Barclays Research - Potencial Do Mercado Voluntário

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Voluntary carbon markets: Close to tipping point – potential for $250bn

market in 10 years' time
Wed Aug 16 2023 ASR
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Special Report
16 A u gu st 2023
Voluntary carbon markets
FOCUS
Close to tipping point – potential for #ESGTransition
#energyrevolution
$250bn market in 10 years’ time
Nature-based solutions have the potential to offset up to 12Gt a

European Integrated Energy
Lydia Rainforth, CFA

year by 2050. The current illiquid, unregulated market for
+44 (0)20 3134 6669
carbon credits is standardising, with the first Core Carbon lydia.rain f o rth @barclays.co m
Barclays, UK
Principle labelled credits to be available late this year. We see
the market as able to grow to up to $250bn in the next decade. ES G Researc h
(i i i )
Maggie O’ Neal
+ 44 (0) 20 7773 6924
maggie.o n eal@barclays.co m
Listen Barclays, UK
(i )
Jordan Isvy
+44 (0) 20 7773 1733

Nature – the missing part of the net-zero puzzle: The first priority of society, governments and
jo rdan .isvy@barclays.co m
businesses alike should be genuine reductions in GHG emissions and decarbonisation. However,
Barclays, UK
there is a need to offset residual emissions in hard-to-abate sectors and, for us, doing something
is better than doing nothing. The potential of nature-based solutions (NBS) – covering forestry,
Investment S c ienc es
carbon farming and blue carbon – is material, at up to 12 Gigatonnes (Gt) a year. Add in credits Chris Stevens
(i i i )
covering emerging technologies, such as Direct Air Capture with Carbon Storage (DACCS) and +44 (0)20 3555 1239
Bioenergy with Carbon Capture and Storage (BECCS), and we estimate the overall market could ch ris.r.stevens@barclays.co m
Barclays, UK
reach in excess of 15Gt a year.
D ata S c ienc e
The voluntary carbon market could reach up to $250bn by 2030E, $1.5tn by 2050E, as
(i i )
Milan Mraz ek
measured by the value of credits issued in a given year: Based on our own Investment
+44 (0)20 7773 1695
Sciences research, and on discussions with industry participants and academics, this report
milan .x.mrazek@barclays.co m
presents a scenario analysis in which we see the voluntary carbon market (VCM) reaching up to
Barclays, UK
Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies
covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision.
This research report has been prepared in whole or in part by equity research analysts based
outside the US who are not registered/qualified as research analysts with FINRA.
This is a Special Report that is not an equity or a debt research report under U.S. FINRA Rules 2241-
2242.
(i)
This author is a debt research analyst in the Fixed Income, Currencies and Commodities Research
department and is neither an equity research analyst nor subject to all of the independence and
disclosure standards applicable to analysts who produce debt research reports under U.S. FINRA
Rule 2242.
(ii)
This author is a member of the Fixed Income, Currencies and Commodities Research department
and is not an equity or debt research analyst.
(iii)
This author is a member of the EMEA Equity Research department who may publish equity and
debt research
FOR ANALYST CERTIFICATION(S) PLEASE SEE PAGE 37 .
FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 37 .
FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 38 .
Completed: 15-Aug-23, 16:34 GMT Released: 16-Aug-23, 04:10 GMT Restricted - External
Barclays | Vo lu n tary carbo n markets
$250bn a year by 2030E compared to less than $500mn today. By 2050E, we see this market as
having the potential to approach $1.5tn a year.
Pricing reflects transitional stage: In our original note from 2020 Nature-based
( solutions &
Article 6 of the Paris Agreement,17 November 2020), we highlighted late 2022 and 2023 as the
years in which we expected to see the tipping point for the voluntary carbon markets. Since
then, much work has been done on establishing Core Carbon Principles and setting up
infrastructure, yet, as debate has intensified over the use of the VCM and the quality of projects,
prices have averaged close to just $2/t this year, down some 80% versus 2022 and over 90%
below the highest-priced regulated market.
Core Carbon Principles developed: The voluntary carbon market is currently unregulated, but
this is set to change, and change quickly. In March 2023 the Integrity Council for Voluntary
Carbon Markets (ICVCM) launched its Core Carbon Principles (CCP) aiming to create a central
marketplace for carbon credits that sets key standards and essentially delivers a benchmark
price against which credits with additional properties can be assessed. The ICVCM announced
that the initial assessment phase for carbon-crediting programs and categories of carbon
credits has been launched and that it expects to begin revealing carbon-crediting programs that
are CCP-eligible and carbon credit categories that are CCP-approved in late 2023. This is a key
step, in our view, with the market having been somewhat in limbo pending this development.
Insights from Investment Sciences: Working alongside our Investment Sciences team and
using data from three major registries over the years 2008-June 2023 accounting for over 1.6bn
credits issued and 755mn credits retired, we can gain a number of insights into this market,
which is up 70x in the past 10 years. Renewables have been the largest source of offsets, with
agricultural credits also growing. Interestingly, the most rapid growth in credits so far in 2023
has been in demand offsets. The top five buyers of carbon offsets by volume are Delta Air Lines,
Volkswagen, Shell, Primax Colombia and Telstra Corp (top 100 buyers are shown
here), but we
see a key role for financial institutions in enabling smaller businesses to generate and claim
credits.
Opex vs. capex: The voluntary carbon market is still developing and increasingly the
verification of projects is important. We see an increased bifurcation of the market between
those companies that can spend capex to deliver a multi-year ladder of projects to build up ex-
ante credits compared to those that require ex-post credits.
Market solutions to help move to net zero: We see four key industries as likely to benefit from
the growth of NBS: energy, finance, agriculture & agricultural tech and finally monitoring &
verification. Those companies investing in building NBS today are likely to face a lower cost of
internalising the carbon externality moving forward.
16 August 2023 2
The Story in 6 Charts
FIGURE 1. E nergy demand continues to grow... FIGURE 2. ...and fossil fuels remain important
EJ pa EJ Oil Natural Gas Coal

Dynamism Deadlock Development
1,000
1,000 Nuclear Hydro Renewables
900
900
800
800
700
700
600 600
500 500
400 400
300 300
200 200
100
100
0
0
1965 1975 1985 1999 2009 2019 2033 2043

Energy mix 2019 Dynamism mix Development Deadlock mix
2050 mix 2050 2050
Source: bp, Equinor, Total, Barclays Research estimates Source: Barclays Research estimates
FIGURE 3. But carbon budgets are running out... FIGURE 4. ...requiring a rapid fall in emissions
Gt CO2 pa Development
gt CO2 pa Dynamism Deadlock
Deadlock
Dynamism 50
2.0 Degree Budget
1.5 Degree Budget

40
30
20
10
1965 1975 1985 1995 2005 2015 2025 2035 2045

2019 2024 2029 2034 2039 2044 2049
Source: bp, UN IPCC, Barclays Research estimates Source: bp, Barclays Research estimates
FIGURE 5. NBS will be critical... FIGURE 6. ...and the market is set togrow rapidly
2,000
nb$
Development
1,500 Dynamism
Deadlock
Forestry Carbon Farming
1,000
500
Blue Carbon
2016 2021 2026 2031 2036 2041 2046
Source: Verra, Gold Standard, Barclays Research estimates Source: Barclays Research
16 August 2023 3
A well functioning VCM is crucial to a just transition to
net zero
The voluntary carbon market (VCM) can play a key role in accelerating progress towards net zero
goals. It does so by acting as a vehicle for private capital to flow to developing countries as
payment for decarbonisation services that generate global benefits, but have historically been
provided free. This is important for a number of reasons.
Firstly, the VCM facilitates the transfer of capital to emerging and developing economies which
are osten less integrated into global capital markets. These tend to be regions where mitigation
and adaptation financing needs are greatest. Indeed, estimates for the total yearly climate
finance required in developing and emerging market economies by 2030 are in the $2-3trn
1 2
range (The macroeconomics of the green transition
, 23 May 2023). The IHLEG estimates that,
of the $2.4trn required in EM and developing economies, roughly half can be mobilised
domestically, with the other half (c.$1.2trn) needing to originate externally. Current efforts to
reach these numbers have fallen short by a whole order of magnitude, with the $100bn
international climate commitment still proving elusive Figure

( 7). Continued failure to mobilise
finance for mitigation efforts in developing countries represents a large source of physical
climate risk as this is precisely where emissions are projected to rise the mostFigure
( 8) and
thus where capital has the greatest potential impact on emissions, particularly in facilitating
early-stage transition movements such as the decoupling from coal. A second-level effect of the
VCM is that it sets financial incentives for policymakers to protect carbon sinks, generating
additional positive environmental impacts by protecting nature-based solutions (NBS) as well
as creating positive co-benefits for biodiversity.
FIGURE 7. Flows of international climate financing are still some way FIGURE 8. ...with accompanying large opportunity costs, as emissions
short of meeting needs... are projected to grow most in EM and developing countries
$ bn Gt CO2 emissions
1,200 40
1,000
30
800
20
600
400 10
200
2010 2020 2030 2040 2050

