Carbon credits have become a hot topic in the fight against climate change, with both positive and negative attention being drawn to them. As more businesses pledge to reduce their carbon emissions, the market for carbon credits continues to grow. But just how essential are carbon credits in the battle against global warming? This article will explore the twin role of carbon credits in abating climate change and the major challenges the market must address.
Carbon credits are also known as carbon offsets in the voluntary carbon market (VCM). Under the compliance or regulated market, they are referred to as carbon allowances or permits that allow the holder a certain amount of carbon emissions. The regulated carbon market is born out of the laws mandating carbon reductions. It’s managed by emission trading systems (ETS) and is also called the cap and trade system. It dwarfs the size of the VCM ($1 billion), with market value hitting $851 billion. While carbon emissions trading in the compliance market is equally effective, our focus is on the VCM.
Only heavy emitters are mandated by national governments not to go beyond their allowed or cap emission limits but voluntary carbon reduction initiatives from large corporations are also moving the needle in the haystack. More so today when more and more investors and stakeholders are pushing for ambitious CO2 reductions. That means companies have to invest in technologies that can massively cut their CO2 footprint. Any emissions they can’t yet avoid or reduce should be offset by buying or investing in projects that generate carbon credits.
Carbon offset credits allow companies to meet their decarbonization targets and reach their net zero emissions goals. As a result, they ramp up global efforts to fight climate change and mitigate their catastrophic effects in two ways.
Each carbon credit represents one metric ton of CO2 or its equivalent gas that’s avoided from getting released into or removed from the atmosphere. But for a project to produce carbon credits, it has to show that its emission reductions meet a set of criteria. These include being real, additional, measurable, permanent, and verified. It is also important that appropriate safeguards are in place to ensure projects really address and mitigate any potential environmental and social risks. Only after meeting those criteria that the project can issue the credits, corresponding to the amount of carbon emissions reduced.
In other words, only upon retirement can the buyer, whose name the credit was registered and retired, claim its impacts. Once retired, that credit should not be circulating anymore or traded again in the carbon market. The income from the sale of carbon credits will support the development of or, in some cases, the implementation of carbon projects that come under 170+ different types. These include the major categories of the following, among others: Renewable energy, e.g. solar or wind farms Fossil-fuel based replacements, e.g. biofuels Natural climate solutions, e.g. reforestation Energy efficiency Resource recovery, e.g. methane emissions avoidance
These projects fall under either carbon avoidance/reduction or carbon removal. Distinguishing between them is important to show the dual role of carbon credits in tackling climate change. First role takes effect in the short term: carbon credits from emissions avoided or reduced can help ramp up the transition to a decarbonized economy. Common examples of the projects supported by carbon avoidance credits include renewable energy, energy efficiency, and improved forest management. Avoiding emissions is often a cost-efficient means to tackle CO2 emissions.
Second role happens in the medium and long term: carbon credits playing this role are crucial in scaling up carbon removal projects and they’re essential to offset residual or emissions that are unavoidable. To reach net zero emissions by 2050, about 5 gigatons of CO2 emissions must be removed every year. Examples of CO2 removal projects include reforestation and technology-based carbon capture such as direct air capture (DAC). Carbon credits can help finance the development and scale-up of these solutions.
Aligning corporate sustainability and climate commitments with the latest science is the best practice in the fight against climate change. If a company doesn’t have any baseline to base its emission reduction targets on, it must create one first. The Science Based Targets initiative (SBTi) has established methodologies for setting climate targets, adopted by more than 1,000 companies. They particularly include the large multinational corporations and heavy emitters that are implementing various actions to reduce emissions. These include enhancing energy efficiency, shifting to renewable energy, and tackling value chain or Supply 3 emissions.
Under the climate mitigation hierarchy, shown above, avoiding emissions directly within the company should be the priority. But for CO2 emissions that can’t be avoided, the next step is to offset them through carbon credits. Companies can use carbon offset credits in ways they deem suitable for their climate change goals, which come in different types. They can use it to pledge to be carbon neutral, climate positive, and net zero. Though they vary, they all often involve a company or organization supplementing internal reductions by financing reductions elsewhere through the purchase of carbon credits.
Offsetting CO2 footprint allows a company to count the reductions in its residual climate mitigation reports. Being carbon neutral means compensating for unabated footprint by accounting the carbon credits toward a certain part of its emissions. It can be on a product level or activity level, which is often on a yearly basis. Aiming for a climate positive target refers to going beyond the targets set to make a net-positive impact.
In conclusion, carbon credits are playing a crucial role in the fight against climate change. They help to reduce carbon emissions and mitigate the catastrophic effects of global warming. Carbon credits are essential in scaling up carbon removal projects and offsetting residual emissions that are unavoidable. Companies can use carbon offset credits to reach their decarbonization targets and achieve their net zero emissions goals. As the demand for carbon credits continues to grow, it is important that projects meet the required criteria and appropriate safeguards are in place to ensure they address and mitigate any potential environmental and social risks.
