Carbon Credits Work
A carbon credit is an instrument that enables companies to offset their greenhouse gas emissions. It represents one metric ton of reduced, avoided or removed emissions of carbon dioxide or other greenhouse gases. There are many types of projects that create carbon credits, from renewable energy to reforestation, and everything in between. Each project is verified by a number of independent organizations, known as standards bodies. The most respected are Verra (which hosts the Verified Carbon Standard), Gold Standard, American Carbon Registry and Climate Action Reserve. These standards groups establish a set of rules for each type of project, including accounting methodologies specific to the project’s nature and an independent auditing system. Once a credit has been used to offset emissions, it is “retired” and no longer tradable.
The voluntary market for carbon credits has become more crowded over the past year as more and more companies commit to corporate net-zero goals. The market’s momentum is driven by the Paris Agreement’s goal of keeping global warming within 1.5 degrees Celsius over pre-industrial levels.
While the carbon.credit markets are largely unregulated, some key players make this market work. For instance, a broker is an individual or firm that buys and sells carbon credits on behalf of their clients, typically with a fee. Carbon finance firms are another important player. They provide the financing to support projects that produce carbon credits. They often also act as a carbon project developer, and some even have their own trading arm to trade the carbon credits they create.
How Do Carbon Credits Work?
Some carbon projects are designed to meet a range of other social and environmental goals, which are known as co-benefits. These can include things like improving water quality or reducing poverty in communities, which makes them more attractive to potential buyers than projects that only offer a reduced carbon footprint. These projects tend to be referred to as “community-based” and can cost more to verify.
One of the biggest challenges in the carbon credit industry is the long lag time between when a project begins and the creation of the credit. It can take years for some projects to mature and be ready for sale, and this is a major factor in the high price of carbon credits.
Despite these hurdles, the carbon market continues to grow as more companies embrace it to offset their greenhouse gas emissions. This is particularly true for those that have a hard time meeting their own net-zero goals with their existing operations. These businesses are buying carbon credits to show their consumers and investors that they’re doing more than just paying lip service to reducing climate change. Ultimately, however, carbon credits are just a bridge for emitters to use as they work to reduce their overall emissions. They are not a license to pollute, and studies have shown that the majority of companies who purchase carbon credits actually end up doing more to reduce their own emissions. This shows that companies should continue to pursue aggressive reductions while utilizing the carbon market as they transition away from fossil fuels.
