Happy 2021! The year ahead will be a busy one in the carbon markets. As 2020 drew to a close, corporate commitments to carbon neutrality continued to gain steam. Natural climate solutions were being recognized as powerful carbon mitigation and climate resiliency tools. And finally, diversity and equity impacts were rightfully part of the discussion.
For the California compliance market, the changes started on day one. On January 1, 2021 the offset usage target for the fourth compliance period (2021-2023 inclusive) dropped from 8% to 4%. In addition, there is a usage limit of 2% for non-California-based offsets. These changes will have an impact on non-California offsets related to a possible oversupply that may depress prices. It will also likely lead to a decrease in future compliance projects being developed outside California.
The voluntary offset market is also poised for change. The number of companies that publicly committed to carbon neutrality goals tripled from 500 to over 1500 from 2019 to 2020. Will the potential near term oversupply of compliance offsets be soaked up by voluntary buyers? Demand for voluntary offsets is expected to expand dramatically this year, with an increased preference for nature-based projects like forestry and grasslands. A recent report by Ecosystem Marketplace noted that many voluntary buyers have a preference for offset projects that are located in countries where they have operations. With an uptick in carbon reduction commitments from US-based companies, demand for US-based carbon offsets should also increase. Will voluntary prices increase as a result?
More voluntary offset buyers are looking at how offset projects benefit local communities. Many are adding project screening tools using the UN’s Sustainability Development Goals. The SDG’s focus on a wide swath of issues like poverty reduction, good jobs, equity and diversity. This is a welcome addition.
In the year ahead, the Compliance Offset Protocol Task Force will issue its recommendations that we hope will strengthen and expand carbon offsets’ role in the carbon market, a handful of states will vote to enact regulations that promote greenhouse gas reductions and offset usage, and the incoming Biden administration has committed to climate action at the federal level. We look forward to 2021 as a year of genuine action on climate change.
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