^{Chapter 2:}
Supporting
demand

Chapter 2:

Supporting demand

Demand in carbon markets is largely driven by entities voluntarily ‘offsetting’ their current and/or anticipated future emissions. In some cases, carbon removals or avoidance units are embedded into compliance markets, via linkages to emissions trading schemes (ETS), carbon taxes or mandated ‘offset’ schemes. In some quarters, demand may be suppressed due to concerns about the ‘quality’ of carbon units and their underlying projects; i.e. the perception (or reality) that carbon impact has not been achieved.

This section sets out the levers available to governments, legislators, standards bodies and market participants, to create demand utility in carbon markets.

2.1. The collective action and carbon pricing problems

Climate change – and the actions required to solve it – is a widely acknowledged challenge. However, the relationship between those who cause the problem and those who bear the risk is not symmetrical, calling for collective action involving all parts of government, commerce and civil society.

Although sector pathways are starting to emerge, corporate action ranges significantly across and within sectors, and between countries. For example, some large technology companies have net zero targets including negative emissions and compensation for historic emissions, while others have 2050 net zero targets, and others have no targets at all. These differences generate a significant range of carbon buying strategies, from none to market leading. The first mover here is a leader, but, unless, all the players participate, leadership fails to produce the intended environmental benefits and a scaled market.

Additionally, markets or governments do not price carbon effectively as an externality, which caused carbon pricing to be immature and to vary significantly. Hence there is no immediate and monetised incentive to take part in carbon markets. This is not unique to carbon markets but is felt most acutely because carbon units are treated as an expense, with little utility outside of voluntary claims (albeit this is not clear, see Section 5.2) and a general contribution to meeting planetary climate goals.

ETS carbon prices vary widely from US$1tCO₂e through to US$167tCO₂e,²⁴ with very significant dilution of many carbon prices per tonne, due to sector coverage and free allowances. Furthermore, because carbon taxes have historically largely been separated from carbon credits, emitters pay to pollute, rather than invest in projects (as outlined in Section 1). This is, however, changing globally: 66 countries currently have a carbon tax or ETS in place.²⁵

_²⁴_{The Price of Carbon Around the World in 2024}_²⁵_{Our world in data; Carbon taxes globally}

2.2. Demand inhibitors: inconsistent claims standards

Without linkage to compliance markets and carbon taxes, prospective buyers need a clear reason to buy into carbon markets. A common starting point involves alignment with science-based standards bodies.

As stated in Section 1, there is an emerging recognition from these bodies that carbon markets (particularly removals) are needed to support the achievement of net zero. But standards bodies frequently differ in how companies can claim the use of carbon credits and investments against their emissions (see Table 1).

Table 1: Claims positions from standards bodies

	Role of offsets in net zero target	Limit to offset quantity	Type of activities that can be offset	Transition or at net zero
Committee on Climate Change	Yes – only residual	Not set value – “minimise the use”	Residual emissions, primarily from aviation, agriculture, heavy industry	Only at point of Net Zero
SBTi Corporate Net Zero Standard	Yes – only residual	Up to 10% of baseline emissions	Residual emissions, primarily from aviation, agriculture, heavy industry	Only at point of net zero – consulting on Scope 1 ‘interim’
Oxford Offsetting Principles	Yes – only residuals at net zero, but for full portfolio during transition	No set value – only residual	Residual emissions, primarily from aviation, agriculture, heavy industry	Progressively increase investment into projects up to net zero date

The Science Based Targets initiative (SBTi) position is moving, and it has recently consulted on updating its net zero guidance, to allow companies to claim neutralisation of a proportion of interim Scope 1 emissions, using carbon removals.²⁶ Previously, the body’s guidance had restricted this to claiming removals against targets ‘at the point of net zero’ – hence significantly delaying demand utility for buyers. Table 1 is non-exhaustive, and there are other standards bodies that provide guidance on the use of carbon credits. The International Standards Organization (ISO), for example, has developed ISO 140868, which specifies principles for achieving carbon neutrality through the quantification, reduction and offsetting of the carbon footprint. It establishes a hierarchy for neutrality and sets out criteria for carbon credits.²⁷

Nonetheless, standards body positions either remain restrictive over the use of carbon within net zero claims and/or they remain inconsistent across different standard bodies. Without clear use cases, demand in the market may continue to be constrained.

