How Carbon Credits Work

Carbon Credits Work

We all know that reducing greenhouse gas emissions is a critical part of solving climate change. However, not all companies are able to eliminate their emissions completely or as quickly as they would like. As such, carbon credits allow businesses to offset the residual emissions that they can’t eliminate and thus make faster progress toward climate targets. If you want to participate in a carbon credit program, it’s important that you understand how they work. This way you can purchase the best quality carbon credits, maximize the impact of your investment and ensure that the programs are as clean as possible.

A carbon.credit is a tradable certificate that represents one tonne of carbon dioxide (or equivalent greenhouse gases such as methane and nitrous oxide) that has been reduced, avoided or removed from the atmosphere through a mitigation activity. Each credit is assigned a unique emissions reduction attribute and can be verified by a third party. The best-quality carbon credits are generated through high-quality projects that meet stringent requirements such as those set by governments and international accreditation bodies.

There are two main markets for carbon credits: the compliance market and the voluntary market. In the compliance market, which is regulated by government, companies are given limits on how much they can pollute and must buy or sell any extra carbon credits beyond those limitations. This makes it doubly incentivized for companies to invest in technology innovations and improved management practices that will reduce their emissions. However, companies that fail to comply can be hit with penalties that include fines and additional taxes.

How Carbon Credits Work

In the voluntary market, companies and individuals who are environmentally conscious choose to buy or sell carbon credits because they want to do so. This marketplace is growing rapidly due to a rise in corporate net-zero goals and interest in meeting international climate goals such as the Paris Agreement. Carbon credits are most often created through agricultural or forestry practices such as planting trees, but they can also be created from any project that reduces, avoids or removes greenhouse gases. These projects can be undertaken by anyone from individual landowners to large corporations, although it’s more common for a middleman such as a carbon trading company to create and sell them.

When purchasing or selling carbon credits, you should only deal with reputable brokers and traders who have a proven track record in the carbon credit industry. These individuals can help you establish your needs and buy or sell in accordance with the rules of the relevant compliance or voluntary carbon credit marketplaces. Ideally, they will also have a solid understanding of the relevant environmental and social impact standards and taxonomy, as well as the methodologies used to verify the emission reductions and associated co-benefits of a carbon project. In the future, liquid reference contracts and a daily price signal will provide the necessary infrastructure for supplier financing and risk-management services in the compliance and voluntary carbon market.