What are Carbon Credits? How They Work & Market Price
Saving the environment will take everyone. Individual efforts and local initiatives are essential, but we need worldwide policies and voluntary action from companies to ensure we meet our targets for lowering emissions. Carbon offsets are simple way companies of all sizes contribute to positive change for the planet especially when they support high-quality carbon projects. But what is a carbon credit? And how carbon credits work?
Let’s answer these questions below while also looking at the basics of carbon credits.
What are Carbon Credits and how Carbon Credits work?
Carbon credits are a system to measure, compensate and offset for greenhouse gasses that are emitted into the earth’s atmosphere. They are measured in metric tons.
What is a carbon credit vs carbon offset? Carbon offsets or carbon credits have the same function to compensate for emissions occurring in another place. ‘Carbon offset’ and ‘carbon credit’ are terms that are generally used interchangeably. ‘Carbon credit’ is more often used in reference to a financial unit of measurement that represents the avoidance, sequestration or removal of one tonne (1,000 kg or 2,205 lbs.) of carbon from the atmosphere. ‘Carbon offset’ is often used when referring to an action.
There are two markets for carbon credits; the compliance market and the voluntary market. Carbon credits work in the compliance market can be part of the cap-and-trade program that rewards companies for green initiatives and punishes them for failing to adjust. Alternatively, the voluntary carbon credit market supports credits that can be purchased by individuals or businesses on a voluntary basis. Let’s take a closer look at both.
Compliance vs. Voluntary Carbon Credits
The compliance carbon credit market is regulated by national, regional, and international governments in order to meet regulatory targets. Here’s how the process works:
First, a company is granted a certain number of credits based on predetermined emissions. One credit is equal to one tonne of greenhouse gas emissions.
Using the carbon tax credit, companies are then allowed to emit the same amount. If they exceed the credit, the company will be fined. At the same time, if the company manages to go below its limit, it can sell off its excess carbon reduction credits to other companies and make money for their efforts.
This can be achieved not only by direct reduction of carbon that’s released but also by improving operational efficiency and reducing energy usage, or even by adopting more eco-friendly approaches into their business.
As regulations become more strict and the limits are reduced, the carbon credit price is set to increase, providing an even bigger incentive to companies that implement the most innovative measures. By inserting a market-based incentive into pursuing green initiatives, governments can motivate businesses to improve their processes, seek out green initiatives, and change their overall culture.
The voluntary carbon credit market is just that—voluntary. When individuals purchase carbon credits without any intent to be compliant with a regulated carbon market, they are voluntarily choosing to offset their business or individual carbon emissions.
This process is fairly straightforward. By working with a company like Cool Effect, which focuses on the voluntary carbon credit market, you can purchase carbon credits on a voluntary basis based on your personal or business goals. For example, when you fly, you are contributing to carbon emissions. An individual or business and purchase a carbon offset to compensate for those emissions if they choose. This is not a legal requirement but a voluntary choice. Businesses often choose to offset corporate-mandated travel or business operations as part of their commitments to give back rather than because of regulation.
As consumers become more aware of the damage to the environment because of their choices, voluntary carbon credits are becoming more popular.
To ensure that the carbon credits have a maximum positive impact, it’s important to opt for high-quality providers to ensure that a true reduction of GHG is happening.
For example, the projects that receive your donations must be verified and trusted, so that the majority of the funding goes towards enacting positive change. Ideally, the project should not only help the environment but have multiple secondary benefits.
The additionality of the project is essential. ‘Additionality’ means that without the income from carbon credits, the project couldn’t exist.
Voluntary carbon credits are valuable because their premise is not based on legal requirements but is designed to help companies and individuals take responsibility for their actions.
How to Choose High-Quality Carbon Credits
In the previous section, we talked about the importance of choosing a high-quality carbon credits seller. But how to make the right choice?
The first step is to ensure you’re reducing as many emissions as possible. Switch to renewable energy, manage food waste and reduce single-use plastic. Once you’ve done all of that, gather your footprint in metric tonnes so you know how many carbon credits you need to purchase. When you’re looking at carbon providers, make sure that they are transparent about pricing and science. Your choice should have a clear process for selecting the carbon projects they work with. You should also make sure that the vast majority of the funding goes towards the business of reducing GHG and not administrative costs.
What is the Kyoto Protocol?
The Kyoto Protocol is a complex international agreement that limits greenhouse gas emissions in participating countries. Signed in Kyoto, Japan, during a 1997 summit, it was ratified by 192 countries that pledged to reach individual targets according to their current pollution levels and capabilities.
Even though a wide range of countries participated, the Kyoto Protocol emphasized developed countries that had the resources to make meaningful change and were the most significant contributors to greenhouse gasses.
The decisions made in Kyoto served as a fundamental shift in global policy, holding the biggest polluters accountable and asking them to pledge to take steps to reduce the damage in the upcoming decades.