0
Developed economies
2016 2017 2018 2019 2020 2030
Emerging market and developing economies

Int. c l imate financ e d el ivered Int. c l imate financ e p l ed ged
Int. c l imate financ e req uired Total
Source: Barclays Research, OECD (2022) Source: Barclays Research, IEA (2021)
Secondly, the VCM, if implemented correctly, can play a pivotal role by accelerating least-cost
decarbonisation. In order to stay on a 1.5C consistent pathway, emissions need to roughly halve
by the end of the decade, leading to substantial transition risk for heavy emitters, especially in
hard-to-abate sectors (Figure 9). Put together, emissions from hard-to-abate sectors account for
roughly 25% of emissions today, with our own estimates implying that this is set to rise to over
Voluntary carbon markets: COP-26 to create market scale

50% by 2050 ( , 18 October 2021).
Clearly, eliminating residual emissions in sectors such as aviation, steel and cement, where
1
The IEA estimates that investment will need to be in the region of $1.8trn as early as 2030. Similarly, The Independent
High-Level Expert Group on Climate Finance (IHLEG) estimates that approximately $2.4trn will be needed, while the
latest IPCC report provides a figure closer to $3trn.
2
The Independent High-Level Expert Group on Climate Finance (IHLEG)
16 August 2023 4
commercially viable carbon-free alternative technologies are yet to emerge, is likely to come
with a much higher opportunity cost than supporting carbon sinks in developing and emerging
economies. Indeed, with the prospect of reverting to a 1.5C-aligned pathway becoming
increasingly remote, we see a growing need to expand negative emissions to compensate for
overshoot. This can be seen inFigure 10, which shows the gap between the emissions
reductions implied by the net zero targets of the world’s 1,000 largest companies and those
required to achieve a 1.5C pathway. We can see that the gap starts to widen from 2030, implying
a growing need for negative emissions to offset the shortfall.
FIGURE 9. E missions need to fall by 43% by 2030 to remain on a 1.5C FIGURE 10. ... with the VCM an important tool to offset resid
ual
aligned pathway... emissions
GHG Emissions (Gt/year)

Emissio n s redu ctio n s implied (GtCO2)
60
15
50
12
40 WB1.5C pathway
9
30
20
6
10
0 O ffset
1960 1980 2000 2020 2040 2060 2080 0
2020 2025 2030 2035 2040 2045 2050
H istoric al NDC Targets Imp l ied Pathway 1.5 Pathway

Offset demand - existing net-zero targets
Total - announced net-zero targets
SBT - well below 2 degrees C
Source: Barclays Research, IEA (2021) Source: BloombergNEF (2023), Barclays Research
16 August 2023 5
A market that is set to scale.....
NBS overlooked – Topics such as hydrogen, electrification via renewables and battery storage
rightly generate a lot of attention as key ways to transform the energy system and reduce
emissions. Yet, even with the actions being taken to reduce emissions at a business and
individual level, we still project energy demand to grow such that there will be a need to offset
residual emissions. We estimate that up to 30% of emissions can be sequestered through
investment in NBS (Voluntary carbon markets: COP-26 to create market scale

, 18 October 2021),
and this, together with emerging technologies such as Direct Air Capture (DACS), is likely to be
an area that attracts greater investor attention and increased investment from companies.
Offsetting costs lower than technical solutions – There is a wide range of pricing for carbon
sequestration technologies. From our conversations with customers and data that we can track,
voluntary carbon pricing has averaged $1-2/t over the past 12 months (that for individual
projects ranges from as low as just 50c/t up to $65/t, based on the quality of the project), with
significant work needed on verification. DACS credits can sell for $1000-1500/t.
Voluntary carbon markets as an opportunity: Up to $250bn by 2030E, $1tn + by 2050E –
The current illiquid, unregulated market for carbon credits currently stands at less than $500m,
having grown 70x in the past 10 years in terms of volumes. For scale, the market needs to see a
defined set of standards that can be used to set a benchmark price and be traded on liquid
exchanges. Key to confidence in this market will be the verification process. With the launch of
the Core Carbon Principles (CCPs) in early 2023, we think the scene is set for the scaling of these
markets. With the potential for carbon credits issued to reach 5.3Gt in 2030E and at a price of
$50/t (Voluntary carbon markets: COP-26 to create market scale

, 18 October 2021), this would
imply a c.$250bn market. Even in a scenario of slower take-up and lower prices, we would still
see market potential in excess of $150bn by 2030. Should the VCM reach its full potential by
2050, we think it could reach $1.5tn+.
Forestry, blue carbon and carbon farming all needed – NBS, also referred to as natural
climate solutions, tend to focus on the forestry element, with carbon sequestration numbers
expressed in the number of trees (1 trillion as an example) needed to help reduce emissions. Yet
NBS encompass a wide range of options, which we outline in the report – including natural
forestry, carbon farming and blue carbon.
Opportunities across the value chain – There is an increasing need for businesses to
aggregate expertise in the NBS arena. Many of the European energy majors are leading carbon
traders already, with carbon-neutral fuels growing rapidly in popularity. We see Shell,
TotalEnergies, bp, Eni and Akerbp as the leaders from an energy space perspective, but material
opportunities are likely to exist in financial services, agricultural technology and verification,
and how the value chain fits together is still evolving.
16 August 2023 6
...but has experienced growing pains
Structural market conditions have inhibited the growth of the VCM
We continue to see carbon offsets as a useful market mechanism to fulfil the dual purpose of
both delivering financing to climate mitigation projects in regions struggling to attract sufficient
capital, whilst also accelerating progress towards corporate and country net zero targets.
However, the work being done on CCP and a number of controversies have seen buyers opting
out, delaying decisions and thinking about what role carbon offsets have in a lower-carbon
strategy. We have seen some evolution of the market to carbon contributions rather than
offsets. However, the voluntary nature of the market, together with a lack of structure, has seen
limited participation. This can be seen in the contraction of the size of the VCM from 2021
onwards (Figure 11), which has coincided with a number of high-profile allegations of offsets
not doing what they claim to do. So far in 2023, the market is developing broadly in line with its
trajectory in 2022.
FIGURE 11. The VCM peaked in 2021, and has since experienced a contraction
mtoe per year
400 2018 2019 2020 2021 2022 2023
350
300
250
200
150
100
50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Verra, Gold Standard, ACA, Barclays Research
A market beset by an absence of regulation and standards
We believe the market contraction of recent years can be linked to the VCM’s unregulated
nature, which has highlighted some important structural flaws, in turn denting confidence and
inhibiting growth. The lack of rules and consensus over established standards and
methodologies has raised doubts about the quality of offsets. In order for the VCM to be
effective in fulfilling its primary aim of bringing down emissions, it must be able to demonstrate
that offsets are generated by projects that display genuine additionality relative to business as
usual.
This has, in some cases, been difficult, with allegations of “phantom credits” issuance made
against the world’s largest offset verifier, Verra, in an article published in The Guardian in
3
January 2023. Analysis undertaken in conjunction with academics claimed that over 90% of
Verra rainforest offset credits did not represent any genuine carbon reduction, with the impact
of projects systematically overestimated. This was said to be particularly true in the REDD+
(Reducing Emissions from Deforestation and Forest Degradation) offset category, which is prone
to abuse due to the subjectivity of calculating avoided emissions relative to a hypothetical
scenario in which projects are not put in place to protect forests. Verra has since announced a
4
major overhaul of its methodology – a move that it denies is linked to the recent allegations.
3
The Guardian (2023). Revealed: more than 90% of rainforest carbon offsets by biggest certifier are worthless, analysis
shows
16 August 2023 7
These allegations, and subsequent lack of market confidence in the avoided deforestation
category, are problematic considering that the category’s share of offset supply has grown
progressively in recent years, reaching 44% in 2022 (

Figure 12). The lack of confidence in this
market is is reflected in lower average OTC prices for avoided deforestation relative to
reforestation projects – although these OTC prices remain above those for the three other
categories (Figure 13), which raises even stronger questions about the perceived legitimacy of
these categories. This perceived integrity deficit has prompted the Science-Based-Targets
initiative (SBTi) to declare that no offsets will be permissible as part of a strategy to hit 2030
targets, and that only “permanent” removal and storage credits will be allowed to count as part
5
of neutralising 10% of 2050 residual emissions. Although the exact implications of this remain
to be clarified, many market participants believe that this means ‘temporary’ storage credits
such as REDD+ or aforestation and reforestation will no longer be admissible. If this
materialises, it risks bifurcating the market by driving a large reallocation of demand towards
permanent storage credits. This may, in fact, help alleviate some of the controversies around
the VCM since the decarbonisation benefits of these projects are more tangible and measurable.
FIGURE 12. The RE DD+ project cate

gory now makes up c.44% of offset FIGURE 13. OTC average, min and max prices in 2022, by project
supply category
$/ton
Offset supply (MtCO2) Average
1,200 20
REDD+ Reforestation
1,000
Energy generation Emissions
15 12.1
800
Energy demand Agriculture
10.7 9.9
Other
600 10 7.0 5.3

