Expert author: Carbon specialist, Sarah Costello
Carbon credits are a vital part of the global carbon markets and demand is steadily increasing as governments and organisations ramp up their efforts to reach net-zero emissions. In this guide we look at:
- What are carbon credits
- Why do we use carbon credits
- Carbon market development
- Carbon trading history
- Achieving carbon neutrality
- Reaching net-zero emissions
- Carbon offset projects
- Carbon credit standards
- Enhancing environmental and social co-benefits
- Achieving UN Sustainable Development Goals; and
- Trading carbon credits
What are Carbon Credits
Carbon Credit is a transferable instrument certified by governments or independent certification bodies to represent an emission reduction of one metric tonne of CO2e. The purchaser of an offset credit can “retire” it to claim the underlying reduction towards their own GHG reduction goals.
Why do we use carbon credits
Avoiding the climate catastrophe requires control over the carbon budget, which is the amount of carbon dioxide emissions permitted over a period of time to keep within 1.5 degrees Celsius and not exceeding 2 degrees Celsius. Following COP26, countries and companies increased their pledges around the emission reduction targets, yet the current trajectory is unlikely to be sufficient to achieve temperature goals. Moreover, even as we progress along the scalability and learning curve of new technologies, some emissions will remain unavoidable by 2050. Therefore, high quality carbon credits with embedded co-benefits play a crucial role in complementing decarbonisation efforts.
Carbon market development
Carbon markets are trading systems that allow countries, companies or organisations to buy or sell carbon credits in an effort to meet their regulatory and voluntary emissions reduction targets or offset their carbon footprint beyond those targets. Currently there are two types of carbon markets with limited fungibility between them. They are the:
- Compliance markets – These markets are created and regulated by mandatory national, regional or international carbon reduction regimes.
- Voluntary carbon markets (VCM) – These are decentralised markets allowing companies and individuals to purchase carbon credits on a voluntary basis.
Both the compliance markets and the voluntary carbon markets have developed over time to service the carbon sourcing requirements of government and industry.
Carbon trading history
Emissions trading began in the 1990s (for Sulphur Dioxide in the USA) and trading activity increased after the signing and ratification of the Kyoto Protocol, the first international agreement where nations committed to reduce carbon emissions. Article 12 of the Kyoto Protocol included the Clean Development Mechanism (CDM), which allowed a country with an emission-reduction or limitation commitment to implement carbon projects in developing countries. This formed the basis of the offset market. The voluntary carbon market (VCM) was also created in the early 2000s as organisations voluntarily bought and sold carbon credits in a bid to remove or reduce greenhouse gas (GHGs) emissions and promoted the use of social and environmental co-benefits to enhance the impact of their projects.
Achieving carbon neutrality
A key driver of the VCM is the push towards carbon neutrality, which is achieved by calculating a carbon footprint and reducing it to zero through a combination of internal emission efficiency measures and external emission reduction projects. Put simply, being carbon neutral means that the amount of carbon dioxide (CO2) emitted is offset by reductions or sequestration elsewhere.
Net-zero emissions targets mean reducing your own emissions as far as possible and then accessing carbon credits for the residual emissions. The 2015 Paris Agreement led to recognition by government and industry that carbon credits are integral in helping to achieve net-zero goals. This prompted industry to turn towards carbon offset programs, and specifically, the carbon credit market as a means to deliver incentives to reduce and sequester emissions. Last year, the COP26 in Glasgow saw more than 1,200 organisations make net-zero pledges which further accelerated the trading of carbon credits in both the compliance market and the voluntary carbon market. To further support the push to net-zero, the UN has launched a Race To Zero campaign, which now covers 1,049 cities, 67 regions, 5,235 businesses, 441 investors and 1,039 higher education Institutions.
Carbon offset projects
Carbon offset credits can be produced by a variety of activities that avoid, reduce or remove emissions from the atmosphere. These activities are usually undertaken as individual or grouped projects across the following sectors:
- Forestry and Land use
- Waste Disposal
- Household and Community
The size of projects can vary from representing a few hundred tonnes of CO2e per year to millions of tonnes per year. Emission reduction projects represent activities that result in a measurable reduction in emissions that would otherwise not take place without carbon finance. For example, activities which are supported by government law, subsidies or regulation are generally not considered “additional” and therefore ineligible for financial support from issuing offsets. Activities which remove carbon from the environment are very rarely supported by other revenue sources and therefore require offset revenue in order to be financially viable.
Carbon credit standards
In the voluntary carbon market standards and methodologies are set and accepted by non-profit organisations such as Gold Standard and Verra, some voluntary standards are also implemented by national and regional government regulators (e.g. Australia, California and Japan). The Standards help the carbon market run smoothly by setting out protocols around how carbon credits will be assigned to different types of projects, based on key criteria and verified by an independent third party. The Standards are important in helping to ensure the integrity of carbon trading and offsetting by verifying that the reduction or avoidance of emissions has occurred. This creates greater certainty for end users, civil society and regulators.
Enhancing environmental and social co-benefits
Co-benefits are the additional environmental, socio-economic and other community outcomes that can increase the value of carbon credits. Co-benefits must satisfy eligibility criteria and need to be reported and verified. The three main types of co-benefits are:
- Environmental: Co-benefits that help improve biodiversity and habitat for threatened species by creating healthier soils, wetlands and water systems.
- Socio-economic: Co-benefits that improve the resilience and strength of regional communities by supporting direct and indirect employment and economic opportunity
- Indigenous and marginalised communities: Co-benefits that provide services to Indigenous people and support cultural activities.
Achieving UN Sustainable Development Goals (SGDs)
The 2030 Agenda for Sustainable Development was adopted by the United Nations in 2015 and provides a blueprint for peace and prosperity for the planet. The 17 Sustainable Development Goals (SDGs) are at the heart of the agenda and cover everything from ending poverty to improving health and education, reducing inequality, driving economic growth and preserving our oceans and forests. Given that carbon projects often seek to preserve or restore ecosystems to absorb CO2, they have the ability to generate co-benefits that go beyond direct emissions avoidance or removal and deliver environmental, social and economic benefits that align with the SDGs.
Trading carbon credits
Carbon credits can be bought and sold in a number of ways, including:
- Buying carbon credits directly from developers such as Viridios Capital.
- Purchasing carbon offsets through a broker.
- Buying carbon credits on an exchange; and
- Buying carbon futures on blockchain using tokenization schemes.
To facilitate trading, carbon credits are priced based on historical transactions. Platforms such as https://www.viridios.ai/ provide valuation and project information to help market participants determine fair value.
For further information on buying carbon credits, contact Viridios Capital at: [email protected]