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The World Federation of Exchanges (The WFE), the global industry association for exchanges and CCPs, has published new research today, the first study examining the dynamics of the primary markets in the Voluntary Carbon Market (VCM).
The WFE Research paper analyses a comprehensive dataset of carbon offset projects with vintage years from 1996 until 31 December 2024 across the four major voluntary registries. The paper, titled “The dynamics of global voluntary carbon markets: An empirical analysis of the carbon credits lifecycle”, authored by Dr Ying Liu and Dr Pedro Gurrola-Pérez, finds:
Carbon credit issuance
- On average it takes 2.5 years from the year when the CO2 emission reduction or removal took place (known as the vintage year) to issue a carbon credit, compared, for example, to the 8-12 weeks it typically takes to issue a green bond.
- Average issuance time is decreasing, but it still exceeds 2010 levels, reflecting the market’s struggle to adapt to increased supply.
- This lag varies across project scope and registries. Carbon credit issuance for chemical process projects have the fastest issuance time, while issuance for transport projects takes the longest.
Carbon Credit retirement
- On average, the duration from credit vintage year to retirement (the point at which the holder of the credit claims the offset of carbon credits against its own carbon emissions) is 4.4 years.
- Retirement age is characterised by an uptrend from 2015 to 2021, implying that investors were purchasing older credits (or credits with an earlier vintage year) during this period. This reflects both changes in investor preference, and the longer issuance time during the period, which made credits older by the time they were ready to be traded.
- Household & Community projects exhibit the shortest retirement age at 3 years, and Carbon Capture & Storage projects take the longest at 9 years.
Market participants
- Proportional demand for credits from large end-users, particularly from the top ten retirement beneficiaries, has declined by roughly 27 percentage points since 2010. This shift indicates a more diversified investor base with increased participation from a broader range of market participants.
- Over 54% of retirements are of sizes smaller than 10 tCO2e, with a mean quantity of retired credits of 2,730 tCO2e, suggesting a substantial participation from medium and small buyers of credits.
*All data as of 31st December 2024.
Nandini Sukumar, CEO of the World Federation of Exchanges, said, “The WFE’s research shows the key issues that need to be addressed if the global carbon market framework, as agreed at COP29, is to be successful. The results show that VCMs currently lack the resilience and efficiency that investors experience on established mainstream markets. Regulated exchanges, already operating successful markets, will play a significant role in improving the functioning of VCMs, bringing their experience of running regulated public markets over the centuries. There is work to do: increasing standardisation of the markets, providing an infrastructure that stimulates efficient price formation, improving the levels of transparency and ensuring investor protection is enshrined at the heart of the VCM model. At COP29, the world took an important step forward with the international carbon market, but it won’t live up to its promise if these issues aren’t addressed. WFE Members will lead the way.”
Dr Pedro Gurrola-Pérez, Head of Research at the World Federation of Exchanges, said, “The lag in carbon credit issuance is correlated with the number of new projects, which suggests that the increase in the lag is linked to the difficulties in scaling up the monitoring-verification cycle. In other words, the reduction in issuance time we observe in recent years may not be because processes are somehow improving, but more likely because supply has slowed down. The research also shows that since 2021 VCM growth has stalled. While retirement of credits is diversifying, the findings show a decrease in the proportion of participation from large investors, who are crucial to ensuring efficient secondary trading. To attract large investors, these markets need to become more automated and standardised.”
The WFE will host a webinar to present the findings of the research on 10th March at 1pm GMT. The WFE will convene stakeholders to discuss how exchanges can promote and enable sustainability within the financial ecosystem in Singapore on June 5, at the industry’s annual ESG meeting.
Read the full paper here. To sign up for the webinar click here.