400
5
200 44%
0
0
Avoided Energy Reforestation Energy Emissions
2015 2016 2017 2018 2019 2020 2021 2022
deforestation generation demand
Source: BloombergNEF (2023), Barclays Research Source: BloombergNEF (2023), Barclays Research
Asymmetric information
The controversies surrounding the VCM are reflective of the information asymmetry inherent in
the structure of this market. Established frameworks and regulation help alleviate this issue in
other markets, but those are still under development in the VCM. The issue of information
asymmetries between buyers and sellers is problematic for a number of reasons. Firstly, it
places the onus on buyers to undertake expensive and resource-intensive due diligence
processes to vet potential offset purchases, dampening demand. Secondly, it exposes buyers to
potential accusations of greenwashing if it transpires that the credits that have been purchased
do not genuinely offset their residual emissions – potentially inflicting reputational harm that
would exceed that of inaction on decarbonisation. This risk is amplified by the fact many
projects take place in developing countries with fewer institutional guard-rails to uphold
individual human rights. As well as the carbon additionality component, the Guardian article
included allegations of forced evictions and abuse of communities living within designated
project areas. The string of controversies related to the VCM has resulted in high-profile
companies such as EasyJet pivoting their sustainability strategies away from dependence on
6
the offset market, and rechannelling investment towards decarbonising operations.
4
Verra (2023): Verra response to Guardian article
5
With the exception of the agricultural sector
6
Financial Times (2022). EasyJet to ditch landmark carbon offsetting scheme
16 August 2023 8
Uncertainty over property rights
Another market structure issue in the VCM is a lack of certainty over property rights, leaving
buyers questioning the legitimacy of their purchased claims on decarbonisation outcomes.
There have been instances where offsets have been suspended due to question-marks over
their legitimacy. In March this year, Verra announced that it would put its Northern Kenya
Grassland Carbon Project on hold following accusations that it did not adhere to its Voluntary
7
Carbon Standard (VCS). The allegations, made by indigenous rights advocacy group Survival
International in a report published on March 16, related to a perceived lack of additionality as
well as negative welfare impact on indigenous communities. Similarly, Verra also announced in
March it would “inactivate” its rice cultivation methodology, which some major companies have
8
used to issue credits verified by Verra. As well as methodology changes by issuers and verifiers,
government policy changes have also emerged as a material risk that threatens the upholding
of property rights. Zimbabwe’s decision in May 2023 to declare all existing offsets “null and
void” in addition to introducing a 50% tax on offset producers has shaken confidence in the
9
market. Physical climate risk also manifests in this market, with the potential for wildfires to
destroy forests and void the associated claims of emission reductions. This was the case most
recently during US forest fires in 2021, when trees planted as part of offset projects saw offset
10
investments made by BP and Microsost quite literally go up in smoke.
Moral hazard and misaligned incentives
The lack of regulation coupled with the structural market characteristics that prevail in the VCM
leave this particular market prone to abuse, especially with incentive structures as they
currently stand. As we show inFigure 14, the key players in the market on both the demand and
the supply side could have an economic incentive not to insist on high standards in the absence
of regulation and deterrents for malfeasance. In our view, the current structure of the VCM
places too much onus on market participants acting in good faith, and potentially going against
pure economic incentives.
7
Verra (2023). Update: Northern Kenya Grassland Carbon Project
8
Climate Home News (2023). Revealed: How Shell cashed in on dubious carbon offsets from Chinese rice paddies
9
https://www.reuters.com/world/africa/zimbabwe-regulate-carbon-credit-market-curb-greenwashing-2023-05-23/
10
Financial Times (2021). US forest fires threaten carbon offsets as company-linked trees burn
16 August 2023 9
FIGURE 14. An unregulated market with misaligned incentives creates inefficient outcomes...
This figure is simplified. Please see Figure 28 for a more granular description of participants in the VCM.
Source: Barclays Research
11
Verifiers and auditors are paid on a per credit certified basis, whilst project developers can
increase avoided emission calculations, and therefore the value of a project, by using bullish
assumptions in deforestation models, especially as established consensus-driven
methodologies have yet to emerge. Buyers can also be incentivised not to scrupulously vet all
the offsets they buy in order both to keep offset prices low and to minimise due diligence costs.
This can be seen in the overwhelming majority of avoidance credits being retired relative to
removals, which would come at a higher price for buyers Figure

( 15), as well as the large share of
credits issued pre-2015, when clearer distinctions on credit labels were introducedFigure
( 16).
Finally, governments and policy-makers can generate cashflows from REDD+ offsets by setting
signals that deforestation would be allowed to occur at a greater rate than would actually be
the case, or at the very least holding back policies to reverse deforestation. To be clear, we are
not saying that systematic market abuse is taking place, but rather that, in the absence of
regulation, the pure economic incentive structure of market actors points towards a race to the
bottom when it comes to standards.
11
For instance, Verra is paid $0.10 per permit certified and on average approves 75% of all voluntary offset applications
16 August 2023 10
FIGURE 15. Avoidance credits make up the vast majority of credits FIGURE 16. ...whilst a large share of credits retired were issued pre-
retired to date... 2015
Removal Retired offsets, by issuance year (%)
8%
4%
Pre-2015
6%
2016
10% 2017
2018
45%
2019
11% 2020
2021
2022
10%
2023
14%
Avoidance
92%
Source: BloombergNEF, VCS, GS, CAR, ACR Source: BloombergNEF, VCS, GS, CAR, ACR
Price decline accelerates debate on usefulness
There comes a point where, if carbon credit prices do not approximate the social cost of
12
carbon , or even companies’ own internal budgets, their validity to the market must be called
into question. The chart below shows the price of carbon credits from Bloomberg, which has
fallen from c$9/t at the start of 2022 towards $2/t now.
FIGURE 17. Price slump has not helped confidence in the market
$/t
10
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
22 22 22 22 22 22 22 22 22 22 22 22 23 23 23 23 23 23 23
Source: Bloomberg
In addition, prices in the global carbon regulated markets are typically higher and really
incentivise emission reductions (Figure 18). The chart below shows pricing across key regulated
markets, with Europe having the highest levels. We expect genuine carbon removal or
avoidance credits to trade below regulated market levels, but there should be at least some
correlation between the two. Moreover, in view of the large price differential, the blending of the
VCM into regulated markets can undermine regulators’ ability to raise tax revenues and drive
genuine decarbonisation. Indeed, certain jurisdictions allow offsets to be used to
counterbalance emissions in cap-and-trade systems (e.g. Canada, Korea, China) as well as in
carbon tax regimes (e.g. South Africa, Mexico, Singapore). There isn’t anything inherently wrong
12
The US Social Cost of Carbon (SCC) was estimated at $51/t as of Feburary 2021. Other estimates for the social cost of
carbon reach up to $300/t.
16 August 2023 11
with doing this in theory, but in the current VCM market environment this risks creating
perverse incentives and undermines policy objectives.
FIGURE 18. Re gulated pricing
$/t EU UK EU aviation Cal ifornia
140
RGGI New Zeal and South Korea China Listing Agreement
120
100
80
60
40
20
Jul 2022 Sep 2022 Nov 2022 Jan 2023 Mar 2023 May 2023 Jul 2023
Source: Bloomberg
16 August 2023 12
Looking for a way forward
VCM financial infrastructure is emerging
In an effort to increase confidence in the VCM, and bring together a number of good principles
already in the market, the Integrity Council for the Voluntary Carbon Market (ICVCM) and the
Voluntary Carbon Markets Integrity Intitiative (VCMI) have emerged as important standard-
setters.
On the supply side, the ICVCM published its “Core Carbon Principles and Programme-Level
13
Assessment Framework” in March 2023. This provides a baseline, framework and benchmark
for what carbon credits can be considered as an offset, regardless of which carbon crediting
programme issued them or the type of credits they are. Among other requirements, the Core
Carbon Principles (CCPs) require that carbon credits fund emission reductions that are
additional, permanent, measured robustly and only counted once. The ICVCM has since
released its “Core Carbon Principles Assessment Framework” in which it details the criteria
under which programs will be assessed to establish whether or not they qualify for a CCP
14
label. The ICVCM aims to take a regulatory-like approach to carbon credits that it certifies,
auditing programmes or categories and suspending/terminating the eligibility of the
programme if material failings are found. The initial assessment of programmes will launch this
year; CCP-approved programmes and credit types will be announced in Q3 23 so that CCP-
labelled carbon credits can be issued.
On the demand side, the VCMI, whose formation was announced in March 2021 as part of the
COP26 ramp-up, focuses predominantly on issuing guidance for corporations with net zero
targets. In June this year it released its “Claims Code of Practice” containing guidelines for best
practice when it comes to the meaningful retirement of offsets and the claims corporates can
15
make around these. This contains a three-tiered system (Platinum, Gold, Silver) for
categorising claims that companies can make. These guidelines should help drive consensus in
the market and reverse the trend of ‘greenhushing’ whereby firms are incentivised to downplay
actions or even reverse them as a result of fears of being accused of greenwashing.
The ICVCM and the VCMI announced a joint commitment to coordinate launches of new
standards over the course of the year in what they described as an “integrated market integrity
16
framework”. As with the Core Carbon Principles and Programme-Level Assessment
Framework of the ICVCM, the VCMI Claims of Code of Practice is aimed at supporting integrity in
the VCM to facilitate growth. The VCMI Claims Code of Practice requires that companies comply
with foundational criteria (e.g. long-term goals should be aligned with the Paris Agreement),
then select one of three (Platinum, Gold, Silver) claims to make, and meet the required carbon
credit use and quality thresholds (e.g. purchase of carbon mitigation credits outside the value
chain of the company and obtain third-party assurance of reported information).
In the absence of formal regulation, we believe that the ICVCM and VCMI initiatives can help
lend credibility to the market by phasing out the issuance of low-quality credits. Constraining
the issuance of low-quality, low-priced credits should also help to drive higher prices on the
VCM across different credit types, such that the current price gap between the VCM and
compliance markets starts to narrow. To succeed, the ICVCM will need to be nimble and able to
respond to a fast-developing market, but also be firm in terms of the standards set out to ensure
the integrity of the market.
13
ICVCM (2023). The Core Carbon Principles
14
ICVCM (2023). The Core Carbon Principles Assessment Framework
15
VCMI (2023). Claims Code of Practice
16
ICVCM (2023). ICVCM and VCMI join forces to operationalize a high-integrity market to accelerate global climate action
16 August 2023 13
In our view, whilst the introduction of regulation and frameworks designed to drive higher
standards is overall a positive for the VCM, it must not over-constrain the development of the
market and restrict its dual purpose of delivering lowest-cost emission abatement. The
apparent decision by SBTi to only allow the use of permanent storage offsets also risks creating
a supply-demand imbalance as current projections suggest the supply of permanent storage
offsets will not be able to keep up with the demand needs presented in
Figure 10.
The trajectory of the VCM is contingent on Article 6 of the Paris Agreement
As we wrote in Voluntary carbon markets: COP-26 to create market scale

