5 Things to Know about Carbon Credits

By Manu Bharadwaj
, 8 minute read

Quick summary: Carbon Credit is essentially a permit received from government or an authority body to emit a certain amount of CO2 for a specific price. Carbon credits are measurable, verifiable emission reductions from certified climate action projects which reduce, remove or avoid greenhouse gas emissions. Carbon credits can be purchased with the intention of contributing to offset projects. Investing in carbon credits is a necessary step in a company’s goals and commitments and is also vital for saving the planet.

Global warming needs to be limited to 1.5˚C to align with the Paris agreement goals. In order to achieve this, the current greenhouse gas emissions need to be cut to half by 2030 and reduce them to net-zero by 2050. 

But do you know that all activities cannot be made carbon free. Companies can account for their unavoidable emissions by buying carbon credits from certified activities that protect ecosystem or install efficient technologies to reduce or remove emissions from the atmosphere. Companies can compensate for their environmental footprint by paying someone else to reduce their emissions and use carbon credits to get to carbon- neutral status. 

What are Carbon Credits and how do they work? 

Carbon Credit is essentially a permit received from government or an authority body to emit a certain amount of CO2 for a specific price. Carbon credits are a tradable request that represents a certain amount of carbon dioxide being removed from the atmosphere.

One Carbon Credit = One tonne of CO2 

Carbon credits are measurable, verifiable emission reductions from certified climate action projects which reduce, remove or avoid greenhouse gas emissions. They restore forests, reduce dependency on fossil fuels, protect the ecosystems and empower communities. Since these credits are purchased in measurable quantities, the companies which undertake these climate action projects must adhere to several regulations to ensure that credits are put to best use. The projects must adhere to a set of criteria to pass the verification process by third-party agencies and a review by a panel of experts at the leading carbon offset standard like Verra and Gold standards. 

The amount of carbon credits allocated to each company is reduced over time. After an organization buys a carbon credit, the credit is permanently retired so that it cannot be reused. 

A carbon credit is worth one tonne of CO2e (tCO2e) emissions which is equivalent to 556.2 cubic metre of volume. Carbon credits can be purchased with the intention of contributing to offset projects. Companies set lower emission targets every year so that they can reduce the emissions and not only purchase offsets. Only the residuals are offset.

What are the types of Carbon Credits? 

Carbon Credits are of two types 

  • Certified Emissions Reduction (CER) 

This type of carbon credit is backed by the UN and issues a permit for one tonne of carbon emissions. They are issued to UN member staes for offsetting projects through the Clean Development Mechanism (CDM), regulated by the Kyoto protocol 

  • Voluntary Emissions Reduction (VER) 

A carbon credit that has a third-party certification standard such as Gold / Verra standards but is not certified by the CDM. It is exchanged over the voluntary carbon market for credits. VER projects are certified but not traded through a central government system. 

How is Carbon Credit different from a carbon Offset? 

Carbon credit is a tradeable request that amounts to a certain amount of carbon dioxide being removed from the atmosphere in exchange for an existing carbon footprint that is already there. A carbon credit can only be produced in exchange for a carbon footprint that has already been made. 

Carbon offset is when a company emitting a high carbon footprint chooses to invest in a project that reduces carbon emissions, instead of reducing their own contribution to global warming on their own. A carbon offset can be purchased in advance to compensate for the anticipated use of carbon emissions. Carbon offsetting is an act of cancelling out the carbon emissions produced in one place with the act of reducing emission in another place.  

Both are measured by a tonne of CO2 equivalent.

Why do we need to invest in Carbon Credits? 

We just have 10 years to prevent irreversible damage to the planet on account of climate change. 

The world’s carbon emissions are increasing at an alarming rate and carbon offsetting is an important mechanism to counter climate change

The benefits of carbon credits are that they contribute to funding for an organization or project that is committed to reducing carbon footprint. They also provide the company producing a high rate of carbon emissions, a greater flexibility to their project. The necessity of altering their production methods can be compensated by purchase of carbon credits. 

Carbon credits do not erase the carbon footprint that has already been made. The companies that invest in projects to reduce carbon footprint cannot eliminate the emissions that they have already made. They should not be viewed as a sole strategy to reduce one’s carbon footprint.

