CLIMATE AND CARBON FINANCE MARKET ANALYSIS

The global climate and carbon finance market is estimated to be valued at US$ 367.0 billion in 2023 and is anticipated to witness a compound annual growth rate (CAGR) of 33.7% from 2023 to 2030.

The global climate and carbon finance market encompasses a diverse range of financial activities and instruments that are specifically geared towards climate change mitigation and adaptation efforts. These include carbon markets, climate finance mechanisms, sustainable investment instruments, and various other financial products and services aimed at facilitating the transition to a low-carbon and climate-resilient economy. The market size of the climate and carbon finance sector can be subject to variations, influenced by factors such as policy frameworks, regulatory environments, international agreements, technological advancements, and investor preferences.

Global Climate and Carbon Finance Market: Regional Insights

• North America: The U.S. and Canada have been active in climate and carbon finance, but the approaches differ. While the U.S. has seen a mix of state-level initiatives, federal policies, and market-based approaches, such as carbon pricing schemes at the regional level, Canada has implemented a nationwide carbon pricing system. Both countries have also witnessed growing interest from investors and financial institutions in sustainable investments.
• Europe: Europe is the largest market for carbon trading, driven by the European Union Emission Trading Scheme (EU ETS), the world's first and largest carbon market. The EU is committed to reducing its greenhouse gas emissions by at least 40% by 2030 compared to 1990 levels.
• Asia Pacific: The Asia Pacific region, including countries like China, India, Japan, and Australia, has been experiencing significant growth in renewable energy investments and climate finance activities. Asia Pacific accounts for approximately 30% of the market share. China launched its national carbon market in 2021, which is expected to become the world's largest carbon trading market.

Analyst’s view: The global Climate and Carbon Finance is expected to witness steady growth in the coming years. The growing concerns regarding climate change and greenhouse gas emissions are driving more countries and organizations to explore carbon pricing solutions. Stringent environmental regulations aimed at reducing carbon footprint will increase the demand for carbon credits. Technologies to capture, utilize, and store carbon also provide opportunities to monetize carbon emissions.

Figure 1: Global Climate and Carbon Finance Market Share (%), By Region, 2022

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Global Climate and Carbon Finance Market Drivers:

• Increasing efforts by governments to reduce carbon emissions: The increasing efforts by governments worldwide to reduce carbon emissions are significantly impacting the climate and carbon finance market. These include carbon pricing mechanisms such as cap-and-trade systems and carbon taxes, which create a financial incentive for businesses to reduce their carbon emissions. This is driving the demand for carbon credits and boosting the carbon finance market.
• According to IEA, In 2022, global energy-related carbon dioxide (CO2) emissions increased by 0.9%, equating to 321 million metric tons, and reached a record high of more than 36.8 gigatons.
• Growing investments in renewable energy sources: The adoption of renewable energy sources is a significant factor driving the climate and carbon finance market. Climate and carbon finance provides crucial funding for renewable energy projects such as solar, wind, and hydroelectric power. These projects help reduce greenhouse gas emissions and combat climate change, aligning with the goals of carbon finance.

According to International Renewable Energy Agency (IRENA), solar and wind capacity additions worldwide jumped more than 60% from 2019–2021 reaching almost 900 gigawatts of new capacity.

Global Climate and Carbon Finance Market Opportunities:

• Carbon offset programs: Carbon offset programs play a significant role in the climate and carbon finance market. Carbon offset programs involve projects that reduce, avoid, or sequester greenhouse gas emissions, such as reforestation projects or renewable energy initiatives. These projects generate carbon credits, which can be traded on the carbon market, forming a key part of the carbon finance system. Carbon offset programs provide a financial incentive for businesses and individuals to reduce their carbon footprint. By purchasing carbon credits, they can offset their own emissions and meet their environmental goals. This drives demand in the carbon finance market.
• Investment in developing nations for climate adaptation projects: Climate and carbon finance provides crucial funding for climate adaptation projects in developing nations. These projects help these countries adapt to the impacts of climate change, such as rising sea levels, increased temperatures, and extreme weather events. Many climate adaptation projects, such as reforestation or sustainable agriculture, can generate carbon credits. These credits can be sold on the carbon market, providing an additional revenue stream for these projects and driving the carbon finance market.

Global Climate and Carbon Finance Market Trends:

Increasing Carbon Pricing: Governments and businesses are increasingly recognizing the cost of carbon emissions to society and the environment. As a result, more countries are implementing carbon pricing mechanisms, such as cap-and-trade systems or carbon taxes, which are driving the demand for carbon credits and boosting the carbon finance market. Carbon pricing mechanisms, such as cap-and-trade systems or carbon taxes, create a financial incentive for businesses to reduce their carbon emissions. This drives the demand for carbon credits, which businesses can purchase to offset their emissions.