_²⁶_{SBTi corporate net-zero standard, V2 2025}_²⁷_{ISO 14068-1:2023 - Climate change management — Part 1: Carbon neutrality}

2.3. Demand inhibitors: inconsistent carbon and quality standards

Alongside inconsistent claims standards and a lack of wider demand utility, demand continues to be held back by inconsistent standards for calculating carbon impact and lack of quality benchmarks. As the UK Government recently stated:

Confidence in the integrity of these markets is key to unlocking their full potential, but high integrity practice has not always occurred. Clarity and consensus on what constitutes a high quality credit and how credit use should be reflected in corporate claims are critical first steps towards unlocking the stability of demand that is necessary for scaling high integrity markets.²⁸

_²⁸_{Voluntary carbon and nature markets: raising integrity - consultation document (accessible webpage) - GOV.UK}_²⁹_{ICVCM Leading the way to a high integrity Voluntary Carbon Market}_{³⁰ British Standards Institute,}_{Nature markets – Supply of nature-based carbon benefits – Specification,}_{March 2025}

Inconsistency presents challenges at both a methodology level and benchmark level. With more than 500 carbon methodologies available, many, if not most, project types may choose different methodologies from different registries. This increases the likelihood of delivering different carbon values from the same project.

There are emerging benchmarks to address quality. For example, the Integrity Council for Voluntary Carbon Markets (ICVCM) seeks to greenlight methodologies that meet integrity criteria, and, through this process, rationalise the number of methodologies in the market that meet certain quality standards.²⁹ Likewise, the British Standards Institute (BSI), supported by the UK government, has issued a series of principles for nature carbon markets wishing to support “transparency and accountability” for the delivery of carbon impact.³⁰ This is designed to work alongside other principles such as the ICVCM, as well as crediting programs embedded in Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) and UN Article 6 Mechanism.³¹

_{³¹ ICVCM assesses carbon crediting programs and methodologies for adherence to the criteria in the Assessment Framework, granting ‘CCP Eligibility’ to programs and ‘CCP Approval’ to methodologies that comply. When a CCP-Eligible carbon crediting program has credits in their registry that have been issued under a CCP-Approved methodology, the program labels those credits with the high-integrity CCP label – clearly identifying which credits have met the CCP integrity standard.}

Given the number of methodologies, it is important to have crediting standards benchmarks to support consistency in measuring impact. However, these benchmarks should be consistent and focused to avoid confusion and a proliferation of competing ‘principles’. The market also needs to recognise that the principles alone do not deliver a mechanism to enable the fungibility of carbon (despite, for example, the BSI referring to the value of the “fungibility of carbon” in articulating its principles). Principles are primarily a ‘filter’ on the journey to common standards and benchmarks. And (as Chapter 7 highlights) principles could extend their range, to support consistent data standards – something not present in the market today.

Recommendation:

Governments should support consistent standards benchmarks (i.e., ‘principles’) in the market, rather than allowing multiple overlapping ones to proliferate. These filter the number of carbon methodologies in the market, but do not per se support the delivery of fungibility – a limitation the market needs to recognise.

2.4. Demand accelerators: carbon claims and use clarity

There is a scientific consensus over the need for carbon reductions and removals to meet net zero commitments, and a growing acknowledgement that carbon removed and avoided now is likely to have a greater benefit than waiting. Additionally, there is significant pent-up investment and business activity to enter and scale the market. To accelerate demand, standards bodies and, ultimately, governments should, therefore, provide more clarity over use cases and claims.

These organisations should confirm that corporates can claim the use of high-quality carbon units against their net zero targets covering the following areas:

Claims that can be made now against all scopes: Carbon units can be claimed against their emissions reduction targets today and this should be applied to all scopes of emissions (i.e., Scopes 1-3).
Removal of quantity thresholds: Use should be based on activities that cannot reasonably be decarbonised, rather than against thresholds such as caps of a proportion of emissions (e.g. 10% caps). By acknowledging that some activities cannot be reasonably decarbonised today – but could be in future – organisations could claim carbon units against these activities today.
Use of avoidance as well as removals units: While removals units are largely preferable, there remains a strong case to invest in a number of avoidance projects such as nature avoidance (notably to avoid ‘tipping points’ in certain regions). A clear range of project types should be outlined as ‘acceptable’ and in line with the science to be used, rather than drawing the line at ‘removal’ versus ‘avoidance’.

