Carbon credit futures fall 90% as major buyer shun the market

(Photo: iStock)

Due to doubts about the effectiveness of forest carbon offset, major carbon buyers such as airlines are beginning to avoid the trading market. This has led to a 90% collapse in carbon futures from their 2021 peak to the present, potentially hindering global carbon reduction efforts.

According to Nikkei Asia, the carbon futures on the Chicago Mercantile Exchange have plummeted due to anticipated weak demand for carbon credits with offset futures that cover airlines' emissions hitting a historical post-listing low in November.

Wael Sawan, the CEO of European energy giant Shell, stated in October that the company has abandoned a plan to spend 100 UAD million annually on carbon offsets. This UK-based company used to purchase carbon credits through private, voluntary markets to offset carbon emissions from liquefied natural gas production and transportation. They had also planned to purchase carbon credits worth 120 million tons of CO2 equivalent annually by the end of 2030.

Private carbon credits typically involve nature-based carbon offset projects, such as forest conservation initiatives. If developers can demonstrate environmental benefits through certification by private institutions, they can issue carbon credits. However, recent examinations by experts, including professors from Cambridge University, after reviewing 18 large-scale forest conservation projects, revealed that the actual emission reduction effect was only 6% of the promised amount.

The Kuamut Rainforest Conservation Project in Sabah, Malaysia. Doubts about the efficiency of forest carbon offset have led major carbon buyers, including airlines, to avoid the trading market. (Photo: Wikimedia Commons)

The private carbon credit market is still relatively small, with a total volume of $1.9 billion in 2022, accounting for less than 1% of the transactions on public emissions trading systems. However, the private trading is generally considered a complementary solution to public initiatives.

Carbon Direct, a U.S. carbon market management company, estimates a 5% decrease in private carbon credit issuance this year. With airlines and energy companies delaying purchases, developers seem to be reducing issuances or postponing projects, potentially causing a significant impact on global carbon reduction efforts.

The political maneuvering at the United Nations Climate Change Conference (COP28) makes it challenging for countries to reach a consensus on the global carbon credit system. Despite this, experts remain optimistic about voluntary carbon credit markets. Jonathan Crook, a regulatory expert from Carbon Market Watch, suggests that if a voluntary standard or program gains favor in some countries, it could set a benchmark and attract significant investment.