Carbon Credits

Carbon credits are a kind of permit that allows one ton of carbon dioxide or other greenhouse gases to be emitted, or removed from the atmosphere. They are issued for specific projects that meet certain standards, and their value depends on several factors. The type of underlying project, its vintage and delivery date, as well as whether or not the underlying project also helps to meet some of the UN’s Sustainable Development Goals (SDGs), are all important factors in determining the value of credits.

The voluntary carbon.credit market is a growing source of emissions reductions. These credits are purchased by companies – and individual consumers – that have committed to offset part or all of their GHGs. These include tech companies, airlines and oil and gas majors, as well as other industries that are setting net-zero targets or looking for a way to hedge against the financial risks of the energy transition.

These companies are purchasing carbon credits either as a part of an industry-wide scheme, such as the Carbon Offsetting and Reduction Scheme for International Aviation, or to satisfy internal compliance standards. While they are not technically regulated, the market is governed by a set of standards, and some respected organizations, such as Verra, have been established to validate the quality of these credits.

Who Gives Carbon Credits?

The other type of market is called a ‘cap-and-trade’ market, which sets a cap on pollution and requires companies to reduce their emissions to meet this cap. If a company’s emissions exceed the cap, it must buy extra credits to cover its emissions. Then it can sell the excess credits to another company that needs them.

‘Cap-and-trade’ markets are usually set up by nation states or political unions and are subject to strict rules. For example, they must not restrict the flow of emissions from one country to another or allow an artificial ‘winner-take-all’ market where a few high-emitting companies will dominate the supply of credits.

A ‘cap-and-trade’ market is often seen as an effective tool to mitigate climate change, but it has its limitations. Besides its limited geographic scope and ability to create artificial winners and losers, it can also result in over-simplified accounting systems that are easily exploited by cheating companies. This is particularly true in the case of GHGs. The amount of carbon in the atmosphere is increasing rapidly, and it’s crucial that these pollutants be able to be tracked and measured, so that they can be effectively reduced.

As an alternative to traditional cap-and-trade systems, which are based on a regulatory model and have many potential drawbacks, voluntary carbon markets can be a good option for countries and companies that want to encourage climate action. These markets are much more flexible and can be accessed by all sectors of the economy, rather than just the industrialized nations who are under stricter government control.

These markets are often regulated by national governments, but in some cases they are governed more by industry groups. For example, a recent initiative by the international airline industry set up the Carbon Offsetting and Reduction Scheme for the International Aviation (CORSIA) in order to meet their net-zero emissions target.