Retiring carbon credits can be a powerful tool for individuals and businesses to offset their carbon emissions and contribute to a greener future. By retiring these credits, we can ensure that the emissions reduction achieved is permanent and not double-counted, creating a more transparent and effective carbon market. This approach not only helps combat climate change but also encourages the development of sustainable practices and technologies.
Carbon credits are tradable certificates that give entities the right to emit a tonne of CO2 or its equivalent. They are generated by projects that reduce or remove CO2 from the atmosphere like planting trees. The credits serve as a permit, allowing the holder to neutralize their emissions. In that way, they work like renewable energy certificates (RECs) which are also a market-based instrument that certifies the holder owns a megawatt-hour of electricity from a clean energy source. Essentially, RECs are a type of carbon credit alongside many others.
These credits come in two major categories: compliance and voluntary markets. In the voluntary carbon markets, carbon credits are also called offsets. Emitters voluntarily bought them to offset their greenhouse gas emissions. In the compliance markets, businesses’ emissions are ‘capped’. If they go beyond that cap or limit, they’re fined or they can buy carbon credits corresponding to the amount of their excess emissions.
Retiring carbon credits involves a series of stages. But let’s focus on the last three crucial steps that ensure the integrity of the credits, the process of trading them, and what it means to retire them. The verification process is critical for ensuring the accuracy, transparency, and integrity of reported project data. Verifiers have to confirm a project’s compliance with the carbon program’s eligibility criteria. They validate the collection of project monitoring data as per program requirements and verify the accuracy of emissions reduction calculations based on approved methodologies. After a project has undergone the verification processes, it becomes eligible for registration within the program. In other words, the credits they generate are now available for trading.
Carbon credit trading has become very popular today among individuals and organizations and various carbon exchanges began to emerge. This is happening for a simple reason: Reducing GHG emissions is a global initiative and the carbon market offers great opportunities for entities seeking to cut their emissions. You can buy or trade carbon credits for retirement purposes through various platforms. There are a couple of online carbon credit marketplaces and spot exchanges to choose from. Here are the top four carbon exchanges this 2024 that you can consider. You can also try popular marketplaces like the one that Salesforce launched or that of Alcove’s.
Lastly, let’s move toward the end goal of carbon credit trading – retirement. Carbon credit retirement also means their death. A carbon credit is retired once its benefit has taken place. That means it has been used and the carbon benefit it represents has been claimed by the entity that bought it. Retiring your carbon credits requires you to ensure that they are removed from the marketplace and labeled as ‘retired’ in any records or registry. The retired credits must serve their emission reduction purpose only once to prevent double counting.
Take note that retirement only occurs once the impact has happened. This means retiring your carbon credits depends on what type of credit you purchase. If you’ve bought ex-post carbon credits, you can retire them right after your purchase. You can then instantly get the proof of retirement. For ex-ante and pre-purchase carbon credits, retiring them won’t happen immediately after you bought them. That’s because their impact hasn’t yet occurred and their retirement should be in the future. You should know when the timeline would be from the seller or the marketplace where you purchase the credits. It may take months or even years, depending on the specific project you invest in.
By buying carbon credits, entities help fund efforts that support decarbonization elsewhere. These initiatives often yield positive benefits to the environment and local communities. More importantly, each credit retired helps quantify the actual environmental impact of those projects. When it comes to the impact of retiring carbon credits on investors, be it individuals or companies, it has two major effects. First, it preserves the integrity and effectiveness of emission reduction projects. It prevents double counting or reusing of the credits by multiple entities. This further guarantees transparency and accountability in the carbon markets. In effect, carbon credit retirement instills confidence among companies regarding the impact of their purchases or investments. Thus, secondly, retiring carbon credits helps build a good reputation and enhance brand value of your company. Take for instance the case of large businesses supporting various carbon reduction projects. Giant technology companies like Microsoft and Apple have been investing millions in carbon offsets from projects that either reduce or sequester carbon from the atmosphere. As they do that, they’re not only addressing their emissions but also dealing with their corporate sustainability.
So, how do carbon credits become the new currency of ESG investing to meet environmental obligations and corporate sustainability? In the U.S., the coin of the realm is dollars while in the EU, it’s Euro. In the ESG world, it’s the carbon credit. Carbon credits are taking a small space on the ESG goals of businesses. But as more companies are pledging to reach net zero, these credits are also gaining more momentum in ESG investing to ramp up carbon emission reductions. And slashing emissions has now become a critical element of corporate and environmental responsibility to help fight climate change. Corporations use carbon credits to reach their net zero, carbon neutrality, or carbon negative goals.