Recommendation:

Standards bodies should provide clear, aligned positions on use of carbon units against net zero targets. Governments should set these expectations, and if standards bodies fail to act, then the government should step in to provide this clarity.

2.5. Demand accelerators: compliance markets

The world has struggled to achieve consistent, collective action against climate change, while pricing carbon generates significant, immediate costs. To address these challenges, policymakers need to mandate action via market-based mechanisms. However, markets alone have failed to comprehensively price the externality (i.e., place a monetary value on damage from emissions) necessitating some form of formal carbon pricing.

The principles of carbon pricing and compliance markets, and carbon taxes, are broadly accepted, with 66 ETS and carbon taxes across the world.³¹Carbon offset compliance markets exist via the CORSIA scheme across the aviation industry, in Australia, New Zealand and other jurisdictions. California’s ETS enables companies to offset carbon credits against a proportion of their liabilities, while in Singapore, carbon credits can also meet a proportion of companies’ carbon tax obligations.

These are all examples of mandatory mechanisms, and jurisdictions are likely to develop different constructs, to increase demand utility and support fungibility within and across schemes.

Therefore, the following is recommend:

2.5.1. Connection to ETS

Where ETS exist or are planned, countries should integrate carbon into these schemes by allowing companies to meet their ETS requirements via carbon units. To varying degrees, ETS currently price the cost of carbon – but effectively operate as ‘pay to permit’ schemes, where covered corporates compare the cost per tonne of polluting against the weighted cost per tonne of decarbonising. ETS often price this at the margins, due to free allowances in certain sectors; this can obscure the significant dilution of the price to pollute.

Carbon credits effectively price the externality and, within an established ETS system, can deliver prices per tonne that policymakers seek. Credits also go beyond ETS permits to sequester the carbon directly. An ETS framework also helps to counter concerns that carbon credits will be used to replace decarbonisation efforts; delivering ever higher market prices within ETS can continue to incentivise decarbonisation to meet policymakers’ expectations.

Jurisdictions are increasingly recognising the value of the link between ETS and carbon units. The UK recently announced its intention to incorporate certain carbon removals within its ETS by the end of 2029.³² And the EU has issued a consultation seeking views on carbon removals units within its ETS – which is the largest scheme globally.

Furthermore, the EU, with its economic weight, and its incoming Carbon Border Adjustment Mechanism (CBAM), is likely to pioneer ETS. For example, should the UK seek EU ETS linkage, it will need to follow its rules; if not, then UK corporates will have to follow CBAM requirements that are consistent with ETS requirements.

To deliver consistent ETS approaches and frameworks, policymakers around the world should consider the following questions:

Integration profile: Over what timeframe and across which sectors are carbon units integrated into the ETS?
Carbon units and standards permissible: Which credit standards are permissible?
Market infrastructure: Which registries can carbon units be used? How does the country account for carbon flows internationally?
Location of carbon units: Which jurisdictions can credits be issued for use within the ETS?

Recommendation:

Policymakers should integrate carbon units into t Emissions Trading Systems (ETS). This should be done in a consistent manner, particularly for requirements and criteria related to credits standards, project types and market infrastructure – to drive market integrity and coherence.

_³²_{Integrating Greenhouse Gas Removals in the UK ETS: Main Response}

2.5.2. Delivering Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA)

CORSIA is a global, market-based measure to offset the increase in total CO₂ emissions from international aviation above 2020 levels. Airlines are required to reduce their emissions by purchasing eligible units (i.e., carbon and/or sustainable aviation fuels (SAF)) from approved projects that reduce or remove greenhouse gases from the atmosphere. CORSIA therefore provides a demand mechanism for carbon credits.

Countries must establish a national framework to implement CORSIA, including legal and regulatory measures to support the scheme's objectives. They should monitor compliance, take necessary actions against non-compliant airlines, and connect CORSIA to national ETS schemes that also cover airlines.