Investing in Carbon Credits 

  • Serves as a catalyst for faster climate action 
  • Attracts funding for deserving projects 
  • Puts a price on Carbon 
  • Scales solutions for reduction in emissions 
  • Promotes sustainable development 
  • Helps companies accelerate their journey to net-zero. 

Investing in carbon credits is a necessary step in a company’s goals and commitments and is also vital for saving the planet. Businesses should take a holistic view and develop a broad sustainability strategy because carbon credits are not a quick fix to solve the real world problem and they should never prioritize emission reductions. 

Carbon Offset Projects 

According to the World Economic Forum, $44 trillion of economic value generation is highly dependent on nature and its degradation is happening at a rapid pace. 

Projects reduce or remove the greenhouse gas emissions in these 3 ways 

  • Reduce greenhouse gas emissions. Eg. Replacing fossil fuel with renewable energy. 
  • Remove greenhouse gas emissions from the atmosphere. Eg. Tree-planting, Carbon capture 
  • Avoid greenhouse gas emissions. Eg. Refrain from deforestation 

Nature based solutions are designed to protect, restore and manage nature while mitigating climate change and facilitating a green future. These solutions include land restoration, forest protection, reforestation, agriculture and sustainable land management. They are a critical path to net-zero transition. 

Nature based solutions are becoming an integral part of climate action, with carbon markets providing an indication of demand.

Nature-based solutions that accounted for 5% of carbon credits in 2010, account for around 40% today.  

How much does a carbon credit cost? 

Do you know that credits are generally traded in units of 1 tonne of CO2, and it’s estimated that credits worth 2 billion tonnes of CO2 will be needed to get to the 2030 target

Carbon prices vary depending on the projects. They can go from roughly $10 to hundreds based on the offsetting project and the market that its bought from. 

  • CERs are over $300 
  • VERs range from $10 to $100 per tonne on average. 

The price variation could be due to 

  • Implementation costs depending on size and location of project 
  • Technology solutions differ in rates 
  • Carbon pricing Regulations 
  • Value the projects deliver also decides the price of the credit 
  • Supply and Demand 

Global prices of carbon credits are climbing upwards by 60% more in 2021 ($4.0) than in 2020 ($2.5). 

Carbon Credit Market 

According to Coherent market Insights, the global carbon credit market was valued at US$ 211.5 billion in 2019and is expected to reach US$ 2,407.8 Billion by 2027 at a CAGR of 30.7% between 2020and 2027. 

The global Carbon Credit Trading market size was valued at USD 2000.0 million in 2021 and is expected to expand at a CAGR of 29.88% during the forecast period, reaching USD 9600.0 million by 2027.

Global Voluntary Carbon Offsets market size is projected to reach US$ 700.5 million by 2027, from US$ 305.8 million in 2020, at a CAGR of 11.7% during 2021-2027.The real value of the voluntary carbon market is now around $2 billion, with rising price trends of about 170 types of carbon credits as per a recent Ecosystem Marketplace (EM) report.

Carbon Credit Regulations and Trading Programs 

The Compliance offsets are regulated by the government and the carbon reduction schemes like the CDM. The Voluntary offsets are not regulated by UN or the government and are only certified by third-party auditors. 

There are 17 emission trading programs in the world operating in 35 countries. Trading programs are regional efforts that normally use a cap-and-trade system which allows certain amount of carbon credits to be bought and that decreases yearly to lower the emissions. Trading can happen between entities if one uses less and another needs to utilize more. 

The EU Emissions Trading system (EU ETS) is the world’s largest carbon market. California Cap and Trade, Chinese National Emission Trading scheme (ETS) are a few more. 

Remember

Way Forward 

TraceX has forayed into the Voluntary Carbon market helping companies in their journey to tackle climate change. TraceX is building a DMRV platform

for streamlining the Carbon Credit market and bringing in accountability and transparency in carbon offset projects. Stakeholder management, Measurement of baseline emissions and setting reduction targets in accordance with the global carbon standards helps in quick certification and issuance of credits. The blockchain solutions provide scalability in carbon markets, giving credibility to the credits generated and enables tokenization. 

Join us in accelerating the net-zero journey with Nature Tech Solutions by reviving ecosystems and contributing to the climate justice. 

Manu Bharadwaj
VP - Growth & Strategy

VP of Growth and Strategy of TraceX Technologies. An engineer turned entrepreneur and a Traceability expert.

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