As the world continues to grapple with the devastating effects of climate change, polluters are under increasing pressure to help clean up the planet-warming carbon they dump into the air. Carbon credits are one solution that many believe can promote both corporate sustainability and global sustainable development. But what are carbon credits, how do they work, and what role do they play in the fight against climate change?
Carbon credits are permits to emit a certain amount of carbon that are tradable in carbon markets. The idea behind carbon credits is to put a price on carbon emissions, incentivizing emitters to pollute less. International carbon trading markets have been around since the 1997 Kyoto Protocols, but new regional markets have prompted a surge of investment. In 2022, around 41 billion metric tons of greenhouse gases were emitted, up from 36 billion metric tons in 2016. These gases are the ones to blame for the Earth’s rising temperatures.
One carbon credit represents one tonne of CO2 or its equivalent (CO2e) gas that an organization can emit. Carbon credits work like permission slips for emissions, serving as a unit of measurement for CO2e emissions that have a tradable element. The number of credits issued to a company corresponds to its emissions limit or “cap” set by a regulatory body. If a company doesn’t go above its cap, then it will have excess carbon credits which they can sell in the compliance carbon market regulated by the government. But if the company goes beyond the limit, it can turn to the carbon market to buy the required carbon credits.
Carbon offsets, on the other hand, are from projects or initiatives that reduce or remove carbon emissions. Carbon reduction projects generally fall into two types: nature-based and technology-based. Nature-based solutions usually include reforestation and wetland restoration projects. They naturally sequester carbon in the environment. Technology-based projects often involve investments in new technologies that increase efficiencies or reduce emissions like renewable energy projects. Once an offset is generated, the organization that develops or completes the project can retain the offsets or trade them on a voluntary carbon market (VCM). Other companies can then buy the offsets to compensate for their own carbon footprint.
Carbon-intensive sectors such as energy face a harder quest to net zero emissions than others. This is why the biggest buyers of carbon credits were from the energy sector, as well as from the finance, technology and consumer goods sectors. The Ecosystem Marketplace (EM) keeps track of these companies and how much credits they’re buying. In another analysis, researchers found that at least 36% of large companies buy carbon credits voluntarily to offset their footprint. The analyzed companies include the world’s biggest and top S&P 500 businesses. The findings revealed that Microsoft, Salesforce, Goldman Sachs, Disney, and Nike, among others, are the top buyers.
In a broader analysis by EM, which included carbon project developers and investors, they found that the most popular projects producing carbon offsets are forest and renewable energy initiatives. In separate Bloomberg analysis of data from Verra, the largest buyers of voluntary carbon credits are cryptos, airlines, and carmakers. The analysis covers only about 50% of the global carbon market in 2021 as data is voluntarily disclosed.
On the sellers’ side, Tesla is the largest seller of carbon credits under the California cap-and-trade system. The company had earned billions of dollars from it. Last year, Tesla’s total carbon credit sales reached a record $1.78 billion. All thanks to the carmaker’s hundreds of thousands of sold EVs.
The cost of carbon offsets varies widely. Even so in the VCM. The cost depends on various things, including project type, location, and certification standard. The VCM is a voluntary market, meaning companies do the offsetting voluntarily, either as part of their ESG goals or because of shareholders’ pressure.
In conclusion, carbon credits and offsets are a market mechanism to help reverse the effects of climate change. Carbon credits are permits to emit a certain amount of carbon that are tradable in carbon markets, while carbon offsets are from projects or initiatives that reduce or remove carbon emissions. The biggest buyers of carbon credits are from the energy sector, as well as from the finance, technology, and consumer goods sectors. The most popular projects producing carbon offsets are forest and renewable energy initiatives. The cost of carbon offsets varies widely, depending on various factors.