Price disparities between carbon markets

There are two broad types of carbon markets; voluntary markets and compulsory markets. There is also a price disparity between the two, with credits from compulsory markets being sold at much higher prices.

Compulsory schemes, such as the UK Emissions Trading Scheme (UK ETS), are regulated as the government sets a limit on pollution levels and credits are traded for the amount of carbon emissions over or under this cap. Agriculture does not fall under the UK ETS and instead voluntary schemes can be used. Regulated, voluntary schemes include the Woodland Carbon Code and the Peatland Carbon Code. In addition, there are a range of unregulated, voluntary schemes that allow farmers to receive money for sequestering carbon on agricultural land. Learn more about the two types of carbon market

The importance of verifying credits

Compulsory schemes are regulated and verified by the government, which increases the quality of the credits and the confidence of buyers compared to voluntary schemes. Voluntary schemes have differing and, in some cases, less robust monitoring and verification methods.

The Woodland Carbon Code and Peatland Carbon Code are two voluntary but regulated schemes. The Woodland Carbon Code can provide an additional income source to the agricultural industry, allowing the planting of woodland to generate independently verified carbon credits, backed by the government. These can then be sold to companies to offset their UK based carbon emissions. Credits from the Peatland Carbon Code are generated by emissions reductions resulting from investments in peatland restoration projects. This is done by quantifying the greenhouse gas benefit from sequestering and storing carbon in peatlands. The ownership and use of carbon credits from these schemes can be found on the UK Land Carbon Registry. This provides transparency to the regulation and verification of these credits. However, these schemes are not applicable to soil-based carbon sequestration. More information on these two schemes

Since there are currently no regulated frameworks for soil-based voluntary schemes, carbon credits from these unregulated, voluntary schemes are cheaper than other forms of carbon credit. Moreover, there is a set demand for regulated credits since they are verified, and large polluters are legally required to offset their emissions over their allowed amount. This contrasts other companies voluntarily offsetting their emissions to become net-zero; these are currently the key customers for the unregulated market.

Since the UK ETS scheme operates within a stabilised market, the price of each carbon credit is supported through a minimum auction reserve price of £22.00/t CO²e. The auction clearing price also ensures credits are sold at the market value. For 2023, the UK ETS’ carbon price is £83.03/t CO²e compared to c.£20.00-30.00/t CO²e for unregulated, voluntary markets. Even though the Woodland and Peatland Carbon Codes are regulated, Pending Issuance Unit (PIU) credits linked to the initial establishment period of these schemes currently sell for c.£20/t.

Conversely unregulated, voluntary markets have individual governance. With no regulatory body setting annual rules, limits and prices, unlike in regulated schemes, price disparities between the different schemes are common.  The voluntary market also relies on the individual schemes, farming methods and organisations which sell them to ensure valid credits are supplied. This makes verifying and comparing the quality of voluntary credits challenging.

Price disparities between compulsory credit schemes

Whilst the UK ETS only came into operation on 01 January 2021, it is based on the EU ETS which started it’s first-phase in 2005. This scheme has been trading longer than other compulsory schemes such as the California Cap-and-Trade scheme (began in 2013), currently trading slightly above $25.00/t CO²e. The Regional Greenhouse Gas Initiative (RGGI), which began in 2009, is limited to the power sector and its most recent clearing price was $12.50/t CO²e. Clearly, there is a link between the age of carbon credit schemes and the price of the carbon traded.

How might the price change in the future?

Demand for voluntary carbon credits is increasing and is set to grow more rapidly as more companies look to reduce their environmental impact by becoming net-zero. This is slowly pushing up the price of voluntary credits. However, until there are more streamlined, measurable ways of verifying the credits through front-running, independent certification bodies, voluntary credits will remain cheaper than compulsory credits. With greater regulation through verification, voluntary credits will hold more value in terms of increased demand and an increased price per credit. Stay tuned for a follow up article on the potential for price changes in the voluntary versus compulsory carbon market sectors.

Choosing the best voluntary scheme for you

When looking to get involved in a voluntary scheme, it is recommended that you seek legal advice. Baselining your carbon stocks as early as possible and sticking to one carbon calculator is key to calculating the value of your carbon. Read more at Does my carbon have a value? Yes, it does

For more information on calculators and tools available visit Environment: Sustainable Farming Incentive and Carbon Outlook

Due to the disparities in the voluntary market, analysing the minimum requirements for each voluntary scheme and the scheme’s monitoring methods are key to ensuring you produce high quality credits that hold more value.

To work out which scheme is best for you, you should compare the length of each scheme, the requirements, the cost to you, the payment amount provided to you for each credit, as well as any buffers and sanctions involved should the carbon stored be released back into the atmosphere. Stay tuned for AHDB’s own comparison of various voluntary schemes available.

Do you have a question regarding carbon markets? To get in touch, email carbon.markets@ahdb.org.uk