Carbon Credits: How do they work?
Carbon credits have emerged as a pivotal tool in fostering environmental responsibility in the relentless pursuit of sustainable solutions to combat climate change. As our planet grapples with the adverse impacts of carbon emissions, understanding the intricate workings of carbon credits becomes essential for individuals, businesses, and governments alike. If your business is looking to reduce its carbon footprint and adopt more sustainable practices, one option to consider is the use of carbon credits.The goal of carbon credits is to create a financial incentive for businesses to reduce their carbon footprint and invest in cleaner, more sustainable business practices.
What are Carbon Credits, and How Do Carbon Credits Work?
Carbon credits permit the owner to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of one ton of carbon dioxide or the equivalent of other greenhouse gases.
Carbon credits, often called carbon allowances, can be considered a unit of measurement; however, they have a “tradeable” component. The number of credits issued to a particular company or organisation represents its emissions limit (or “cap” from cap and trade).
If a management team is able to limit company emissions below its cap, then the organisation has a surplus of carbon credits; they may wish to retain these for future use (or sale); alternatively, they may sell them immediately into the compliance carbon market, which is overseen by the regulatory body.
If a management team cannot keep company emissions under its limit, then they are non-compliant and must make up that difference. Over-emitters turn to the carbon market to purchase carbon credits from an “under-emitter” within their cap and trade network.
The ultimate goal of carbon credits is to reduce the emission of greenhouse gases into the atmosphere. As noted, a carbon credit represents the right to emit greenhouse gases equivalent to one ton of carbon dioxide.
The ultimate goal of carbon credits is to reduce the emission of greenhouse gases into the atmosphere.
Carbon Credits vs. Carbon Offsets: What’s the difference?
Carbon credits are not the same as carbon offsets. The primary difference between carbon credits and carbon offsets lies in their purpose and origin.
Carbon credits are typically part of a regulatory framework, while carbon offsets are voluntary measures that individuals or organizations can take to compensate for their emissions and contribute to environmental sustainability. Both involve a quantifiable reduction or removal of greenhouse gases, but the context and purpose differ. Both carbon credits and carbon offsets are measured in tonnes of CO2e, which can be confusing to many. Unlike carbon credits, offsets are not created or distributed by a specific regulatory body. They are also not limited to individual regulatory jurisdictions (like carbon credits are) — in fact, they may trade freely on any number of ‘voluntary markets’ around the world.
Any organisation (public, private, governmental, etc.) can elect to engage in carbon reduction projects — either because management/leadership believes it’s the right thing to do or because they wish to generate carbon offsets, which can, in turn, be monetised on the carbon markets.
Carbon reduction projects generally fall into one of two categories; these are nature-based or mechanical. Nature-based initiatives include reforestation and wetland rejuvenation projects and solutions that “naturally” sequester carbon in the environment. Mechanical solutions generally invest in new technologies that increase efficiencies or reduce emissions (like renewable energy projects or direct carbon capture technologies).
If carbon credits are a measurement unit to “cap” emissions (meaning permissible emissions), carbon offsets can be thought of as a measurement unit to “compensate” an organisation for investing in green projects or initiatives (whether natural or technological) that remove emissions.
Once an offset is created, it can be retained by the organisation that completed the project, or it may be traded on a voluntary carbon market.
What are the Different Types of Carbon Credits?
There is the compliance and voluntary market — and your location and industry determine whether you must participate in the compliance market.
Global Compliance Market
Compliance markets are regulated systems where the government limits how much carbon industries can emit — AKA their carbon cap. Then, the companies in that industry must stay under the allowed amount.
If a company emits more carbon than its allowance, it can buy two different types of carbon credits — permits to pollute or reduction credits. Permits to pollute are hefty fees per excess metric ton that over-emitters can purchase from their government or other companies. Buying reduction credits — carbon credits produced by carbon offset projects — is more cost-effective and is generally the preferred option (reducing greenhouse gases and all that good stuff).
The Voluntary Carbon Market
The voluntary carbon market is similar to the compliance market — there are still rules and standards for what can be called a carbon credit and the validity of the carbon offset projects’ claims. But in the voluntary markets, anyone can buy carbon credit. Businesses, charities, and individuals can all participate in reducing global emissions!
Companies buy carbon credits created by carbon-sequestering projects — one credit still equals one metric ton of carbon removed from the atmosphere. Eco-aware organisations do this to meet their sustainability targets and reduce their carbon footprint. Microsoft is steadfast in its commitment to achieving carbon negativity by 2030 through the strategic procurement of high-quality carbon credits from a diverse array of carbon removal solutions. Similarly, Google is actively working towards net-zero emissions and the utilization of 24/7 carbon-free energy by 2030, exemplified by their pioneering offshore windmills at the Norther Offshore Wind Farm in Belgium. Joining this sustainability drive, companies such as Apple, Amazon, Salesforce, and Unilever are resolutely dedicated to diminishing their carbon footprints.
Emission Reduction Credits (ERCs)
Emission Reduction Credits fall into two categories: removal and avoidance offsets. They could be generated from the same carbon project, but removal offsets are created from activities that pull carbon out of the atmosphere (like reforestation), while avoidance offsets reduce emissions by preventing the carbon from being released in the first place (like preventing deforestation).
Conclusion
Conclusively, this article underscores the significance of carbon credits as a linchpin in the global endeavor to reduce greenhouse gas emissions. Beyond being a financial incentive for businesses to adopt cleaner practices, carbon credits represent a dynamic framework for organizations and individuals to actively contribute to a more sustainable future. A comprehensive understanding of the nuances surrounding carbon credits empowers stakeholders to make informed decisions, fostering a collective responsibility for the well-being of our environment. In embracing the principles of carbon credits, we pave the way for a more environmentally conscious and sustainable world.