Voluntary carbon offsets are helping companies and countries meet ambitious climate targets. By purchasing “credits” from projects that remove or reduce carbon output, the private and public sectors hope to mitigate the impact of their emissions in the short term as they work toward eliminating their carbon emissions.

To reach the sustainability goals in the 2015 Paris Climate Accords and various national and company-level targets, Morgan Stanley Research estimates that the world must remove at least 1 gigaton of carbon dioxide per year by 2030, based on analysis of data from Network for Greening the Financial System, though the opportunity for avoidance or reduction credits could be up to 10 gigatons per year. Each carbon offset represents one metric ton of carbon dioxide removed, reduced or avoided in the atmosphere.

“The carbon-offsets market has evolved rapidly, prompting increasing interest from investors and corporates,” says head of ESG fixed income research Carolyn L. Campbell. While offsets should be used only against unavoidable emissions for which there are no other viable alternatives, they represent an important runway while other methods to decarbonize develop, she says. Campbell and her team estimate that about 4,000 carbon-offsets projects have issued credits for roughly 1.7 billion offsets (or 1.7 gigatons of carbon). With 3,800 more projects listed, pre-registered or registered and awaiting credit issuance, the voluntary carbon-offsets market is expected to grow from around $2 billion in 2022 to about $100 billion in 2030 and around $250 billion by 2050.

Just where that growth occurs, however, is largely dependent on three key shifts in the carbon offset market, centered around which credits to buy and whether to buy any at all. Here Morgan Stanley Research outlines the risks, opportunities and emerging trends.

1. From Reduction and Avoidance to Removal
Currently, projects that focus on avoiding or reducing atmospheric emissions of carbon dioxide account for 82% of the offsets market. Buyers of this type of offset get credit for preventing future emissions by, for example, protecting forests or opting for renewable energy over fossil fuels.

2. From Nature to Technology
After 2030, however, technology-based carbon removal will likely outpace nature-based measures. “Indeed, most well-established net-zero models rely on tech-based removal after 2030, seeing upward of 5 gigatons of carbon dioxide removed per year by 2050,” says Campbell

3. From Offsets to Investments

In an ideal world, a company or a country should invest in technologies, improvements and efficiencies to set itself on a path toward absolute zero–that is, no emissions whatsoever–while offsetting current emissions in the interim. Indeed, some companies, most notably certain airlines, are increasingly shifting more of their sustainability budgets to research and development and stepping back from offset purchases. For air carriers, which face sector-specific decarbonization rules and have a high degree of control over the majority of their emissions, the ability to invest in available—albeit expensive and still maturing—tech solutions to help meet decarbonization goals represents a unique case, says Campbell. While the high-emitting steel and cement industries share a similar profile, they aren’t subject to global emissions regulations as airlines are and don’t share the same proximity to consumers either.

The Oaktree

The growth of the voluntary carbon market. The voluntary carbon market is already growing rapidly, and is expected to reach $250 billion by 2050. This growth is being driven by a number of factors, including the increasing number of companies that are setting net-zero emissions targets, and the growing consumer demand for carbon offsets.

The rise of new carbon credit standards. In order to address the challenges of fraud and misrepresentation in the carbon credit market, a number of new carbon credit standards are being developed. These standards are designed to ensure that carbon credits are genuine and that they represent real emissions reductions.
The increasing use of carbon credits to drive innovation. Carbon credits can be used to drive innovation in a number of ways. For example, they can be used to fund research and development into new technologies that can help to reduce emissions. They can also be used to incentivize companies to adopt new practices that can reduce their emissions.