likely center around compliance markets. They also indicated potential interest from corporations in Southeast Asia, where there are fewer renewable energy projects.

Market looks to CCPs beyond 2025

Looking ahead, the market is focused on the CCPs beyond 2025, yet trading activity remained subdued in 2024. While the ICVCM granted the CCP label to landfill gas credits in June, trading activity has not picked up significantly. An India-based developer noted that "there could be a future for CCP-approved landfill gas," highlighting interest from North and South America, as well as Southeast Asian countries like Thailand and Malaysia.

The Platts Methane Collection Current Year price, which reflects landfill gas credits without a CCP tag sourced from Turkey, was the only credit type in the avoidance complex to end the year higher. This price was assessed at $3.80/mtCO2e on Dec. 20, marking a 23% increase from Jan. 2. This rise was attributed to increased inquiries from buyers and higher offers reported in November.

Despite rising prices for landfill gas credits, demand for credits with the CCP tag did not materialize, leading to sparse trading activity throughout the year. A Europe-based trader said that the CCP commands a minimal premium in the market, indicating that only small clips of CCP are trading, which reflects the market's tepid response to recent developments.

Another Europe-based broker predicted that the CCP premium would not take effect for a couple of years, as the market needs further development in terms of supply and education about the high-integrity label. They estimated that the premium for these credits might range from $1/mtCO2e to a few dollars.

Renewables only eligible for small-scale CORSIA Phase 1

The International Civil Aviation Organization confirmed Dec. 6 that large-scale renewable energy projects are excluded from eligibility under the first phase of the Carbon Offsetting and Reduction Scheme for International Aviation. Only projects generating a maximum of 15 MW have been approved for this phase, which runs from Jan. 1, 2024, to Dec. 31, 2026.

A Southeast Asia-based developer remarked that this exclusion effectively translates to virtually no supply. They suggested that it would have been preferable for only projects in least developed countries to be included. The majority of renewable energy credit supply is located in Turkey, India, and China. An India-based developer stated that the supply of CORSIA Phase 1 eligible credits will depend on how quickly corresponding adjustments are granted. They noted that India is not prepared with the corresponding adjustment process.