How Do Carbon Credits Actually Work?
Carbon Credits Actually Work
While many companies are working hard to reduce their carbon footprint, it’s not always possible to avoid using fossil fuels altogether. For example, flying to work or visiting family may be unavoidable. Or, a company might use electricity to run its plant or warehouse. These types of carbon-emitting activities can be offset with the help of a carbon credit. A carbon credit is a financial instrument that allows businesses and individuals to offset some of their carbon emissions by investing in projects that capture or reduce greenhouse gas (GHG) emissions, according to the Gold Standard Institute.
carbon.credit are available through a variety of market mechanisms, including voluntary markets. These are primarily driven by corporate commitments to net zero emissions, as well as interest in meeting international climate goals set out in the Paris Agreement on GHG emission limits. The burgeoning voluntary market has seen a significant increase in activity over the past year, and some analysts believe that it could eventually surpass the existing regulatory markets.
Typically, a company would first establish its need for carbon credits by disclosing all of its greenhouse-gas emissions, and its targets and plans for reducing them over time. It then calculates how much carbon it has emitted. Then, to avoid a penalty comprised of fines and extra taxes, it can buy carbon credits from another company that has produced less than the amount it is allowed to emit. The purchasing company can then claim these reduced emissions as its own, a process called “retiring” them from the market (so that no one else can claim them).
How Do Carbon Credits Actually Work?
The carbon credit industry is structured similarly to other commodity markets, with brokers and retail traders that purchase large amounts of credits directly from the supply side and bundle them into portfolios, ranging in size from hundreds to thousands of equivalent tons of CO2, for sale to end buyers. Various certifications exist to verify the quality of credits, with leading ones being Verra and Gold Standard.
As with other markets, navigating the world of carbon credits is a complex and often opaque affair. The global carbon market has a long way to go to become transparent, verifiable and environmentally robust. The current system can lead to companies buying a credit that doesn’t actually represent an emission reduction, or paying too little to sustain the project that is ultimately sold.
Gold Standard believes that carbon markets can be powerful drivers for positive impact, but only if the right rules and quality are in place. The goal is to build a world-wide carbon market that reflects true social and environmental costs and rewards the value of quality impacts, not just quantity of carbon emissions reductions. It’s an ambitious goal, but one that can help us slow climate change.