The market for carbon offset credits

Our choices can have an immense impact on our carbon footprint, whether it's flying internationally, producing raw materials or shopping online. Individuals, and more significantly, businesses generate inevitable carbon emissions, which impact climate change. We have a shared responsibility to try our best to reduce emissions where possible and adopt a more environmentally friendly lifestyle. It can include switching to renewable energy instead of fossil fuels, divesting from carbon-intensive activities, buying organic, taking public transport instead of driving and so on.

Reducing emissions and decarbonizing economies are urgent matters that should be part of every companies goal. However, for what they cannot cut down, businesses can compensate for their unavoidable emissions through what we know as carbon credits.

What is the carbon tax credit?

UA carbon credit is a license that allows businesses to emit carbon dioxide (CO2) and other greenhouse gases up to a certain amount. Each credit is equivalent to one ton of carbon dioxide. This program is a market-oriented mechanism set up to reduce the concentration of greenhouse gases.

Companies that have excess credits can sell them to another company that needs more. Carbon credits are an international decontamination mechanism contemplated in the Kyoto Protocol to reduce polluting emissions. Companies that exceed the cap receive a fine, so it is in their best interest to reduce greenhouse gas emissions and make money by reselling carbon credits or saving them. There are two different types of carbon credits:

  1. Voluntary emissions reduction (VER): These carbon credits are provided by projects that have gained voluntary third-party approval but have not been officially certified by the Clean Development Mechanism.
  2. Certified emissions reduction (CER): These emission credits are issued by the Clean Development Mechanism and make it possible for a project to offset its emissions.

This trading approach serves as an incentive for companies to reduce their greenhouse gas emissions. Il also aims at balancing worldwide emissions. The goal is to reduce the number of credits over time and encourage companies to mitigate their atmospheric pollution and adopt more environmentally friendly practices.

The funds generated by greenhouse gas mitigation projects can finance carbon reduction schemes in the world, such as The US Clean Air Act, The United Nations Kyoto Protocol and many more.

How do you get carbon credits?

Polluters can buy carbon credits from companies offering carbon offset opportunities or from investment funds. Those funds have to be registered, to adhere to regulatory requirements and standards and are verified by approved providers. Simply put, buyers acquire a tradable certificate or permit (carbon credit) from a certified company that allows them to emit a certain amount of carbon or greenhouse gases into the atmosphere.

The quality of the credits purchased is based on the validation process and the sophistication of the development company or fund that sponsors the carbon project. Companies who wish to acquire carbon credits must stick to an assigned amount called Assigned Amount Units (AAU), disclosed in individual units and entered into the country's national registry, validated and monitored by the United Nations Framework Convention on Climate Change (UNFCCC).

How does the purchase of carbon credits help reduce emissions?

Carbon credits create a market for reducing carbon and greenhouse gas emissions by putting a price on greenhouse gas emissions. So, for businesses, emissions become an internal cost that they have to consider, and which is visible on their balance sheet alongside raw materials, assets and such.

Therefore, companies that emit lots of carbon gas have to spend a lot of money to buy carbon credits. This economical cost pushes many companies to invest in new machinery or implement alternative eco-friendly practices. By treating carbon emissions as a market commodity, it becomes easier for businesses to understand and manage their emissions and reduce them gradually.

How much is a carbon credit?

High-quality carbon credits follow a strict set of standards. Therefore, before purchasing carbon credits, make sure to check that the projects in which you want to invest have registered with a third-party internationally-recognized verification standard. Those third-parties can be the Gold Standard, Verra’s verified Carbon Standard, Social Carbon and Climate Community and Biodiversity Standard (CCBS) or the United Nations Framework Convention on Climate Change (UNFCCC).

As predicted, energy use and consequently emission levels are increasing over time, as for the number of companies needing to buy credits, implying that the rules of supply and demand will most likely push the market price of carbon credits to rise in the future.

