Ratings and price volatility: early insights from a maturing market

Introduction

Since launching the BeZero Carbon Ratings in 2022, we have witnessed a growing correlation between our ratings and credit prices. By 2025, our research showed that every notch on the BeZero Carbon Rating scale commanded a 40% price premium (Figure 1) ¹. Sector-specific dynamics exhibit analogous trends, with the latest Fastmarkets report indicating significantly higher prices for better-rated ARR, IFM, and REDD+ projects ².  

The increasing alignment between credit prices and underlying project performance marks an important milestone in the development of a well-functioning and scalable market. All the same, as finance professionals (and other market actors) know too well, prices are only one side of the coin. Volatility – how much and how quickly prices can change over time – represents the other side. In the debt market, for example, extensive research has shown that the credit spreads of lower-rated issuances are not only higher on average but also more volatile over time than those of their higher-rated counterparts ^3,4.

Despite the growing scale of the Voluntary Carbon Market (VCM), no similar research appears to have been conducted to date linking carbon ratings to price volatility. Yet, this should be of great interest to investors, brokers, dealers, and other intermediaries, as well as regulatory and supervisory bodies. In the debt market, credit ratings are a well-recognised measure of price risk. They are regularly used to guide investment decisions, determine collateral eligibility and haircuts, and define regulatory frameworks such as the Basel III minimum capital requirements for banks ⁵. The European Central Bank’s recent decision to incorporate a climate factor into its collateral framework, aimed at better managing the financial risks associated with climate change, signals that a policy shift is underway ⁶. The application of well-established market architectures to nascent climate finance instruments represents a critical step toward their next phase of scale and market maturity.

Initial findings suggest that higher-rated credits tend to exhibit lower price volatility

Given the decline in carbon credit spot market activity in recent years (as evidenced by reported trade volumes ⁷), purely transaction-based prices cannot be relied upon to compute long-term estimates of historical price volatility. One factor contributing to this limited liquidity is the increasing use of offtake agreements by project developers to secure initial financing ⁸. As a result, an expanding share of credits is being transferred directly from developers to end buyers, bypassing traditional spot trading venues such as carbon exchanges and reducing visible pricing activity in the market.

As such, we leverage the AlliedOffsets historical price dataset for this analysis. This dataset includes weekly prices from June 2023 to September 2025 for BeZero-rated credits, offering a sufficient number of data points. Each week, AlliedOffsets collects hundreds of sample bid, ask, and transaction prices from brokers, exchanges, and project developers. These data are then cleaned and processed through a proprietary nowcasting model to compute project- and vintage-level estimated prices ⁹. AlliedOffsets’ pricing methodology does not incorporate BeZero project ratings. Consequently, any observed relationship between price volatility and rating cannot be attributed to the pricing model itself but rather reflects underlying market dynamics.

We find a clear relationship between rating and historical price volatility. On average, lower-rated carbon credits have exhibited significantly higher historical price volatility than higher-rated ones (Figure 2). Credits rated ‘BB’ or below have shown roughly one-third more volatility than those rated ‘BBB’ or above. The difference is even more striking at extremes: ‘C’-rated and ‘D’-rated credits have experienced price volatility more than two and three times that of ‘AA’-rated projects, respectively.

To test the robustness of our findings, we repeat the analysis using only a subset of BeZero-rated projects that AlliedOffsets has classified as ‘High Confidence’ throughout the full sample period. These are credits for which the price estimates are deemed highly reliable, with consistent data from multiple brokers ¹⁰. While this reduces the size of the dataset, we still observe a strong negative correlation between rating and price volatility: the lowest-rated credits continue to show more than twice the price volatility of the highest-rated ones (Figure 3).

Finally, we control for sectoral and credit-type effects to verify that these factors do not drive the observed relationship between ratings and price volatility. Based on data availability, we focus on the Forestry sector, namely Avoided Deforestation (avoidance credits), Afforestation, Reforestation & Restoration (removal credits), and Improved Forest Management (both credit types). Across all sub-sectors, credits rated ‘BBB’ or higher consistently exhibit lower price volatility than those rated ‘BB’ or below, reinforcing our findings (Figure 4). Nevertheless, volatility patterns do vary across project types. The negative correlation between rating and volatility is most pronounced for Improved Forest Management projects, while Avoided Deforestation credits display the highest volatility levels.

Towards a mature carbon market

Our analysis contributes to the growing body of evidence suggesting that the carbon market is maturing. As in the debt market, several factors may explain the higher price volatility among lower-rated credits. First, lower-rated credits are likely more exposed to shifts in market sentiment. When overall confidence declines, investors typically sell or reprice riskier credits first, whereas higher-rated credits tend to benefit from a ‘flight-to-quality’.

Second, lower-rated credits are usually more vulnerable to project-specific reversal events. For example, credits issued by a Forestry project with significant permanence risk could be at higher risk of being compromised by a wildfire in the project area, or by an investigative report revealing community discontent following inadequate free, prior and informed consent processes. These higher underlying physical risks might contribute to greater price swings for lower-rated projects.

Third, the observed positive relationship between price and performance implies that lower-rated credits tend to trade at lower prices, often well below USD 5 ¹. As a result, small absolute price changes correspond to large percentage fluctuations, for the same reason that penny stocks often exhibit higher volatility than large-cap equities. This effect is further exacerbated by the limited market liquidity and wide bid-offer spreads, which are still observed in the VCM. Finally, structural market factors may also influence our findings. For instance, the growing use of offtake agreements among higher-rated projects could help stabilise their prices by reducing exposure to volatile spot market conditions. 

Concluding remarks

This analysis is the first to investigate the relationship between ratings and price volatility in the VCM. Our finding that lower-rated credits tend to experience a significantly higher price volatility than higher-rated credits is an important signal of a maturing carbon market. In principle, both price levels and volatilities should be intrinsically linked to the underlying credit performance. The strength of their observed correlations with ratings indicates that the market is increasingly pricing in relevant information. Our analysis therefore underscores the importance of integrating well-recognised measures of risk – such as ratings – into the infrastructure required to scale the carbon market.

That said, there are some limitations to our analysis. By focusing on pricing estimates which are as close as possible to real market observations (i.e. ‘High Confidence’ AlliedOffsets prices), we prioritised accuracy but worked with a relatively small dataset available, particularly for some rating categories. Further research is warranted to examine how the relationship between rating and volatility varies across sectors, vintages, and other relevant dimensions. As more granular and longer-term datasets become available, BeZero will continue to investigate these interconnected dynamics in the carbon market. 

References

This analysis is based on historical estimated offer price data from Allied Offsets.

1. 2024: Carbon credit markets in review. BeZero Carbon, January 2025

2. Fastmarkets price assessment - October 15, 2025. Fastmarkets, October 2025

3. Explaining Credit Default Swap Spreads with Equity Volatility and Jump Risks of Individual Firms. BIS Working Papers, No 181

4. Dupoyet, B., Jiang, X., & Zhang, Q. (2023). A new take on the relationship between interest rates and credit spreads. Applied Economics, 56(5), 520–536

5. Calculation of RWA for credit risk. BIS, June 2025

6. ECB to adapt collateral framework to address climate-related transition risks. ECB press release, 29 July 2025

7. 2025 State of the Voluntary Carbon Market (SOVCM). Ecosystem Marketplace, May 2025

8. Ten insights for buyers from our 2024 voluntary carbon market report. Carbon Direct, November 2024

9. Comprehensive Carbon Credit Pricing Updates. AlliedOffsets, February 2025

10. Enhancing Pricing Accuracy with Confidence Scores. AlliedOffsets, September 2024