Introduction
Climate change is one of the most pressing issues of our time, and its impact on our environment and society is undeniable. In the quest to combat Climate Change and reduce greenhouse gas emissions, various strategies have emerged, including the use of carbon credits.
What are Carbon Credits? How do companies use them? Are Carbon Credits really useful in the fight against Climate Change?
What Are Carbon Credits?
A carbon credit is a (digital) asset that proves that 1 ton of CO2 is not emitted (i.e. avoided CO2 emissions) or captured (i.e. CO2 is sequestered from the atmosphere). These assets are tradeable in various centralized marketplaces like CIX, CTX Global or decentralized ones like CarbonMark, Toucan, and AirCarbon.
Phew! That’s a lot to take in…
Let’s unpack the key topics.
A carbon credit is a tradable asset. Companies (and individuals) can buy and sell them in a semi-regulated market. The price of these assets fluctuates a lot and depends on four key factors: a) credibility of the proof, b) quality of the carbon credit, and c) the co-benefits the carbon credit program creates, and 4) regional differences.
- Proving that 1 ton of CO2 is not emitted or sequestered is hard. There are various standard setting organizations like Verra and Gold Standard (analog incumbents), new ones like OxCarbon (digital disruptor), and niche ones like Puro Earth. These organisations define standards and methodologies for how organizations (known as project originators) can prove that their work leads to avoidance or sequestration. Once proven, the carbon credit is registered in a registry which helps validate the authenticity of the carbon credit.
- The quality of the carbon credit tells us something about how “true” it is that this carbon credit matters to the fight against climate change. Two concepts hover around validity:
- Additionality asks the question whether it is true that the CO2 would not be sequestered without additional money coming from Carbon Credits. This rules out a lot of renewable energy projects (most RE is now cheaper than fossil fuels) and many projects focusing on nature protection (especially in areas where nature was well protected before and e.g. historical deforestation is low)
- Permanence asks the question how true it is that the CO2 will be absorbed or avoided for a long time. In general, reforestation projects have lower permanence while engineered carbon solutions (e.g. storing carbon in biochar, carbon-enhanced materials, or olivine rocks)
- The co-benefits of a project are the other positive impacts that happen through carbon credit projects. These mainly focus on biodiversity, human health, and employment.
- Regional differences can create strong price discrepancies. Although the market is officially global (from the planet’s perspective the location of carbon sequestration or avoidance does not matter), the markets are not very efficient, leading to lots of pricing differences and arbitrage opportunities.
How Do Companies Use Carbon Credits?
Companies are major contributors to greenhouse gas emissions, especially companies in polluting industries such as petrochemicals, heavy industry, transportation, mining, and energy. These companies should try to reduce their CO2 and other greenhouse gas emissions as rapidly as possible.
Yet, many companies are unable or unwilling to reduce their emissions at a speed that aligns with climate science. Some simply don’t care, but others want to be able to tell their stakeholders they are doing what’s needed. They can then buy carbon credits and use them as carbon offsets. When a company uses a carbon credit as an offset it basically considers the carbon credits as a permit to keep emitting carbon dioxide or other greenhouse gases into the atmosphere. For every ton of GHG emissions, they can buy an equivalent ton of CO2 avoidance or removal and then claim some kind of “carbon neutrality” or “net zero”. This offsetting requires the official retirement of the carbon credit which means it is taken out of the registry and cannot be traded anymore. By retiring a carbon credit, a company says it has removed or avoided one tonne of carbon dioxide.
Importance of Carbon Credits in the Fight Against Climate Change
Carbon credits play a crucial role in the battle against climate change for several reasons:
- Incentivizing Emission Reductions: By putting a price on carbon emissions, carbon credits create financial incentives for companies to invest in cleaner technologies and practices, accelerating the transition to a low-carbon economy. This is especially true when governments impose a tax on carbon emissions.
- Global Collaboration: The carbon market allows emission reduction efforts to take place on a global scale. Companies and governments worldwide can work together to combat climate change, transcending borders and promoting international cooperation.
- Supporting Sustainable Projects: Carbon credit revenue often funds sustainable development projects like renewable energy installations and reforestation, which contribute to environmental, social, and economic benefits.
- Complementary Approach: Carbon credits supplement regulatory measures and provide flexibility for companies to meet emission reduction targets cost-effectively.
Conclusion
Carbon credits represent an innovative and market-driven approach to addressing climate change. By incentivizing emission reductions and funding sustainable projects, they empower companies and governments to take tangible action in the fight against Climate Change. As we move forward, embracing high quality carbon credits and adopting sustainable practices will be critical in safeguarding our planet’s future for generations to come.
However, the practice of using carbon credits to offset emissions has clear risks. While there is some evidence that companies that buy carbon credits reduce their emissions faster than those who don’t, it is important that companies invest first and foremost in reducing carbon emissions and only purchase carbon credits for those emissions they cannot avoid yet.