CORSIA has been designed and adopted across the globe – and welcomed by airlines and their representatives. Governments should, therefore, set clear regulatory penalties for non-compliance, to incentivise the use of carbon to address emissions. They should also seek to avoid ‘double charging’ for the same emissions for airlines covered by ETS schemes. Such measures can help economies to maintain airlines that are both climate friendly and cost competitive.

Recommendation:

Governments should seek to implement CORSIA schemes domestically, acknowledging how carbon projects can support aviation to meet net zero commitments. Penalty regimes can incentivise airlines to comply with purchases of eligible units (i.e. carbon reductions) where required. It is important to help ensure that airlines are not double charged where they are already covered by ETS schemes.

2.5.3. Delivering compliance carbon schemes

A number of countries have implemented compliance carbon schemes. These operate separately from ETS or carbon taxes, but mandate that, under specific circumstances, companies purchase carbon units to meet obligations.

Australia has a mature compliance carbon market. Certain sectors, such as electricity, are subject to the Safeguard Mechanism, requiring organisations to keep their emissions below a baseline level. If they exceed this baseline, they must purchase Australian Carbon Credit Units (ACCUs) to offset the excess emissions. Where jurisdictions do not seek to implement wider carbon pricing mechanisms (such as ETS or carbon taxes), compliance carbon schemes could stimulate demand – as well as price carbon.

2.6. Demand accelerators: buying mechanisms and connecting supply and demand

Several mechanisms can help markets and policymakers stimulate direct or indirect demand for carbon. These include best practice contracting mechanisms, which are being adopted by leading market players and intermediaries; and coordination efforts via buyers’ clubs and guarantees. The latter are modelled on those used in renewable energy markets, such as contracts for difference.

2.6.1. Offtake agreements

The carbon market has historically involved spot trading, where carbon credits are bought as individual units on exchanges, or via over-the-counter (OTC) transactions. In the past three years, however, it has rapidly shifted to offtake agreements directly between buyer(s) and projects delivering carbon removal or abatement (Graph 1). In 2024, the spot market saw US$535m of credits traded, while US$3b of offtake agreements were announced. This trend has accelerated in 2025, with H1 delivering US$7b – the highest direct offtake market volume and value to date. Based on market prices, in April 2025 alone, one buyer, Microsoft, committed to an estimated US$2b of offtake agreements, signalling the significant potential for fast market growth.

Graph 1. Total spot and offtake traded carbon value³³

These offtake contracts resemble the shift in renewable energy offtake contracts, providing the terms for carbon delivery and contract settlement. Purchasers can choose from several model contracts, and aggregators such as Frontier provide standard contracts for their buyers and sellers. Because the contracts can set market standard practices, they should contain consistent, robust verification and carbon methodology clauses; this would support the future fungibility of carbon and provide best-in-class verification. By providing a basis for secondary trading of carbon as ‘spot’ units, these contracts can accelerate the development of exchange-based markets for carbon.

Recommendation

Direct offtake contracts should include best-in-class verification and methodology clauses which use consistent market approaches and standards. Rather than re-inventing ways to measure carbon, parties should agree a small number of approaches, to support carbon fungibility. Contracts should be designed with secondary trading in mind, to support the on-sell to this market where required.

_{³³ EY-Parthenon analysis. 2025 data for spot is assumed, given that data for this part of the market typically lags behind. We have assumed that the market will contract as before so ¼ is assumed for the current period}

2.6.2. Buyers’ clubs, carbon portfolios and ‘stacking’

For those seeking to buy carbon, buyers’ clubs can provide a range of support and aggregator mechanisms to facilitate buying and diligence – as well as risk-managed portfolios and economies of scale. They enable a series of buyers to agree joint purchase commitments, or infrastructure, platforms and standard contracts of legal terms to purchase carbon.

Buyers’ clubs can also send a range of demand signals to different parts of the market – for example, on carbon removals or nature. They may involve various degrees of ‘infrastructure’, ranging from coordinated buyers request for proposals (RFPs), through to aggregated buying mechanisms, supported by diligence and wider transactions services. However, these signals are often future commitments to purchase, with many being long dated (decades) for carbon delivery. The market would, therefore, benefit from short-dated commitments, to ramp up to key net zero and sustainability target dates such as 2030 and 2040.

