This year, companies are improving their climate strategies by integrating carbon offsets. The focus is on projects that create real environmental benefits. With public scrutiny increasing, transparency and quality are top priorities. Top market analysts predict that in 2025, the carbon market will shift. It will emphasize credible, high-integrity solutions. This change will create a stronger, more reliable system for achieving climate goals.
Clearer Rules for Offset Use in 2025
As per Wood Mackenzie, in 2024, independent standards updated 15 offset methods to align with best practices. These changes involve new methods for carbon removal and regional programs.
-
For example, the Science-Based Targets initiative (SBTi) requires companies to cut emissions by 90% across their value chains.
In 2025, SBTi will decide if offsets can apply to Scope 3 emissions or if they will encourage early investments in carbon removal. This decision will provide much-needed clarity for corporate climate plans.
As the year progresses, we can expect more advancements in these methods. They will boost the market’s credibility and reliability.
VCMs Embrace the Shift to Higher-Quality Carbon Credits
MSCI’s latest report on sustainability and climate trends shows big improvements in the quality of voluntary carbon market projects over the past year. Based on their carbon project ratings by mid-2024:
-
Nearly 50% of retired credits were rated B or lower, while only 8% were rated A or AA.
-
Although no projects achieved the highest AAA rating, the progress was evident.
Between Q2 2022 and Q2 2024, the share of the lowest-rated credits (CCC) dropped from 29% to 15%. The use of A or AA credits doubled. This shows a clear shift toward higher integrity and quality in carbon credits.
They analyzed 8,844 firms in the MSCI ACWI Investable Market Index (IMI) and found that firms using carbon credits reported their Scope 1, 2, and 3 emissions more transparently. Those firms were also more likely to set and achieve emission reduction targets more efficiently.
This analysis shows that carbon credits are usually part of larger climate strategies. They are not a replacement for cutting emissions.
Core Carbon Principles Boost Credibility
In 2024, the ICVCM launched Core Carbon Principles (CCPs) to enhance the quality of carbon credits. These principles set strict standards, helping buyers choose reliable offsets. The ICVCM also labeled high-quality projects, guiding businesses toward credible options.
By January 2025, it planned to evaluate 90% of the market, ensuring informed decisions and better-quality credits.
Compliance Markets Go Global
India and Japan have launched hybrid emissions trading systems. Also, ICAO approved six offset standards for aviation under CORSIA. However, a shortage of carbon offsets has pushed prices higher.
Wood Mackenzie revealed,
-
Airlines need over 135 MtCO2e of offsets to keep emissions below 85% of 2019 levels, which highlights more need and demand for solutions.
Clearer guidelines, stricter standards, and rising demand are key for this year’s carbon markets. To achieve carbon reductions, businesses must be proactive and stay focused on their climate goals.
Carbon removal methods are gaining popularity. Two key methods are Direct Air Capture (DACCS) and Bioenergy with Carbon Capture and Storage (BECCS). They are known for their strong impact. These methods can be costly, but better techniques are making them more practical. Still, financing is a major barrier to scaling these technologies.
The graph shows how average prices and the share of carbon offset retirements have changed from 2015 to 2024. Removal offsets saw a sharp rise in prices starting in 2020, reaching about $11 per tCO2e by 2024.
This spike suggests a growing demand for removal offsets, driven by a stronger focus on long-term sustainability and effective carbon reduction solutions.
Carbon Border Taxes: Expanding Beyond the EU
In 2025, the EU is set to provide updates on expanding its Carbon Border Adjustment Mechanism (CBAM). Key areas to watch include:
-
Coverage of indirect emissions in steel, aluminum, and hydrogen sectors.
-
Inclusion of transportation emissions and other materials like organic chemicals.
-
Timeline for adding other sectors under the EU Emissions Trading System (ETS) by 2030.
Importers will soon face financial obligations under CBAM, making carbon accounting essential. The EU will provide flexibility for emissions data, possibly exempting small and medium enterprises. The CBAM Registry will open for non-EU operators in 2025, encouraging companies to work closely with their suppliers.
Beyond the EU, other nations are also adopting carbon border taxes. The UK and Australia are moving forward with their CBAM plans in 2024. Meanwhile, Chile and Taiwan are adding carbon border mechanisms to their pricing systems.
In the US, support is growing for a carbon levy like the Foreign Pollution Fee Act. This is happening alongside a rise in protectionism.
COP29: A Boost for Global Carbon Markets
Last year’s COP29 is driving major growth in global carbon markets by advancing Article 6. It allows governments to buy offsets to meet their climate targets (NDCs). By February 2025, countries will update their NDCs. This will clarify how carbon offsets fit into their plans.
Article 6.2
Article 6.2 enables nations to trade Internationally Transferred Mitigation Outcomes (ITMOs). While some agreements are already in place, low-quality carbon projects remain a concern.
A better collaboration of governments, UN bodies, and voluntary carbon market (VCM) initiatives will be crucial to set clear standards and enhance transparency in carbon trading.
Paris Agreement Carbon Market (PACM)
The Paris Agreement Carbon Market (PACM) helps developing countries build strong carbon trading systems. At COP29, leaders agreed on high standards for project methodologies and social impacts.
Both MSCI and Wood Mackenzie expect detailed rules by 2025. They predict PACM credits will likely enter the market by late 2025. This will offer businesses new opportunities to align with the Paris Agreement.
Subsequently, companies must choose between adopting Article 6’s stricter standards or improving VCM systems. Investors might also face a similar dilemma—wait for Article 6 rules or utilize the current VCM. As Article 6 is expected to boost market credibility, it will also raise future demand by providing clearer guidelines and higher standards.
Governments to Tighten Reins on Carbon Markets
In 2025 and beyond, governments will play a bigger role in carbon markets. They aim to ensure transparency and accountability. For example, the EU plans to launch a Carbon Removal and Carbon Farming (CRCF) framework in 2025. This will include new methodologies. Meanwhile, the US and UK have introduced guiding principles for voluntary carbon markets.
The EU’s Green Claims Directive also bans offset-only claims. Now, European Sustainability Reporting Standards (ESRS) and International Financial Reporting Standards (IFRS) require detailed carbon offset disclosures. Yet, companies will need to adapt to meet these rising transparency standards.
The Carbon Credit Market Beyond 2025
By 2030, the carbon credit market might grow to between $7 and $35 billion, says MSCI. Looking ahead to 2050, the forecast is even brighter, with estimates of $45 to $250 billion. Key trends fueling this growth include:
-
Corporate Climate Goals
-
Rising Demand for Carbon Removal Credits
-
Higher-Quality Credits
As carbon markets continue to evolve, 2025 could be a pivotal year. Companies will likely adopt higher standards and clearer rules. They will also use innovative carbon removal technologies. With stronger government involvement and improved benchmarks, the market is poised for growth. This growth will ensure greater integrity and reliability.