As of today, one carbon credit is equal to one ton of carbon dioxide. That means buying one credit allows the company to emit a mass equal to one ton of carbon dioxide (or carbon dioxide equivalent) greenhouse gas. According to the Environmental Defense Fund, one ton of carbon dioxide is the equivalent of a 2,400-mile drive in terms of carbon emissions.

The price of carbon credits can range between $5 to over $50 a ton, depending on the issuer, the verification standard, and on the project location. According to the IHS Markit Global Carbon Index, the global average price of a carbon credit was $23.65 a ton in 2019 (source).

Why do companies buy carbon credits?

The increased levels of carbon and greenhouse gases in the atmosphere are directly impacting the atmosphere causing climate change and global warming. Mobilizing climate finance is an efficient way to take action in lowering gas emissions. Carbon offsets have already reduced the amount of greenhouse gas in the atmosphere by more than 1 billion tons.

Companies are keener to buy carbon credits because it's a simple and effective way to reduce their carbon footprint, support vulnerable communities and accelerate the transition to a low-carbon world. Other important reasons why they acquire carbon credits are:

Acting sooner is more valuable

When it comes to climate change, the emphasis is always on the fact that we need to move quickly. Scientific evidence shows that the sooner we take action, the better chance we have to slow down climate change, accelerate the clean energy transition and help communities become more resilient.

Pressure to take climate action is increasing

International organizations are putting more pressure on companies regarding the climate change issue. In this sense, reducing corporate emissions and taking full accountability for their climate impact is becoming a standard business practice for corporations aiming to be more sustainable and eco-friendly and give a good corporate image.

Prices are low

For the time being, the supply of carbon credits still exceeds demand. Therefore, the prices are on the lower side. However, with the Paris agreement coming out strongly and more pressure on companies to adopt sustainable practices, the number of new buyers increases by the day. The more buyers there are, the higher prices will get.

Emission reduction projects

There are different kinds of emission reduction projects and programs set up to reduce the amount of carbon and greenhouse gases in the atmosphere. Some projects aim to avoid carbon and greenhouse gas emissions in the first place by replacing fossil fuel-derived energy with renewable energy sources. Others remove emissions from the atmosphere by planting more trees or capturing, storing and destroying carbon and GHG.

Some of the most renowned emission reduction programs are:

The United Nations’ Kyoto Protocol

The United Nations’ Intergovernmental Panel on Climate Change (IPCC) was one of the first organizations in 1997 to develop a carbon credit proposal to reduce carbon emissions worldwide, known as the Kyoto Protocol. This agreement established binding emission reduction targets for every country that signed it. It was followed by the Marrakesh Accords agreement, which explicitly spelled out the rules of how the system would work.

The Kyoto Protocol divided countries into industrialized and developing countries. Industrialized countries operated in their emissions trading market. Developing economies received credits called Certified Emission Reduction (CER) for supporting sustainable development initiatives. The first commitment period of the Kyoto Protocol came to an end in 2012 and was renewed in an agreement called the Doha Amendment. To this day, this amendment is still about eight votes short of the 144 votes needed to be approved.

The Paris Climate Agreement

The Paris Climate Agreement is an agreement within the UNFCCC regarding climate change issues and global warming. The agreement was signed in 2015 by more than 170 nations worldwide. The Paris Agreement sets emission standards and allows for emissions trading. Each country under the agreement must determine, plan and regularly report its actions and contribution to improving the global warming situation.

The US Clean Air Act

The US Clean Air Act is known as the world's first cap-and-trade program that has been created in 1990 to regulate energy emissions. In the 1980s, this program has been recognized by the Environmental Defense Fund for having contributed to reducing emissions of sulphur dioxide that caused acid rains.

California’s Cap-and-Trade Program

In 2013, the State of California initiated its cap-and-trade program to regulate electric power plants, fuel distributors and industrial plants. This program is considered the fourth most important worldwide, following South Korea, China and the European Union.

There are many other programs around the world, whose main goal is to reduce carbon and GHG emissions and contribute to slowing down climate change. Hopefully, all companies will adopt practices to reduce their emissions and contribute to a greener world.

Photo by Thijs Stoop on Unsplash