How can carbon offsets create new value in a rapidly changing world?

Net zero emissions cannot be achieved without carbon credits, but the volume of credits required to meet climate targets could grow by 40-fold between now and 2035.

The pressures to decarbonise are mounting. More than 130 countries have committed to the Paris Agreement and have set ambitious emissions reductions targets. The number of companies, cities and other organisations making net zero pledges tripled in 2021.

Investors are scrutinising environment, social and governance credentials as they weigh up the risk of stranded assets. The top talent is on the hunt for workplaces that align with their values. And consumers are rewarding climate action with their wallets.

The signposts are all pointing in one direction. But meeting credible decarbonisation commitments can be challenging, costly and complex for businesses, particularly in emissions-intensive sectors.

Essential, expensive and evolving: The outlook for carbon credits and offsets was developed by the EY Net Zero Centre to help companies cut through the complexity, manage the uncertainty and create clear pathways to net zero emissions by 2050.

Why carbon credits are front-and-centre

Carbon credits are an essential part of the business toolkit, supporting earlier and more ambitious net zero commitments.

Meeting net zero can take time and may involve asset turnover or business model evolution. By using offsets to reduce their emissions today, business leaders can make incremental moves that are painless and profitable in the short-term as they move towards net zero in the long term.

But demand for carbon credits is expected to increase at least 20-fold by 2035, with volumes forecast to balloon by 30 to 40 times their current levels if we are to meet our obligations under the Paris Agreement. 

We know competition for carbon offsets will heat up, emissions reductions will scale up, and government regulations will ramp up. While we are confident in the overall direction the world is heading, the pace of market consolidation and technology change remain uncertain.

So, to explore the range of possible carbon credit market outcomes – and the potential costs to businesses – the EY Net Zero Centre modelled four future scenarios to 2050.

The first future scenario, based on the announced plans of companies and countries, assumes no increase in ambition or mitigation effort over time. The second reflects the core commitment of the Paris Agreement. The third and fourth involve more rapid and ambitious emissions reductions consistent with limiting climate change to 1.5°C – one technology-enabled and the other with nature-based removals

Across all four outlooks we found rising demand, a race to quality and higher unit supply costs will make high-quality credits scarce and expensive.   

Rapidly falling technology costs or less ambitious global abatement efforts are likely to see these prices at the lower end of the range. Conversely, ambitious global abatement efforts, technology costs that are slower to come down, or persistent market friction are likely to put prices in the higher end of the range. But either way, the bottom line is clear: carbon credits will be more costly.

How can business leaders prepare?

Start by considering the role carbon offsets will play in your organisation’s decarbonisation strategy. The most appropriate use of offsets will be determined by the same factors that shape the decarbonisation strategy itself: business exposure, stakeholder pressures and opportunity space. 

Ask yourself:

1. What is your emissions intensity? Consider your emissions profile now and into the future under different outlooks. How will emissions intensity change over time? What are the key decision points and options? How do your potential emissions profiles compare to peers and competitors, and to global leaders in your sector?
2. How immediate are the pressures to act? Understand the underlying drivers of stakeholder attitudes and their implications. Consider the potential pace of change, and possible triggers or tipping points that could increase or decrease the pressure to act. 
3. What is the opportunity space for reducing emissions? Identify the most salient types and sources of emissions. Consider how well your asset lifecycle aligns with your desired timeframe for reducing emissions and the technology solutions that could help.