According to the World Bank's State and Trends of Carbon Pricing 2022 report, carbon pricing efforts have seen substantial growth over the past decade. Presently, carbon pricing programs cover 21% of worldwide greenhouse gas emissions, a significant rise from the less than 5% coverage in 2010. Moreover, the effective weighted average carbon price surged by 26% in just one year, from 2020 to 2021, reaching $4 per ton of CO2 equivalent.

Growth of Green Bonds: Green bonds, which are used to finance projects that have environmental benefits, are becoming more popular. This trend is providing a significant boost to the climate and carbon finance market. The success of green bonds is encouraging the development of other innovative financial instruments in the climate and carbon finance market. For instance, blue bonds (for ocean conservation), transition bonds (for high-carbon industries transitioning to lower-carbon operations), and sustainability-linked bonds (where the interest rate is linked to the issuer's achievement of sustainability targets).

Global Climate and Carbon Finance Market Restraints:

• High capital investment requirements: The high initial costs required for investments in climate change mitigation and adaptation strategies is a major roadblock in the growth of the global climate and carbon finance market. Implementing large scale renewable energy and clean technology projects, transitioning to electric mobility infrastructure, improving energy efficiency in industries and buildings, expanding carbon sinks through afforestation and reforestation programs require massive capital investments up front. For example, according to the International Energy Agency, meeting the goals of the Paris Agreement would require investments of around $4 trillion annually by 2030 in the energy sector alone.

Counterbalance: Forming strategic partnerships or alliances with other businesses can help to share the burden of high capital investment. This can be particularly beneficial for small businesses or startups.

• Lack of uniform carbon pricing globally: Different carbon pricing mechanisms in different countries can lead to market fragmentation. This can make it difficult for businesses to navigate the market and can hinder the growth of the market. The lack of a uniform carbon price can create regulatory uncertainty. This can deter investment in the climate and carbon finance market.

Counterbalance: One way to counterbalance the lack of uniform carbon pricing globally is to push for an international agreement on carbon pricing. This would require cooperation and commitment from all countries, but it would ensure a level playing field and reduce market distortions.

Global Climate and Carbon Finance Market: Key Developments

• In June 2023, South Pole, The South Pole, also known as the Geographic South Pole, Terrestrial South Pole or 90th Parallel South, introduced a novel climate initiative called "Funding Climate Action" (FCA) along with an associated label, offering companies a clear route to expand their climate investments while ensuring transparency.
• On June 30, 2021, Gold Standard, A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. initiated a program with the aim of bolstering heightened aspirations within carbon markets during the Paris Agreement era. This endeavor is designed to enhance ambition in alignment with Article 6 of the Paris Agreement, while also involving consumers and host nations of Internationally Transferred Mitigation Outcomes (ITMOs) as active collaborators in the battle against climate change.

New Product Launches:

• In April,2023,ClimatePartner has introduced a novel climate action certification known as "ClimatePartner certified," which establishes more stringent criteria for businesses, including mandatory emissions reduction goals.
• In August,2023, Verra has released revisions to the Verified Carbon Standard (VCS) Program, bringing enhancements to version 4.5 of the VCS Standard (PDF) and associated VCS Program documents. These changes aim to enhance the program's usability, transparency, and integrity while ensuring alignment with significant global carbon market initiatives like the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Carbon Offsetting Reduction Scheme for International Aviation (CORSIA).

Merger & Acquisition:

• Verra Mobility to Acquire T2 Systems, This acquisition broadens Verra Mobility's range of intelligent mobility technologies designed to enhance transportation safety and convenience.
• Schneider Electric finalizes acquisition of EcoAct,This Acquistion, The collaboration of two top-tier organizations to expedite business solutions that provide genuine value for both the environment and clients.

Figure 2: Global Climate and Carbon Finance Market Share (%) By Market Type, 2023

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Global Climate and Carbon Finance Market: Key Companies Insights

• Climate Care (K, South Pole Group (Switzerland)
• Climate Trust Capital (S), Carbon Clear (U.K)
• EcoAct (France)
• First Climate (Germany)
• ClimatePartner (Germany)
• Ecosphere+ (U.K)
• Verra (U.S)
• Gold Standard (Switzerland)
• Climate Friendly (Australia)
• Forest Carbon (U.K).

*Definition: The notion of "climate finance" is multifaceted, typically encompassing financial support for endeavors focused on either lessening the effects of climate change or adapting to them. Nonetheless, it is occasionally confused with interconnected and interrelated concepts such as green finance, sustainable finance, and low-carbon finance.