Wheat and chaff: carbon credit market to enter high-integrity supply squeeze

Carbon credits have become about as scarce as sand in the Sahara. Since their peak in 2022, issuance has far outpaced retirements, while negative media coverage of credit integrity and greenwashing allegations has fuelled corporate caution about their use.

Beyond these gloomy headline figures, however, a new dynamic is emerging. High-quality credits are on track to become increasingly scarce, according to ratings agency BeZero Carbon.

Overall carbon credit issuance fell by around 50% in 2025 compared with its peak three years earlier. Over the same period, the pace of retirements, where credits are used to offset emissions, declined far more modestly, by 16%, according to BeZero Carbon’s 2025 global carbon credit market review.

While the drop in issuance has been driven largely by a retreat from traditional energy sector credits, retirements excluding energy actually increased. Corporates linked to industrial processes and household devices are making greater use of carbon credits, with retirements in these sectors rising from 12% in 2021 to 25% in 2025.

Over the same period, the share of higher-quality nature-based credits rated A rose from 19% to 28%, BeZero Carbon points out.

Scarcity of high-integrity credits

The ratings agency warns that high-integrity credits are becoming structurally scarcer. For credits rated A or higher, and BBB or higher, retirements have exceeded issuance since 2022, leading to a sustained drawdown in available supply.

Sebastien Cross, co-founder and chief innovation officer at BeZero Carbon, said: “Carbon markets today are incomparable with where we were three years ago. Our analysis shows that businesses are increasingly favouring higher-rated, lower-risk projects. Integrity is now shaping real market outcomes, whether in which credits are retired or how they are priced. Carbon ratings are a vital part of the information infrastructure needed to give corporate buyers the confidence to scale up investment in climate action.”

The warning echoes findings published by MSCI at the end of 2025, which cautioned that a growing share of lower-integrity carbon credits risked becoming stranded assets, while higher-rated credits were starting to become scarce.

At the same time, buyers remain price sensitive. A survey published this week by Morgan Stanley found that pricing is likely to be a key factor in determining future purchasing volumes for 24% of carbon credit buyers.

“The market has been shifting towards higher-quality credits for more than two years,” said Iain Mackay, executive director and head of environmental markets at Morgan Stanley. “Corporates increasingly have a clear view of what they want to buy and what they are prepared to pay. The most common requests we see are for nature-based solutions priced between $15 and $30 a tonne. While it takes time for supply to respond, the demand signals are now well established.”

Natural capital opportunities

Those signals are increasingly being watched by institutional investors, including pension funds, which have begun to incorporate natural capital into their growing private market allocations.

UK LGPS funds in particular have shown strong interest in natural capital strategies, with pools such as Brunel, London CIV, LPPI, Northern and LPGPS Central integrating natural capital into their fund offering. Return expectations have so far remained cautious, typically in the high single digits as future carbon credit pricing remains a key uncertainty.

Against a backdrop of persistent oversupply, prices across the voluntary carbon market have fallen from their peaks. However, a tightening market for high-integrity credits could create new opportunities for institutional investors willing to back higher-quality natural capital assets.