(18 October 2021), the
ratification of Article 6 of the Paris Agreement is crucial in setting out a legal framework for both
government and corporates to participate in carbon markets. Article 6.2 – which outlines the
rules for inter-governmental agreements for the trading of emissions – was agreed at the
Glasgow COP in 2021 and has been operational since. This has seen several bilateral
agreements already take place, with governments striving to reach Nationally Determined
Contributions (NDCs) through the exchange of internationally transferred mitigation outcomes
(ITMOs). To date, 30 such deals have been struck, whereby developed countries struggling to
reduce emissions in line with NDCs have purchased emissions reductions from developing
17
countries where abatements can take place at a lower cost. The main purchasers of these
ITMOs have been Singapore, Switzerland and Sweden – purchasing these credits from
developing countries across Africa, LatAm and Southeast Asia.
However, this framework applies only to governments and does not include companies. This is
where Article 6.4 comes into play, with the creation of a global offset mechanism where
both
governments and companies could participate in a synchronised system. This is crucial as the
current bifurcated market where governments and corporates operate in divorced structures
with different governing rules has been found to lead to the doubling counting of emissions as a
18
systematic outcome. This is because when corporates purchase offsets, the NDC of the project
developer country is not adjusted to reflect the transfer of claims of emission reductions.
Therefore, not only is reaching an agreement on Article 6.4 fundamental in creating a higher
benchmark for voluntary markets, but it would also resolve the current status quo whereby the
VCM is undermining the Paris Agreement process by casting doubt on the legitimacy of country-
level emission reductions since these are also being claimed by corporates in other countries.
Importantly, the COP26 agreement only ratified the formation of an Article 6.4 Supervisory Body
which would meet to establish the rules of such a global trading mechanism, but a final
agreement remains elusive. The shape this mechanism ends up taking will have huge
implications for the development of the VCM depending on the degree of convergence between
these two markets. It is worth noting that, whilst the Article 6.4 Supervisory Body held its first
meeting at the UN Bonn Climate Change Conference in the summer of 2022 and has since met
six times, disagreements on the same issues that have plagued the VCM (e.g. additionality,
double counting, eligibility of credits, etc) have impeded progress. As such, the consensus view
is that a rigorous and operable agreement on Article 6.4 is unlikely to emerge before this year’s
COP in November.
If no agreement can be reached on Article 6.4 or if it is weak and unclear to the point of being
inoperable, we see the VCM continuing on its current trajectory. That is to say that companies
will continue to operate in a segregated market from governments and that concerns over
double-counting will persist. The VCM would also remain largely unregulated (unless regulators
at a national level intervene, as has been the case in certain instances to date), whilst standards
will be determined by independent organisations such as the ICVCM, the VCMi and the SBTi.
17
International Emissions Trading Agency (IETA)
18
Romm (2023). Are carbon offsets unscalable, unjust, and unfixable—and a threat to the Paris Climate Agreement?
16 August 2023 14
Article 6.4 credits under a weak system would also suffer from a lack of credibility due to the
absence of robust frameworks and definitions.
In the relatively unlikely case that an Article 6.4 carbon market can be operationalised, the
impacts on the VCM would be a function of the robustness of the eligibility criteria. For instance,
Article 6.4 credits may differentiate themselves through factors such as the exclusion of
avoidance credits and greater emphasis on the permanence of removals. If a high threshold
were to be implemented, this risks bifurcating the offset market by creating one market for
governments seeking to achieve an NDC commitment and another for corporates offsetting
residual emissions in order to meet voluntary net zero commitments. In the former, higher
prices would prevail due to the higher eligibility criteria of Article 6.4 credits constraining
supply. Corporates participating on a voluntary basis would operate in the latter, where
eligibility criteria would be determined by independent standard-setters, presumably at a lower
quality and lower price point. This may also risk creating reputational risk for corporates
engaging with this market, due to the perceived lower quality compared with the Article 6.4
market. Alternatively, the Article 6.4 Supervisory Body may opt for lower eligibility criteria
comparable to those that are currently in the process of being implemented in the VCM, which,
while helping to address issues of cross-operability and double counting (if provisions on NDC
adjustments were included), would likely see question-marks about the integrity of such credits
persisting.
Synergies with biodiversity aims
Whilst the main rationale for offset projects has been to generate decarbonisation outcomes,
the growing importance of biodiversity and the recognition of the role of NBS as a tool to
mitigate climate risk mean there is a growing opportunity for the VCM to tap into biodiversity-
related investments. However, the difficulty associated with generating cash flows from
nature-positive economic activities has meant investment opportunities for private-sector
capital have been few and far between (seeBiodiversity and natural capital: mispriced and at
risk, 28 July 2023).
This is starting to change, as governments implement policies to reduce externalities and
protect nature through market-based mechanisms designed to put a price on nature. As with
carbon-pricing systems, these can exist in a variety of forms, including fees and taxes, which
make up the majority of schemes to date, but tradeable permit systems are also increasingly
being deployed (Figure 19).
FIGURE 19. Governments are increasingly introducing biodiversity pricing systems
Num ber of biodiv er sit y pr icing sy st em s
12
10
Fee/cha rg e Ta x Tra da ble permits s ys tems
Source: BNEF (2023), OECD PINE Database, Barclays Research
The interaction between nature and climate-related risks means that the solutions to tackling
these two problems can be complementary. Indeed, measures to protect and restore nature
16 August 2023 15
have substantial benefits when it comes to climate change mitigation and adaptation. Natural
capital assets such as tropical forests and soils provide huge carbon absorption benefits when it
comes to mitigation, whilst on the adaptation side wetlands and peat bogs help manage flood
risk. The growing recognition of the value of NBS in countries’ environmental strategies has
meant that the VCM can increasingly tap into a growing market for biodiversity impact. Indeed,
Figure 20 shows how many carbon offsets are generated by natural capital assets, with
reforestation and avoided deforestation initiatives constituting the lion’s share. These also
constitute relatively high-quality offsets relative to the rest of the VCM, as evidenced by the fact
19
that reforestation projects have had the highest average price on the market at $12/t.
Moreover, many projects that generated carbon offsets had potential biodiversity co-benefits
(Figure 21), with Verra having created the Climate, Community and Biodiversity (CCB) category
for nature-positive projects to differentiate themselves. CCB projects have started commanding
a premium and are heavily concentrated in biodiversity-rich nations such as Brazil, Indonesia,
20
Cambodia and the DRC.
FIGURE 20. Lar ge numbers of carbon offsets are generated by natural FIGURE 21. ...whilst many carbon offset pro
grams have co-benefits
capital assets... for nature
Millions of metric tons of C02-equivalents Millions of metric tons of C02-equivalents
140 120
Agric ul tural l and management
120 Forest management

100
Wetl and rewetting and c onservation

100
80
Afforestation, reforestation and revegetation
80
Red uc ed emissions from d eforestation and d egrad ation
60
60
Avoid ed grassl and c onversion
40
40
20
20
0 0
2015 2016 2017 2018 2019 2020 2021 2022 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agriculture Avoided deforestation Reforestation
Source: BNEF (2023), Barclays Research Source: BNEF (2023), Barclays Research
19
BloombergNEF (2023). Biodiversity Finance Factbook: 1H 2023
20
BloombergNEF (2023). Biodiversity Finance Factbook: 1H 2023
16 August 2023 16
Core carbon principles put the market in place to
scale
Carbon emissions associated with the consumption of energy stood at 34.2Gt prior to the
COVID-19 pandemic and products from the energy industry remain the most significant source
of emissions. As a result, in order for net zero emissions to be achieved, we think there need to
be three decades of rapid change in the energy system. Our report

