2023 proved to be a pivotal year for the Voluntary Carbon Market (VCM), marked by several developments in its trajectory. As we step into the new year, let's reflect on the past 12 months, specifically the critical insights and milestones that have shaped the VCM, its evolution and the implications for the future. From substantial credit issuances in key methodologies to enhanced project quality, as well as record-breaking credit retirements, 2023 set new benchmarks for the industry.

Credit Issuances: Over the preceding year, project issuances persisted for Afforestation, Reforestation and Restoration (ARR), Improved Forestry Management (IFM), and Cookstove methodologies. A significant observation was the market experiencing a larger influx of ARR credits (674,738t) compared to retirements (281,781t), a trend further exacerbated by issuance delays as a result of complications within registries; this reverses supply trends of previous years. Additionally, it highlights the need for strategic planning regarding the availability of these credit types. As the timeline tightens towards Net Zero target dates, carbon credit availability will decrease, and prices will increase

Enhanced Project Quality through Scrutiny: A heightened focus on project methodologies, particularly the scrutiny of the Reducing Emissions from Deforestation and Forest Degradation (REDD+) methodology, was a key theme of the past year. The integrity concerns of this project type were of particular significance as REDD+ credits represented 63% of total retirements in December 2023. This has prompted a recent modification to the REDD+ methodology by Verra to improve overall project robustness and now we are seeing a REDD+ resurgence. Additional improvements to the Verra ARR methodology are anticipated to provide increased credit quality. The Ten Core Carbon Principles (CCPs) by The Integrity Council for the Voluntary Carbon Market (ICVCM) was also released this year which defines a new standard for determining high-quality credits. The Voluntary Carbon Markets Integrity Initiative (VCMI) also released the Claims Code of Practice to standardise global corporate carbon claims. Such improvements play a crucial role in directing financial resources toward carbon projects around the world as less ambiguity leads to more action. This is a necessity for adhering to the 1.5-degree global climate warming pathway.

Sector-wide Credit Retirements Surge: According to Bloomberg, 2023 was a record year for carbon credit retirements, with an annual increase of 6% compared to 2022. Furthermore, December 2023 witnessed the highest monthly retirements ever recorded, showing a 31% increase compared to December 2022 (source: QCI). 2023 also witnessed a surge in credit retirements in certain sectors when compared to the preceding year. Professional Service Firms recorded the highest increase, with a notable 69% uptick in annual credit retirements from 2022 to 2023. Ground and Maritime Transportation also experienced a substantial rise, with a 34% increase. This trend is anticipated to persist, aligning with organisations across sectors inching closer to climate goals.

VCM participants decarbonise faster: Research from Ecosystem Marketplace and Trove was released last year reporting that companies that actively engage with the VCM and use material quantities of carbon credits are decarbonising at a significantly quicker rate than those organisations which are choosing not to use the VCM and focusing only on internal decarbonisation. Together, both reports underscore the effectiveness of VCM as a catalyst for accelerating decarbonisation in corporate sectors. By leveraging external carbon credits in addition to internal measures, companies are decarbonising faster than their peers within their supply chains, highlighting the VCM's role as a valuable tool in the global effort to mitigate climate change.

Article 6 promotes future VCM activity: Article 6 of the Paris Agreement permits countries to voluntarily cooperate and trade with each other to meet emissions reduction targets in their Nationally Determined Contributions (NDCs). However, the expected clarity on this article was not achieved from the discussions at COP 28. Progress has been made by countries such as Singapore and Switzerland in organising the transfer of mitigation outcomes between nations in an effort to mobilise investment in developing countries. However, the global adoption of Article 6.2 by the end of 2023 was not as significant as commentators had anticipated at the beginning of the year. This coupled with a breakdown of Article 6.4 negotiations at the COP 28 discussions means all eyes are on the VCM to aid the delivery of country as well as corporate emissions reductions targets around the world.

Summing Up 2023: On balance, 2023 unfolded as another positive chapter for the VCM, marked by significant increases in credit issuances, enhanced project quality, a historic high for credit retirement and COP 28 inadvertently favouring the VCM. For 2024 we must now see a step change in the number credits issued and retired in the market, continuing the trajectory of historic number of credits issued and retired in 2023. This will be essential if we are to keep to a 1.5 degree warming pathway.

CFP Energy are well positioned to help provide the step change needed to transition to a low carbon world. We can provide direct access to the VCM either through access to our high-quality carbon portfolio or through exclusive investment opportunities providing finance to new carbon projects. We navigate an ever-changing market by delivering key insights and regulatory changes every week to help you achieve your carbon goals.