In a newly issued report, ‘Tightening Climate Policy to Drive Carbon Offsetting and Emissions Trading,’ ratings agency Fitch Ratings forecasts growth in volume and pricing for carbon offsetting tools, driven by increasing demand from tightening climate policies. The agency estimates demand for carbon offsets will exceed supply by 2025, and states that continued tightening in emission reduction targets may drive a sharp increase in offset prices.

Offsets and carbon reduction credits can be largely categorised into nature-based solutions such as afforestation or land management, and technological solutions where emissions in emerging markets are avoided through the adoption of low-carbon alternatives.

According to the report, global carbon trading jumped by more than a third in 2019 to a record high of $214 billion, with the EU’s Emissions Trading Scheme (ETS) making up about 80% of this volume. Expansion in the  number and scope of ETS systems continues will likely drive increased volumes, with the ongoing phased rollout of China’s national ETS likely to be a significant source of growth going forward.

Tightening climate policies along with the expansion in the use of carbon credits are also expected to drive demand for these tools , as emission offsetting efforts expand beyond sectors where climate abatement costs are moderate, such as utilities, to those where adaptation is more difficult and costly, including heavy industry.

While the Paris Agreement supports collaborative efforts surrounding the design and implementation of international offsets, barriers to the development of a global system are significant, including the treatment of international offsets within country targets. The report notes, however, that incentives for an agreement are significant, as free trading of carbon offsets under a global scheme could cut costs of the Paris Agreement by up to 33% by 2030, or achieve a 50% increase in abatement for equivalent costs by directing mitigation towards lowest-cost options.

According too Fitch, the upward trajectory of carbon prices is likely to affect a wider range of energy-intensive industries, with demand for carbon offsets likely to follow. The agency notes that voluntary markets are already on an upward trajectory, with growing demand from corporates to support net zero emissions targets.