Opportunities in global
decarbonisation (9 March 2021) outlined three scenarios (Dynamism, Development and
Deadlock), which seek to show how the energy mix could evolve out to 2050 with different take-
up rates of low-carbon solutions based on sector-by-sector analysis. Our Dynamism case is
consistent with net-zero emissions in 2050, but all three scenarios represent the most rapid
change in the energy mix for a century.
Within that detailed energy transition scenario analysis is an estimate of what carbon emissions
are sequestered, both through NBS and via industrial carbon capture; that modelling forms the
basis of the analysis discussed here. Alongside this is an expectation under each scenario of
how carbon markets evolve and this remains a critical driver of take-up – see
Carbon pricing:
Preparing for the inevitable(9 September 2021) for more detail. As an example, our Dynamism
scenario is based on a rapidly rising carbon price and accelerated regulation from global
governments.
Carbon markets have developed rapidly in the past decade across various jurisdictional levels
ranging from global to national, regional and voluntary. Currently, these carbon markets vary in
their level of maturity and fall into two categories: mandatory and voluntary. In mandatory
(compliance) markets, governments mandate certain entities to participate, osten including a
‘cap’ on the allowable amount of emissions and requiring entities that exceed those emission
limits to offset GHG emissions through the use of carbon credits.

Figure 22 shows that, as of
April 2022, roughly 23% of global emissions were covered by a carbon pricing system spanning
68 national, regional or subnational schemes Carbon

( pricing: not sufficient to achieve climate
goals, 28 September 2022).
FIGURE 22. N umber of carbon pricing initiatives and coverage of global emissions
Number of Schemes
% Emis s ions
80 25
70
20
60
50
15
40
10
30
20
5
10
0 0
2018 2019 2020 2021 2022
Number of Schemes % Globa l Emis s ions Covered
The figure labels indicate the percentage of global emissions covered by the number of implemented carbon pricing
initiatives.
Source: World Bank (2022)
The second category, on which this report focuses, includes ‘voluntary’ markets, in which
carbon emitters are allowed to voluntarily offset their unavoidable GHG emissions by
purchasing carbon credits. These carbon credits are generated by projects targeted at removing
16 August 2023 17
or reducing GHG in the atmosphere. This transfer of credits between the buyers and sellers we
refer to throughout as the voluntary carbon market (VCM). We estimate the current scale of the
market at $500mn based on the number of credits traded and the average pricing we can
observe.
Mandated carbon markets are a critical tool to incentivise absolute emissions reductions, but
for hard-to-abate emissions, the VCM offers a potentially important alternative, as we discussed
in Voluntary carbon markets: COP-26 to create market scale(18 October 2021).
The VCM could be as large as $250bn market as early as 2030E
Nature-based solutions (NBS), sometimes referred to as natural-based solutions, are an
established means of preventing, reducing, capturing and storing carbon emissions. Using NBS
provides opportunities for both climate change mitigation and increased climate resilience.
GHG emissions from Agriculture, Forestry and Other Land Uses (AFOLU) contribute a quarter of
total global GHG emissions. Investments in nature could potentially deliver one-third of the
emission reductions needed to align with the Paris Agreement between now and 2030E.
Stopping deforestation, improving soil management techniques, protecting natural carbon
sinks, restoring damaged habitats, and implementing climate-smart agriculture practices are
solutions that can be scaled today. In absolute terms, academic research including Griscom et
al (2017) suggests that NBS may have the potential to remove up to 12Gt of CO2 emissions per
year by 2050. In addition, there is 3.5-5Gt a year that is likely to be associated with emission
reduction technologies, such as Direct Air Capture with Carbon Storage (DACCS), Bioenergy with
Carbon Capture and Storage (BECCS) and green hydrogen. Our modelling sees 3-5Gt of carbon
credits being traded by 2030E (Voluntary carbon markets: COP-26 to create market scale
, 18
October 2021). At a price range for carbon credits that varies between $10 and $50/tCO2e, this
translates to $30bn-250bn of spend a year. Assuming the VCM reaches its full potential by 2050,
we estimate the market could reach $1.5tn, even at moderate carbon prices. We look at the
potential methods of investment in this market under the investment section later in this
report.
FIGURE 23. Potential pathways for the NBS market, $bn
2, 000
1, 500
1, 000
Devel opment
Dyna m i sm
Dea dl ock
500
2016 2021 2026 2031 2036 2041 2046
Source: Verra, Gold Standard, Barclays Research estimates
Our modelling is based both on recent academic research and our discussions with industry
participants, and suggests that NBS can provide 25-35% of the GHG emission reductions
needed to meet the Paris Accord at less than $100t/CO2e, with a quarter of this being able to be
delivered annually for less than $10t/CO2e.
16 August 2023 18
FIGURE 24. Voluntary carbon credits assumed in modelling
20, 000
15, 000
10, 000
Devel opment
Dyna m i sm
Dea dl ock
5, 000
2016 2021 2026 2031 2036 2041 2046
Of these credits, we assume 70-80% come from NBS. The chart below shows initial estimates of
where emissions savings could come from. The IPCC Climate Change and Land Report
emphasises that the mitigation potential from terrestrial ecosystems comes from restoration
and management of forests and from curbing deforestation, especially in tropical and
subtropical regions, and this is reflected in the chart as having the most potential. Yet soil
management also shows up as one of the largest low-cost areas of sequestration.
FIGURE 25. Climate miti gation potential in 2030 GtCO2 equivalent per year
Source: Griscom (2017) et al
Voluntary reductions are needed as well as mandates
Voluntary commitments and the need for regulatory compliance both drive investment in
emissions offsets. In 2018, 42.4mt of CO2 emissions offsets were retired. This has risen to 57mt
in 2019 and 71mt year-to-date in 2023. Each of the last six months represents the highest month
for retirements we have seen on each of the three major registries: the Verified Carbon Standard
(VCS), the American Carbon Registry (ACR) and the Climate Action Reserve (CAR).
16 August 2023 19
FIGURE 26. Scale of voluntary carbon market, mt
All
400,000,000
350,000,000
300,000,000
250,000,000
200,000,000
150,000,000
100,000,000
50,000,000
0
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Issued* Retired**
How the markets currently work
The VCM is currently unregulated, and this represents a major challenge to negotiate, yet the
operational principle of the market is straightforward. In essence, it can be categorised into two
main areas (similar to fossil fuels): upstream and downstream. The upstream process covers the
ownership and development of projects, verification & monitoring and equipment
manufacture, while downstream covers broking, trading and final purchase.
In the upstream process, project developers run projects that range from renewable energy
generation to improved farming methods through to clean cooking. These projects vary in scale
from industrial to highly local projects. We will discuss these methods in more detail later in the
report, but their implementation produces carbon credits.
While there are many standards that issue offsets through the VCM, the most widely used are:
The Gold Standard (GS), Verified Carbon Standard (Verra), Climate Action Reserve (CAR),
American Carbon Registry (ACR). Issuance through any of these programs ensures that the
issued credits are real and additional and represent genuine action of high environmental
integrity. The level of verification and the nature of the project can significantly impact the cost
of the carbon credits for purchasers. We provide more detail on the standards, the verification
processes and the trading schemes later in this report.
The critical work of the TSVCM aims to set a benchmark for carbon credits through its Core
Carbon Principles (CCP). These are designed to help generate reference contracts in order to
facilitate a core carbon spot market with future contracts, increasing transparency and liquidity.
Ultimately, this should end up being a minimum standard that carbon offset projects should
meet. Additionally, buyers will also be able to review any additional features an offset project
may offer. The carbon credits generated through the underlying carbon offset projects are sold
to buyers, either directly or through intermediaries that can bundle credits together into larger
portfolios. At present, most of the transactions are bilateral deals and over the counter, which
limits scalability.
16 August 2023 20
FIGURE 27. Life-cycle of carbon credit – part 1
Source: TSVCM
FIGURE 28. Life-cycle of carbon credit – part 2
Source: TSVCM
Current challenges with the voluntary carbon market that need to be addressed include:
• Origination: The heterogeneous nature of the market (i.e. large number and type of
projects and methodologies across geographies).
• Additionality: Ensuring that the project actually results in a net reduction of emissions that
would not have occurred otherwise.
• Measurement: Accurate measurement of duration (permanence), quantifying additionality,
16 August 2023 21
prevention of double counting/ensuring credits not claimed by more than one entity.
• Transparency: Verification is challenging, exacerbated by different competing standards
globally, project-by-project reporting including consistency, risks around overstatement.
The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) helpfully categorises carbon offsets
into two groups:
1. GHG Avoidance or Reduction projects – examples include renewable energy or avoided
deforestation.
2. GHG Removal or Sequestration – approaches include NBS (e.g. reforestation) and
technological solutions (e.g. Direct Air Capture).
The pricing of the carbon offsets appears to be influenced by a variety of factors. Many of these,
however, can ultimately be traced back to the above principle of additionality, as well as
measurement, transparency and supply/demand dynamics.
In summary, there is a wide range of prices per tonne of CO avoided or captured. Additionality,
2
age, quality, transparency, project location and supply/demand dynamics all contribute to
determining pricing of different offsets on a per tonne basis. We summarize how all these
market actors interact in the VCM ecosystem below Figure

