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Carbon credits are heating up again as an investment proposition. With the growing emphasis on cost-effective decarbonization, it's critical that companies understand why — and why now.
On the face of it, carbon credits have endured a couple of challenging years. Strong growth in carbon credit use at the turn of the decade has slowed more recently, despite retirement volumes creeping to record highs in the first half of 2025.
But focusing on carbon credit retirements alone risks missing something more fundamental. Investor activity is strong. According to MSCI Carbon Markets, approximately three times as much capital was raised to invest in carbon credit activities between 2021 and 2024 as in the previous three years. 2025 is on track to be a record year.
Carbon credits have been around for some time. So, what has changed, and why is investor interest building?
The first reason is Article 6 of the Paris Agreement. Finalized last year, Article 6 provides a framework for countries to cooperate in achieving national climate goals through the use of carbon credits. This is a potential game-changer.
To understand the scale of what’s possible, consider the Clean Development Mechanism, the UN’s primary carbon credit mechanism under the Kyoto Protocol. Over its functional lifespan, the Clean Development Mechanism saw more than US$300 billion invested in carbon credit projects — roughly US$15 billion per year on average, with peak years likely much higher.
Compare the Clean Development Mechanism with the current size of carbon credit markets. Global project investments were estimated at about US$6 billion in 2023. Even if Article 6 uptake is relatively modest compared to the Clean Development Mechanism, carbon markets are likely to grow.
And early signs that Article 6 will spur carbon markets are promising. More than 100 countries have already indicated their intention to utilize Article 6, including the European Union. In early July, the European Commission proposed allowing the limited use of high-quality Article 6 carbon credits towards the EU’s 2040 climate targets. climate targets.
The second reason is partly a result of the first. Having Article 6 of the Paris Agreement in place appears to have finally awoken governments to the potential of carbon markets to enable both climate policy and economic growth.
Governments have shown tepid interest in carbon credits since the 2008 financial crisis. That has changed recently. For example, the EU passed its ‘Carbon Removals and Carbon Farming’ legislation into law late last year. The law establishes an EU-wide framework for certifying carbon removals, including long-term CO2 sequestration in forests, geological formations, and products. In July, the UK Government announced plans to include carbon removal credits in its emissions trading system.
The action is not limited to Europe. Japan allows the use of carbon credits issued through the Japanese Crediting Mechanism in its domestic carbon market, which will become mandatory next year. In fact, countries as diverse as Singapore, China, Brazil, Kenya, and Indonesia have all taken policy steps indicating carbon credits are part of their climate plans.
Given the central role of governments in scaling markets for everything from cell phones to solar panels, government interest often signals future scale, and sharp-eyed investors appear to be taking note.
The third reason is that we now have a better idea of what high-quality carbon credits look like than ever before.
A lack of quality was one of the main criticisms of carbon markets and was partly responsible for the slowdown in the growth of carbon credit use from 2023. Since then, one of the defining features of carbon markets has been an obsession with the pursuit of higher quality.
That obsession now looks to have borne fruit. Arguably, the most prominent result is the rise of ratings agencies, which allow both carbon credit investors and credit purchasers to understand quality and risk in new detail. The Integrity Council for the Voluntary Carbon Markets has also gone some way to defining a minimum threshold for quality across carbon markets with its Core Carbon Principles.
What’s particularly interesting about quality is that, once defined, it becomes even more obvious that there isn’t enough of it. Typically, fewer than a fifth of rated projects achieve what most carbon credit buyers consider an acceptable level of quality. This hasn’t escaped the attention of investors who see a financial opportunity in creating the next generation of high-quality supply.
Conclusion: carbon credits set for a growth spurt?
All three factors above bode well for carbon markets and are spurring investor interest. And investment dollars are flowing. Recent investments include:
US$250 million in carbon project developer Imperative Global (by carbon investment manager Artemeter)
All of this has led some market commentators to draw parallels between the carbon credit landscape today and more mature renewable energy markets. Renewable energy took off once quality was better defined and governments put in place supportive policies, such as feed-in tariffs and tax incentives. The confluence of Article 6, government support, and a stronger quality landscape may yet put carbon markets on a similar trajectory.
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Our team captured several key takeaways from our LCAW discussions with business leaders, investors, policymakers, and representatives of civil society organizations.
