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Reaching global net-zero emissions requires a massive effort from private industry, but there’ll be plenty of money to go around for those who chip in, according to Morgan Stanley.
The fight against the climate crisis is being fought on several fronts. Century-old automakers are rushing to electrify their fleets and compete with newer rivals like Tesla and Rivian. Electronics companies are removing items like wall plugs from their packaging in the name of sustainability. Nike and Adidas sell shoes made from recycled plastics and factory scraps.
But not all companies can reach net zero on their own. That’s where carbon offsetting comes in. The practice allows firms to buy credits from less carbon-intensive companies and organizations to cancel out their own emissions, effectively bringing them closer to net zero. Offsetting methods include reforestation projects and renewable-energy sources like wind turbines and dams.
Morgan Stanley analysts led by Lucy Beauvallet said in a note to clients that while the market for offset credits would play a critical role in reaching net zero around the world, it’s still far too small to make a sizeable difference. According to the bank’s estimates, yearly removals would need to double, to about 1 gigaton of CO2, by 2030 and accelerate to a 5-gigaton annual pace by 2050 for the world to reach net zero by that time.
That would drive rapid growth in the offset industry, the team said. The bank sees the market expanding at a compound annual rate of 36% and reaching a valuation of $35 billion by 2030. That sum could reach $50 billion in the “most optimistic scenario,” the analysts added.
The bank’s net-zero scenario would emerge in two stages. In the first phase of offsetting, through 2030, most carbon removal would derive from nature-based methods. Research from the University of California, Berkeley, suggests that nearly half of all offsetting in 2020 came from forestry and land-use practices, and about half of that came from efforts to stop deforestation.
The Morgan Stanley team said that while reforestation and other land-use offsetting methods are capable of “creating a strong carbon sink,” they come with drawbacks. Competition over land, negative effects on soil, and carbon leakage — when emissions reduction in one country leads to an increase in another — can get in the way of long-term offsetting.
As such, Morgan Stanley predicted that technology-based offsetting would outpace nature-based solutions after 2030. The team said offsets including renewable-energy sources, carbon capture, and direct air capture should be more efficient by then and lack the risks of methods that require large swaths of land. But such tech doesn’t exist in scalable form, and more investment is needed before it can replace nature-based offsets.
The bank’s outlook relies on a variety of assumptions. Governments could take stricter stances on mandatory offsetting regulations, which could accelerate the market’s growth and pull forward the projected date for a net-zero economy. Corporations’ commitment to offsetting emissions could waver, though the analysts said there is “evidence of incremental demand” as companies look to show climate leadership. Offsetting methods’ prices could also change dramatically depending on the cost of land, biomass, facilities, and carbon-capture technology.
Still, the early signs hint that the offset market is on the verge of a growth spurt. With the climate crisis posing an existential threat to the global economy, methods for countering emissions are likely to explode in popularity.