( 29)
FIGURE 29. Breakdown of participants in the VCM
Supply side
Standard setters Market Intermediaries D emand side
Derivative
Project
Rating Standard National Marketpla s Corporate Governme
Developer Registries Auditors Brokers Exchanges Investors
agencies setters Regulators ces Developer s nt s
s
s
Wildlif eWo r Native Xpan siv

Verra BeZero A mpere ICVCM FCA Pach ama CME Gro u p TPG Micro so st Sw eden
ks En ergy CBL
Go ld Carbo n pla Climate Lo mbard Switzerlan

Ho n ey w ell Sylvera A en o r VCMI CFTC So u th Po le ICE Sh ell
Stan dard ce ImpactX Odier d
A merican Carbo n
A irCarbo n
Carbo n sin kCarbo n CCQI Re-Carbo n SBTi So lu tio n s Qu in tet Delta Sin gapo re
Exch an ge
Registry Gro u p
Climate Carbo n
A ctio n Trade Go o gle UA E
Reserv e eXch an ge
List of market participants is non-exhaustive. A more comprehensive list of buyers is provided in the Appendix.
Source: BloombergNEF (2023), Barclays Research
16 August 2023 22
Insights from Barclays’ Investment Sciences team
Working with our Investment Sciences team and using data from three major registries over the
years 2008-23 accounting for over 1.6bn credits issued and 755mn credits retired, we can see
how the VCM is evolving. The chart below shows the number of issued credits, with 2023 an
estimate based off year-to-date issuance. Following a period of stability between 2010 and
2016, the following five years saw rapid growth and we project this to increase in each of our
scenarios. These coincide with what we see as required across carbon capture in our energy
demand scenarios. Such an expansion is set to create meaningful opportunities, and potentially
costs, for those with unavoidable carbon liabilities that rely on alternative methods.
FIGURE 30. Iss ued credits scenarios, mt
10, 000
8, 000
6, 000
Devel opment
4, 000
Dyna m i sm
Dea dl ock
2, 000
2016 2021 2026 2031 2036 2041 2046
Source: Verra, Gold Standard, ACA, Barclays Research estimates
Key to some of these investment markets is the source of the credits. As we discussed in
Voluntary carbon markets: COP-26 to create market scale

(18 October 2021), the majority of
credits are issued by the agriculture and renewables sector. As we show below, these are still
the biggest issuer sectors but have experienced the sharpest fall in issuance flows since 2021,
with issuance from the industrials sector also experiencing a downturn.
FIGURE 31. Credits by type source
Issued
180,000,000
160,000,000
140,000,000
120,000,000
100,000,000
80,000,000
60,000,000
40,000,000
20,000,000
0
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Waste Demand Agriculture Industry Renewables
Source: Verra, ACS, Gold Standard, Barclays Research
Breaking down issuance by country F

( igure 32), we find that volumes from India have declined
sharply to the extent that they have now been overtaken by China, albeit marginally. Issuance
16 August 2023 23
has also declined sharply in Brazil, whilst credits coming out of Peru have risen making it the
third-biggest issuer globally.
FIGURE 32. Credit issuance by country
Issued
80,000,000
70,000,000
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
United Sta tes Turkey India Bra zil China Peru
16 August 2023 24
The role of nature
This section focuses on the role of Nature-Based Solutions (NBS) in helping meet global GHG
emission reductions goals. Over the past 10 years, there has been growing focus on the
importance of natural ecosystems as sources and sinks for GHGs.
Achieving net zero goals of countries, cities and businesses will likely require a fundamental
change in the way both society and companies operate. A full range of technologies will be
needed, including electrification, increased use of renewable energies, hydrogen and bio
energy, alongside increased energy efficiency (see our previous report

Opportunities in
Decarbonisation, 9 March 2021). Yet, even with what should ultimately prove cost-effective
technologies, it is impossible to reduce emissions to zero on an absolute basis due to both
technical and cost constraints.
Reflecting this, there will be residual emissions that will need to be addressed. As such, there is
a clear need for carbon sequestration, which can be achieved by implementing projects based
on Carbon Capture Use and Storage (CCUS), Bioenergy Carbon Capture and Storage (BECCS) or
NBS. The carbon capture techniques will play an important role in decarbonisation efforts as
more and more companies in the energy sector embrace the concept of net zero.
Fossil fuels still part of the mix in 2050
In 2020 fossil fuels made up 83% of primary energy demand, according to the BP statistical
review, with renewables, including bio fuels, making up 6%. Under any of our scenarios,
renewables are the fastest-growing part of the energy supply mix. However, with energy
demand continuing to grow – our scenarios for 2050E assume a range of energy demand
outcomes 20-50% higher than today – both oil and gas are set to retain a significant role in the
energy mix, even decades into the future. Critically, in all the scenarios we look at, including a
1.5oC scenario (our ‘Dynamism’ case), our analysis suggests that oil and gas are still set to make
up at least 50% of energy demand in 2050E, although this does reflect a lower share of oil, with
natural gas seeing a material step up, displacing coal.
FIGURE 33. E nergy demand under different Barclays scenarios
EJ
Oil Na tura l Ga s Coa l Nuclea r Hydro Renewa bles

