In recent years, the voluntary carbon market (VCM) has faced a paradox: prices are currently low, yet demand is poised to climb. This disparity has a number of causes: an increase in unretired inventory, national compliance markets which increasingly include carbon projects, and higher standards and reduced eligibility for projects. Supply and demand side factors point to an eventual market rebound and price recovery.
Understanding the Supply Side: Shrinking Inventory
At first glance, the VCM appears to be oversupplied, but a closer examination reveals that growth in unretired inventory is slowing. From 2021 to 2024, inventory growth dropped from 34% to 8% year-to-date, with further decreases expected as supply constraints tighten. This slowing growth rate is primarily due to a contraction in key project areas like renewable energy and REDD+. For instance, new regulatory standards, such as VM0048, could decrease REDD+ project volumes by up to 60%. At these reduced volumes, many projects may become financially unsustainable and cease operations altogether.
Renewable energy projects, too, face a decline as non-Least Developed Countries (LDC) projects are phased out before 2030, which will further diminish overall supply. While cookstove projects may help offset this decline, they will likely do so at significantly reduced volumes. In addition, quality and eligibility standards for carbon projects are increasing, which means that carbon credits are harder and more expensive to create. This limited supply presents an opportunity for investors: low carbon prices with restricted future supply just as market demand is projected to rise.
Demand Drivers: A Shift from Hesitation to Action
The demand side of the VCM, on the other hand, tells a different story. Companies like Shell have set ambitious internal emissions reduction goals, triggering substantial carbon credit retirements.
For instance, Shell recently retired approximately 17 million credits to meet its emissions efficiency targets. This significant action by a single corporation—equivalent to offsetting 28% of its Scope 1 and 2 emissions.
This demonstrates the scale of demand that can be achieved as more companies adopt rigorous environmental targets
Such retirements illustrate a broader trend: the potential for a surge in demand as companies increasingly commit to offsetting emissions. Currently, demand is primarily driven by corporate sustainability goals, yet emissions compliance markets (cap and trade or carbon taxes) in jurisdictions as diverse as California, Colombia, Guanajuato, China, Japan and South Africa are including carbon credits as an alternative way of paying the carbon tax or substituting the project credit for an allowance. Global aviation is accruing a mandatory carbon bill, starting this year, that will amount to more than 500m worth of demand by 2028. We now see that the VCM may witness an unprecedented influx of participants.
Looking Ahead: Navigating Challenges and Embracing Growth
Despite numerous challenges, including inflation, geopolitical conflicts, anti-ESG sentiment, and energy insecurity, the carbon market has maintained stability and even seen steady growth in credit retirements. Existing participants have remained engaged, though some prospective participants are still hesitant. As the climate crisis worsens, pressure will mount for these companies to engage in the VCM and for governments to increase their scrutiny and regulatory oversight of emitters. With the convergence of compliance markets and voluntary markets already underway in most regions, the marketʼs growth potential remains strong. The VCMʼs resilience and adaptive capacity amid adversity suggest a positive outlook, with retirements marking real, measurable progress toward a lower carbon footprint.
The carbon market is evolving. Whether driven by corporate responsibility, regulatory incentives, or rising consumer expectations, the transition to a robust, reliable carbon market is underway. The only question is how quickly it will scale to meet the climate crisis.
Chart by Carbon Growth Partners using data from ClearBlue Markets. Picks up the The Integrity Council for the Voluntary Carbon Market (ICVCM)-approved standards ACR at Winrock International, Climate Action Reserve, Verra and Gold Standard.