Supply side and market intermediaries can also help drive demand. Suppliers and their investors need stable and immediate cashflows (rather than multi-decade break-even models) and are taking two paths to this goal. The first is at portfolio level; for example, through portfolios composed of a range of project types with short-term and long-term carbon yields, such as a combination of avoidance or short-dated (as well as longer-dated) removals projects. The second is at project level, ‘stacking’ projects onto the same land by mixing project types per hectare. This may include long-term nature removals (e.g. reforestation) and carbon dioxide removals (CDRs – e.g. biochar), and selling carbon and biodiversity benefits – all on the same land. Project teams should help ensure they can effectively deliver both carbon and biodiversity within this ‘stacked’ ecosystem. If successful, such an approach can achieve more efficient delivery of carbon per hectare, as well as a more attractive and immediate cashflow for investors.

Recommendation

Buyers’ clubs can deliver important demand signals and help enable buyers to enter the market more efficiently. Given the nascency of these clubs, the market would benefit from a greater range of approaches, especially to incentivise the immediate delivery of carbon. Project developers and intermediaries should focus on delivering immediate cashflow and more efficient sequestration processes, working with carbon standards where needed to update the way they verify ‘stacked’ projects.

2.6.3. Connecting physical and carbon markets

Increasingly, economies are developing and executing carbon capture usage and storage (CCUS) strategies to support their net zero commitments. This technology tends to require significant infrastructure (for instance, to transport and store physical carbon, often offshore) and initial capex outlay. Without very high carbon prices – such as through ETS or carbon taxes – CCUS are not economical for businesses. Consequently, in the USA, UK, and EU, governments have stepped in to provide market frameworks, subsidies and, increasingly, offtake and revenue support for emitters with CCUS facilities. The UK government has committed to over US$27b across four initial sites to support the deployment of this technology.

Governments clearly have a role to kick-start markets, using taxpayers’ money where appropriate to solve market failures. However, where mechanisms exist, governments should seek to use private capital and market structures to finance, fund and deliver appropriate infrastructure. This means connecting CCUS and carbon markets, supporting the sale of carbon to private buyers where possible, and incentivising the use of carbon to meet regulatory requirements – for example through connecting compliance and carbon markets. Such financial backing could help governments reduce or remove support for infrastructure-related capex and operating expenditure (opex), or better target areas with market failures that cannot be solved through other means.

Recommendation

Governments should seek to connect carbon markets to CCUS and other similar infrastructure, particularly where they deploy taxpayer funding to support the build and execution of carbon sequestration technologies. This could allow governments to reduce taxpayer funding and/or better target funds at remaining market failures.

2.6.4. Contracts for difference

Outside of linkages to compliance schemes, policymakers have other levers to support pricing and demand offtake, including contracts for difference (CfD).

A CfD is a financial agreement between two parties, typically a buyer or an intermediary and a seller, where the seller agrees to pay the buyer the difference between the market price of a commodity (in this case, carbon credits) and a predetermined price (the ‘strike’ price). If the market price exceeds the strike price, the buyer pays the difference to the seller, and vice versa.

CfDs have been used effectively in energy markets, to give pricing certainty to investors in capex intensive projects, such as offshore wind, which in turn can help deliver project finance. In the UK, the Low Carbon Contracts Company (LCCC) operates as intermediary in these transactions, providing the price differential when the strike price is above the market rate, and recouping the delta when it is below the market rate. Strike prices are determined through auction processes. They have also been deployed in carbon markets; for instance, the Canada Growth Fund has used CfDs to catalyse investment into carbon projects.³⁴

CfDs could also benefit carbon markets, which experience failures similar to capex-intensive energy markets: capital intensive projects with delayed cashflow (in some cases by decades); poor market price signals and volatility – which erodes investor confidence; multi-year projects and cashflow periods; and strategically important activities to deliver against government targets. deploying CfDs could kick-start carbon markets and enable projects to reach market parity prices, as has been the case for UK renewables markets.

Recommendation

Governments can explore using CfDs for carbon and carbon removals (like in UK renewable energy markets), to support innovative technologies, pricing clarity and demand in event of market failure.

_³⁴_{Canada Growth Fund Inc. | CDEV}