1,000
900
800
700
600
500
400
300
200
100
Energ y mix 2019 Dyna mis m mix 2050 Development mix 2050 Dea dlock mix 2050
Source: Barclays Research. For full details see ‘Opportunities in Decarbonisation’
But this still leaves CO2 emissions too high
Under our base case (‘Development’), industry CO2 emissions flatten globally, increasing ~0.7%
per annum through 2036E before declining by ~0.9% per annum from 2037E to 2050E, while our
low-carbon (‘Dynamism’) case assumes emissions fall 1.4% per annum up to 2040E, followed by
an ~11.3% average annual decline until 2050E. These emissions are still above the ambitions set
by companies and governments alike.
16 August 2023 25
FIGURE 34. CO2 emissions profile
gt CO2 pa Dyna m i sm Dea dl ock Devel opment
50
40
30
20
10
1965 1975 1985 1995 2005 2015 2025 2035 2045
Source: Barclays Research. For full details see ‘Opportunities in Decarbonisation’
Carbon capture and offsets will be needed
The energy industry and consumers need to adapt, but, even with major systemic changes, our
own estimates imply that nearly 25 Gt per year of carbon removal will be needed – either
through direct capture or offsets. Today, the scientific consensus is that this is unfortunately not
enough. That’s why carbon capture (and, in particular, reforestation) is a part of the solution,
and is considered essential by the COP21 Paris Agreement to keep global temperature increase
below 2oC and ideally at 1.5oC.
16 August 2023 26
Carbon sequestration approaches
Carbon Capture Utilisation and Storage (CCUS): CCUS involves capturing the carbon dioxide
by separating it from other gases produced by power plants, steel mills, refineries and other
large-scale producers. Next, the carbon dioxide is compressed and transported to storage sites
via pipelines, trucks or rail and finally it is injected back into the ground and stored in porous
rock formations – either onshore of offshore. Alternatively, this carbon can also be used to
convert hydrogen into a synthetic hydrocarbon fuel, or converted into polymers, or, for a more
natural solution, CO2 can be used to stimulate the growth of algae. In large quantities, algae can
help counteract climate change as it can absorb CO2 faster than any other biomass. Algae can
be used as a raw material for creating biofuels, plastics and carbon fibre (also known as
graphite). CCUS is an important emissions reduction technology that can be applied across the
energy system.
Nature-Based Solutions (NBS): The technological expertise of the oil and natural gas industry
fits well with technology advancements such as the hydrogen as a source of energy, CCUS and
offshore wind, which are needed to tackle emissions in carbon-intense sectors where emission
reductions are likely to be most challenging.
Hydrogen combined with CCUS: Hydrogen can play a key role the energy sector. It can
complement the existing businesses and capabilities of the oil & gas sector. The production of
both green hydrogen (electrolysis of water using renewable power) and blue hydrogen
(extracted from natural gas, with the CO2 captured and stored), combined with CCUS, can
significantly reduce GHG emissions from power generation and energy-intensive sectors. It can
be used with biomass to produce renewable hydrogen for use in power generation, transport or
hard-to-abate industrial sectors. As such, CCUS can play a vital role in limiting emissions,
helping achieve net-zero aims and supporting global efforts to meet the Paris goals.
16 August 2023 27
Defining Nature-Based Solutions
Natural capital solutions (NCS) are osten referred to as nature-based solutions (NBS), but refer
explicitly to conservation and management actions that reduce greenhouse gas (GHG)
emissions from ecosystems and store carbon through enhancing, restoring or protecting
natural sinks – like wetlands and peatlands – or by reducing emissions from land-use change.
NCS are usually pursued through three main activities: conservation, restoration and improved
land management across forests, grasslands, agricultural lands and wetlands. Building on the
classification provided by the Gold Standard, we highlight three main broad areas of NBS:
Forestry, Carbon Farming and Blue Carbon.
FIGURE 35. Different types of NBS
Forestry Carbon Farming Blue Carbon
Afforestation Improved Tillage Mangrove Restoration
Reforestation Grassland Management Sea Grass
Improved Forest Cropland Management Algae
Management
Organic Amendments
REDD+
Improved Grazing
Source: Barclays Research
Key to the role of NBS is that projects meet a number of criteria, with projects needing to be:
• Real
• Verified
• Enforced
• Permanent
• Additional
Building on the criteria above, we highlight four important principles for NBS investment:
• NBS investments should raise a company’s ambition with respect to climate action,
enhancing the ambition towards net zero.
• NBS should be seen as providing an interim solution for hard-to-abate emissions, but not a
permanent one as the focus remains on reducing absolute emissions long term. For
unavoidable emissions, carbon sinks will always be needed to achieve net zero but these
should be targeted to be a minimum.
• Carbon credits should also aim to support long-term sustainable land use. Linked to this,
NBS investments should deliver environmental and social safeguards and benefits in
addition to GHG emissions reductions.
• Investments should be verified to ensure the principles of additionality.
16 August 2023 28
These investment criteria apply across all the areas of NBS and below we define the three key
areas:
• Forestry
• Blue Carbon
• Carbon Farming
16 August 2023 29
Forestry
The two major carbon sinks are oceans and forests. While forests are a net sink of carbon, they
can also release carbon into the atmosphere. This can be a function of natural processes and
also as a result of human activity, including deforestation and fires. Afforestation or
reforestation projects can therefore contribute positively to reducing net atmospheric GHG
concentration.
For our definitions, Forestry, or Forestation, includes afforestation, reforestation, improved
forest management and for ease REDD+ (avoidance of destruction). As plants and trees grow,
they absorb/sequester/capture CO2 from the surrounding atmosphere, storing it in their organic
matter and soils. Accounting here is trickier. REDD+ projects typically generate carbon credits ex
post, while forestry projects are typically ex ante – this does prompt questions about incentives.
Afforestation, reforestation and improved forest management
Afforestation is the process of planting trees, or sowing seeds, in a ‘barren land’ devoid of any
trees to create a forest. In contrast, reforestation is the process of specifically and intentionally
planting native trees into a forest that has decreasing numbers of trees. While reforestation is
increasing the number of trees in an existing forest, afforestation is the creation of a ‘new’
forest. Improved forest management techniques are complementary with harvesting. They
allow forests to store more carbon while maintaining wood production over the long term.
A full picture – forestry might not be a panacea
There are some disadvantages to forestry. Depending on how it is done, replacing other
ecosystems with forests can have important biodiversity implications, with some species being
marginalised whilst others benefit. The type of tree that is introduced may also affect the
acidity of run-off water and, in turn, the biodiversity of rivers. Temperature and water
availability can be affected by the planting of large forests and these may not be trivial. It may
be possible that forestation could, in some places, have a negative effect on the climate, and
research is ongoing to fully understand the impact of forests.
REDD+ – more controversial, but credit-positive
Over the past decades, a range of initiatives have been set up to enhance carbon sequestration
in ecosystems and to avoid emissions from ecosystem change. Activities aimed at reducing
emissions through preserving ecosystems, in particular when implemented in developing
countries, are labelled ‘REDD’ (Reducing Emissions from Deforestation and Forest Degradation)
or REDD+, with the + added to indicate that, among other things, interests of local people
including indigenous communities are explicitly considered in such programs.
By crediting stored carbon – that is, simply paying people to stop cutting forests – many current
approaches to REDD and REDD+ face technical and political challenges that may undermine
their long-term sustainability. Therefore, this needs to be considered carefully, with a focus
osten on addressing the drivers of deforestation and unsustainable practices by enabling new
land management techniques, forest restoration and other clean technologies.
Blue carbon
Blue carbon is a relatively new concept, with methodologies of calculating carbon
sequestration still in their embryonic stages. The name comes from the characterisation of
wetlands and because much of the carbon is essentially stored in the soil underwater.
21
According to the Blue Carbon Initiative , blue carbon is defined as the carbon captured and
stored in coastal and marine ecosystems including seagrass meadows, salt (tidal) marshes and
mangroves. These ecosystems are carbon sinks, accumulating and retaining carbon in the
plants themselves, as well as the soils below, with the soils potentially storing over 95% of
21
https://thebluecarboninitiative.org
16 August 2023 30
carbon in seagrass meadows. The IPCC characterisation of wetlands also includes constructed
wetlands for wastewater treatment.
As with forestry, when protected or restored, blue carbon ecosystems sequester and store
carbon. When degraded or destroyed, these ecosystems emit the carbon stored within them.
Based on data from the Blue Carbon Initiative, it is possible that as much as 1bn tpa of CO2 is
being released annually from degraded coastal ecosystems. There are a wide range of estimates
as to the maximum long-term carbon sequestration potential that can be achieved through
improving wetlands. Projects appear to vary between 0.4 and 18tCO2 per hectare per annum,
scaling to a global potential of approximately 1GtCO2 per annum, based on Blue Carbon
Initiative data.
Carbon farming
Soil stores more carbon than trees and for this reason should be seen as important in carbon
sequestration. The significant store of carbon dioxide in soil is increasingly referred to as soil
carbon or soil organic carbon. It is carbon stored in the soil as a component of organic matter,
and plant and animal matter that are in various stages of decay. It is directly related to
agricultural productivity as increased carbon stocks improve water-holding capacity, nutrient
availability and soil fertility. Disturbance of soils can release these carbon stores into the
atmosphere. By contrast, changes in land management practices, especially in agriculture, can
increase the carbon concentration in soils. This is done by changing the balance between
carbon loss via soil disturbance and plant respiration, and inputs, predominantly in the form of
leaving materials such as roots, litter and other residues in the soil, plus the addition of manure.
16 August 2023 31
Nature as an investment as well as a contributor to
net zero
We see four main areas of investment opportunities, either through reducing potential liabilities
or through being involved in the rapid growth of the market.
These are:
1. Energy
2. Finance
3. Agriculture & agriculture tech
4. Monitoring & verification
Given the potential scale of the market, even in our ‘Deadlock’ scenario, we see significant
potential for these businesses.
FIGURE 36. Potential pathways for the NBS market, $bn
2, 000
1, 500
1, 000
Devel opment
Dyna m i sm
Dea dl ock
500
2016 2021 2026 2031 2036 2041 2046
Energy
We see three main roles for energy companies:
1. Reduce cost of any potential liabilities related to carbon prices
2. The new role of carbon management: offering energy purchase agreements
3. Achieving net zero ambitions
Finance
Within finance we see three main areas of opportunity:
1. Carbon market trading (both voluntary and mandatory) – Here we are already seeing
examples of stand-alone companies such as Spark Energy.
2. Asset managers creating net zero portfolios
3. Development of agricultural businesses – Many retail banks have a number of large
agricultural clients. Individually these clients may not be able to develop credits, but on
aggregate they can provide a sizeable source of income.
Emissions trading systems have been gaining in popularity across the world. NBS projects can
usually generate carbon credits that offset emissions and have a real monetary value within the
16 August 2023 32
emissions trading system. The chart below shows the recent evolution of carbon prices in
Europe, which is the most liquid market globally, and this shows the directional trend.
FIGURE 37. EU ETS price over time
EUR/ton
120
100
80
60
40
20
0 71-y aM
91-y aM
12-y aM
22-y aM
32-y aM
81-y aM
02-y aM
71-voN
81-voN
91-voN
02-voN
12-voN
22-voN
81- guA
02- guA
22- guA
71- guA
91- guA
12- guA
81-beF
91-beF
02-beF
12-beF
22-beF
32-beF
Source: Bloomberg
Agriculture & agtech
The recognition and proliferation of NBS projects promises to provide significant growth
potential in the agricultural sector. The main areas include:
• Soil tillage methods
• Precision delivery
• Drones to scale up planting
• Regenerative agriculture
Monitoring & verification
The importance of ‘additionality’ is key to the credibility of the voluntary carbon market. As a
result, we expect rapid expansion in this area:
• Increased demand for verification services
• Soil and seed testing
• Digital supply chain monitoring
Direct air capture – the premium offset
The nature-based offsets we describe above are aimed at helping offset residual emissions. Yet
we should also highlight that there are emerging technologies designed to remove carbon
dioxide directly from the air. As such, these Direct Air Capture projects (DACS) are emerging as
premium-priced credits. DACS is not easy – in large part because of the low concentration of
CO2 in the atmosphere (at just 400 parts per million, CO2 concentration is at a low level
compared with flue gas concentrations, which can be up to 130,000 parts per million).
According to the IEA, there are currently 19 DACS plants operating capturing just 10k tpa. The
latest projects are bigger with the Climeworks/Carbfix Orca project in Iceland, which injects CO
2
into basalt where it solidifies, running at 4 ktpa while Carbon Engineering and Occidental
Petroleum are developing a system of 1 Mtpa expected to be operational by 2024. We see this
market as potentially able to develop to 1Gtpa by 2050Voluntary

