What are Carbon Credits, Offsets, Markets?
The story behind
carbon credits &
Even when we do a lot daily to reduce our carbon footprint, the reality is that most of us won't be able to reduce it to zero. That's where the greenhouse gas emissions (GHG) reduction projects come to help us out. We can also take climate action by supporting green projects: reforestation, carbon dioxide removal technology, clean and renewable energy technology, recycled CO₂ technology, converting waste biomass into negative emissions, converting captured CO2 into new products (carbon fertilisers, carbon nanotubes, carbon fiber, nanoparticles for plastics, concrete and coatings, bioplastic, methanol, chemicals, bio-composite foamed plastics, vodka, fuel), capturing landfill gas to prevent methane from entering the atmosphere, building a wind farm, etc.
Some environmentalists doubt the validity and effectiveness of carbon offsets because the commercial carbon trade is an emerging market and it's difficult to value the quality of carbon reduction projects - there are offset businesses that are not credible and scam consumers with bad or nonexistent projects. However, environmental organisations are trying to establish reliable standards for rating offset companies and projects - credible offset project must always have an accurate estimate of how much GHG a specific project captures. GHG reductions should be accurately quantified, have permanence, transparency and need clear and registered ownership. Tree planting projects are popular because they represent visible improvements but It takes times for trees to grow and reach their full potential, and the likelihood of disease or fire also remains.
Nevertheless, carbon offsets help to raise awareness and encourage individuals and businesses to take responsibility for their part in global climate change and promote sustainable living.
Carbon credits VS carbon offsets
A carbon credit is a certified instrument that represents ownership of carbon offset emissions that can be traded, sold, retired, etc. If a carbon reduction company is regulated under cap-and-trade system, they most likely have an allowance of credits that can be used towards their cap. If the company itself uses fewer emissions than they are allocated, the firm can trade with the credit. Credit becomes tradable, because of a very real reduction in emissions.
A carbon offset is also a real emissions reduction instrument but generally from a project that generate reductions outside the company and outside of any regulatory requirement. Carbon offset is derived from a 3rd party certified project that usually generates carbon credits. While a certified carbon offset project helps to reduce global climate change in the most efficient manner (good value for money and convenient) then carbon credits are created many different ways, not only from a carbon offset project.
Offsets and credits have the exact same reduction in carbon emissions and both foster climate change. The best way is to reduce what you can and offset what you can't. However, we highly recommend to check the credibility of the project(s) behind the company selling you carbon offsets.
Organisations that support businesses going carbon neutral and sell carbon credits: ICROA, ClimateTrade, One Carbon World, Clear, Carbon Footprint, South Pole, Climate Partner, Clean Air Cool Planet, Green Story, Wonderflower, Carbon Neutral Britain, Carbon Fund, Sinai Decarbonisation Platform Software, Atmosfair, Appalachian Offsets, Earthly, Climate Neutral Group.
More about carbon markets & the instruments
Carbon markets aim to reduce carbon emissions (GHG emissions) and use carbon allowances / credits / units (CER) to finance carbon reduction projects around the world. A carbon credit is a generic term for any tradable certificate representing the right to emit carbon dioxide - 1 carbon credit is equal to one metric ton of CO2 emissions or other GHGs in some markets. These carbon credits can be sold privately or in the international market at the prevailing market price. Carbon credits and carbon markets are a component of an international system which goal is to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting GHGs into the atmosphere. All of it is based on the scientific consensus that (1) global warming is occurring and (2) that human-made GHG emissions are driving it. The protocol applies to the 6 GHSs: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6).
Types of carbon markets
There are two main carbon markets: Emissions Trading System (ETS) and a new Voluntary Scheme defined in the Paris Agreement.
Types of carbon credits
There are two types of carbon credits: certified emissions reduction units (CER) and voluntary emissions reduction (VER - carbon offset that is exchanged in the voluntary market for credits).
What helps to regulate the carbon markets?
The Kyoto Protocol is a legally binding instrument and international agreement in place that commits to cutting GHG emissions using Kyoto mechanisms that enable countries or operators in developed countries to acquire GHG carbon credits. A tradable carbon credit can be an (1) emissions allowance, (2) an assigned amount unit (was originally auctioned by the national administrators of a Kyoto-compliant cap-and-trade scheme) or (3) an offset of emissions. The Clean Development Mechanism (CDM) is one of the flexible mechanisms defined in the Kyoto Protocol that provides for emissions reduction projects which generate CERs and these may be traded in emissions trading market. Joint Implementation (JI) is another flexible but expensive mechanism for a developed country to use to set up an emissions reduction project in another developed country. International Emissions Trading (IET) is the 3rd flexible mechanism that enables the countries to trade in the international carbon credit market to cover their shortfall in Assigned amount units as AAU (a tradable 'Kyoto unit' or 'carbon credit' representing an allowance to emit GHGs). These carbon reduction projects can be created by a national government or by an operator within the country through setting quotas. The roadmap for moving to a low-carbon economy by 2050 includes a key role for the EU ETS in promoting decarbonisation throughout the European economy. The EU ETS is also inspiring the development of emissions trading in other countries and regions, and aims to link the EU ETS with other compatible systems.
Emissions Trading Markets
Buyers and sellers of carbon credits can use an exchange platform to trade. It's like a stock exchange for carbon credits. By putting a price on carbon emissions, carbon market and its pricing mechanisms help to internalise the environmental and social costs of carbon pollution. It is anticipated that the value and trading of carbon credits will continue to grow particularly as many governments have committed to 'green turn'. Each international transfer is validated by the UNFCCC. Each transfer of ownership within the European Union is additionally validated by the European Commission. Some exchanges trading in carbon credits: Carbon Trade Exchange (CTX), NASDAQ OMX Commodities Europe, PowerNext, Commodity Exchange Bratislava (platform called Carbon place) and the European Energy Exchange. NASDAQ OMX Commodities Europe listed a contract to trade offsets generated by a CDM carbon project called Certified Emission Reductions (CERs).
Buying Carbon Credits - Voluntary Offsetting Scheme
There are also companies that sell carbon credits to companies and individuals who are interested in lowering their carbon footprint on a voluntary basis. Companies purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. Voluntary units typically have less value than the units sold through the validated Clean Development Mechanism.
Planting Trees - Voluntary Offsetting Scheme
There are also companies that collaborate with tree planting projects around the world to offer the opportunity to plant trees from home with the press of a button. Watch out for scams, the proper organisations that sell 'plant a tree' products partner with carbon reduction projects and solutions that are certified at the very highest level and offer full transparency (evidence of tree planting, carbon reduction and financials). Main certification bodies are Climate Neutral Certification, Gold Standard Emissions Reducion Certification, Verified Carbon Standard, Climate Community & Biodiversity Standard, Fairtrade Carbon Credit.
Towards a Sustainable Future
The number of companies needing to buy credits will increase as the carbon emission levels are predicted to keep rising over time. That will push up the market price encouraging more groups to undertake environmentally friendly activities that create carbon credits to sell. The price of carbon needs to be high enough to motivate the changes in behavior and changes in economic production systems necessary to effectively limit emissions of GHGs.