( carbon markets: COP-26 to
create market scale (18 October 2021).
16 August 2023 33
The process of DACS is essentially the same as for flue gas treatment in that a solid or liquid
system acts as an absorbent and then energy is used to de-gas and recycle the reagent. As such,
it requires energy and the low concentration in air leads to costs which, for now, are higher than
for flue gas systems. The IEA estimates that costs are in the US$100-1000/tonne range, while
Carbon Engineering published that its system could do 1mn tpa at a cost in the range of $94-
232/tonne depending on plant specifics .
DACS applications are currently hindered by very high costs, ranging from USD 600 to USD 1 500
per tonne of CO captured from the atmosphere. While the number of announced DACS
2
applications has been steadily growing for some years now, we think policy support is essential
to guarantee that planned projects are implemented. These policy tools could include tax
credits, public procurement, reverse auctions, advanced market commitments, loans and loan
guarantees, and support to enable transport and storage infrastructure.
Carbon markets – including international crediting mechanisms and domestic compliance
markets – can complement these policies and support accelerated DACS deployment by
providing extra revenue streams to de-risk DACS investment and operations.
There has been strong private sector demand for DACS carbon credits, osten used to meet
corporate net zero commitments, that has fuelled most of the recent DACS project
announcements.
Appendix - List of 100 biggest offset buyers by volume
FIGURE 38. List of 100 biggest offset buyers by volume
Rank Buyer Quantity (MtCO2e)
1 Delta A ir Lin es 24.6322
2 Vo lkswagen A G 15.6566
3 Sh ell 11.3021
4 PRIMA X COLOMBIA S.A . 6.3476
5 Telstra Co rpo ratio n 6.1239
6 DPD Gro u p 5.1569
Takeda Ph armaceu tical

7 4.8353
Co mpan y
8 Green ch o ice 4.8138
9 Gu cci 4.7354
10 Disn ey 3.7283
11 Interf ace, Inc. 3.6699
12 Bo ein g 2.6340
13 ENTEGA 2.4099
14 easyJet 2.2542
15 EY 2.0674
16 Ch ev ro n 1.9930
17 Petro Ch in a In tern atio n al 1.9417
18 Pw C 1.7987
19 Nespresso 1.7857
20 Etsy 1.7146
21 Air France 1.5743
22 No rwegian Cru ise Lin e 1.5716
16 August 2023 34
23 Tokyo Gas 1.5558
24 Pan go lin A sso ciates 1.5154
25 Ch an el 1.4823
26 Civitas Reso u rces 1.4754
27 4A IR 1.4050
28 Netf lix 1.4033
29 TerraPass 1.3495
30 A u stralian Paper 1.3474
31 Nedban k 1.3221
32 CPC Co rpo ratio n, Taiwan 1.2689
33 Barilla 1.2496
34 WeA ct Pty 1.2098
35 Toho Gas 1.1732
36 Zalan do 1.1641
37 Zu ku n stswerk eG 1.1412
38 To talEnergies 1.1225
39 Osaka Gas 1.1161
40 A pple, In c. 1.0611
41 A EL Min in g Serv ices 1.0225
42 La Po ste 1.0029
43 Natu ra Co smetics 0.9854
44 Mo ss Earth 0.9814
45 A llian z 0.9234
46 Jet2.co m 0.8962
47 Ku eh n e + Negal In tern atio n al 0.8961
48 Vattenf all 0.8786
49 Eco lo gi A ctio n 0.8546
Ch in a Natio n al Of f sh o re Oil
50 0.8371
Co rpo ratio n (CNOOC)
51 Co o l Ef f ect 0.8299
52 A xa Insu rance 0.7891
53 Natu ral Capital Partners 0.7824
54 Octo pu s En ergy 0.7579
55 A rcadian Organ ic Meat 0.7575
56 Qan tas A irway s 0.7572
57 PRIMAKLIMA e.V. 0.7435
58 Kerin g 0.7409
59 McKin sey & Co . 0.7057
60 PGE 0.7021
61 Eco sh are 0.6992
62 Native En ergy 0.6629
63 Lyst 0.6500
64 Sto ckh o lm Exergi 0.6413
65 Terpel 0.6405
16 August 2023 35
66 Go ldPo wer 0.6334
67 VistaJet 0.6284
68 Micro so st 0.5559
69 Plan etly GmbH 0.5369
70 Spo tif y 0.5305
71 Ch u rch & Dwigh t 0.5294
72 Co n tin en tal A G 0.5287
73 Go Climate 0.5240
74 Po wersh o p 0.5212
75 Estra En ergie 0.5200
76 JPMo rgan Ch ase 0.4925
77 Pro lo gis 0.4870
78 Westpac Gro u p 0.4834
79 A to s In tern atio n al 0.4750
80 Bu lb En ergy 0.4719
81 Lu igi Lavazza 0.4700
82 Brew Do g 0.4510
83 Wo o dside En ergy 0.4348
84 Fo rtescu e 0.4300
85 SA P 0.4288
86 In ven ergy 0.4280
87 Co mpen sate Fo u n datio n 0.4273
88 A GL En ergy 0.4149
89 Maple Leaf Fo o ds 0.4076
90 Rich emo n t In tern atio n al 0.3869
91 Rh ein En ergie Tradin g GmbH 0.3855
92 WPP PLC 0.3734
93 Ovo En ergy 0.3602
94 Natwest 0.3600
95 Bu tagaz 0.3462
96 Bo sto n Co n su ltin g Gro u p 0.3382
97 Origin En ergy 0.3309
98 Samsu n g 0.3302
99 Wo o dside Bu rru p 0.3195
100 BHP 0.3162
Source: BloombergNEF, Verra, Gold Standard, American Carbon Registry, Climate Action Reserve, Barclays Research
16 August 2023 36
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16 August 2023 37
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Barclays Research - Potencial Do Mercado Voluntário

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Voluntary carbon markets: Close to tipping point – potential for $250bn

Wed Aug 16 2023 ASR

User Highlights & Comments

Voluntary carbon markets

Close to tipping point – potential for #ESGTransition

Nature-based solutions have the potential to offset up to 12Gt a

Lydia Rainforth, CFA

the market as able to grow to up to $250bn in the next decade. ES G Researc h

+ 44 (0) 20 7773 6924

+44 (0) 20 7773 1733

report as only a single factor in making their investment decision.

and is not an equity or debt research analyst.

FOR ANALYST CERTIFICATION(S) PLEASE SEE PAGE 37 .

FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 37 .

FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 38 .

having the potential to approach $1.5tn a year.

below the highest-priced regulated market.

verification of projects is important. We see an increased bifurcation of the market between

ante credits compared to those that require ex-post credits.

internalising the carbon externality moving forward.

The Story in 6 Charts

EJ pa EJ Oil Natural Gas Coal

1965 1975 1985 1999 2009 2019 2033 2043

2050 mix 2050 2050

2.0 Degree Budget

1.5 Degree Budget

1965 1975 1985 1995 2005 2015 2025 2035 2045

2016 2021 2026 2031 2036 2041 2046

A well functioning VCM is crucial to a just transition to

provided free. This is important for a number of reasons.

international climate commitment still proving elusive Figure

additional positive environmental impacts by protecting nature-based solutions (NBS) as well

as creating positive co-benefits for biodiversity.

2010 2020 2030 2040 2050

Emerging market and developing economies

Int. c l imate financ e req uired Total

Voluntary carbon markets: COP-26 to create market scale

latest IPCC report provides a figure closer to $3trn.

economies. Indeed, with the prospect of reverting to a 1.5C-aligned pathway becoming

a growing need for negative emissions to offset the shortfall.

aligned pathway... emissions

GHG Emissions (Gt/year)

1960 1980 2000 2020 2040 2060 2080 0

2020 2025 2030 2035 2040 2045 2050

H istoric al NDC Targets Imp l ied Pathway 1.5 Pathway

Total - announced net-zero targets

SBT - well below 2 degrees C

A market that is set to scale.....

residual emissions. We estimate that up to 30% of emissions can be sequestered through

investment in NBS (Voluntary carbon markets: COP-26 to create market scale

Voluntary carbon markets as an opportunity: Up to $250bn by 2030E, $1tn + by 2050E –

$50/t (Voluntary carbon markets: COP-26 to create market scale

2050, we think it could reach $1.5tn+.

forestry, carbon farming and blue carbon.

and how the value chain fits together is still evolving.

...but has experienced growing pains

Structural market conditions have inhibited the growth of the VCM

mtoe per year

400 2018 2019 2020 2021 2022 2023

Source: Verra, Gold Standard, ACA, Barclays Research

A market beset by an absence of regulation and standards

to abuse due to the subjectivity of calculating avoided emissions relative to a hypothetical

progressively in recent years, reaching 44% in 2022 (