A market-based strategy to lower greenhouse gas emissions is the usage of carbon credits. They reflect a verified decrease of one metric tonne of carbon dioxide (or its equivalent) through initiatives supporting carbon sequestration, renewable energy, or energy efficiency. Individuals or companies can purchase carbon credits to reduce their carbon footprint. By purchasing these credits, businesses help fund initiatives that reduce emissions, effectively balancing off their own carbon emissions and aiding in the global fight against climate change.
A government or regulatory body can require businesses or organisations to release carbon dioxide or additional greenhouse gases over a set period in return for carbon credits, which are exchangeable certificates.
Companies that exceed the cap may be subject to fines, whereas buyers of carbon credits who can lower emissions will be rewarded with credits. Let’s understand what carbon credits are in detail.
Carbon credits are intended to lessen the global warming and carbon footprint brought on by commercial activity. Typically, a company can release one ton of greenhouse gases, such as nitrous oxide, methane, carbon dioxide, and hydrofluorocarbons, for each credit.
In some cases, these are also called emissions permits or carbon allowances.
Did you know? Extreme weather events brought on by climate change may significantly outpace current levels in intensity, frequency, and scale by 2025 to 2031.
What Are Carbon Credits?
Permits that enable the owner to emit a specific amount of carbon dioxide or additional greenhouse gases are known as carbon credits, commonly called carbon offsets. One credit allows for producing and releasing one ton of carbon dioxide or another greenhouse gas equivalent.
Since carbon credits are sold as certificates in the carbon credit market that can be bought or exchanged with other businesses, their price is subject to change. Businesses that use their certificates insufficiently or emit fewer gases than are allowed are rewarded.
One component of a cap-and-trade program is the carbon credit. Companies that pollute are given credits that enable them to do so up to a limit that is periodically decreased.
In the interim, the business may sell any credits it doesn't require to another business that does. Thus, private businesses have two incentives to lower greenhouse gas emissions.
If emissions exceed the cap, they must first pay extra for credits. Second, they can generate income by reducing emissions and reselling extra allowances.
How Do Carbon Credits Function?
Reducing greenhouse gas emissions into the atmosphere is the ultimate purpose of carbon credits. As stated, the right to release greenhouse gases equal to one ton of carbon dioxide is represented by a carbon credit.
In terms of carbon dioxide emissions, that is equivalent to driving 2,400 miles, according to the Environmental Defense Fund.
Companies or countries are given certain credits, which they can exchange to help balance overall global emissions. The United Nations states that as carbon dioxide is the main greenhouse gas, "people speak essentially of trading in carbon."
The goal is to gradually decrease the number of credits to encourage businesses to develop new strategies for lowering greenhouse gas emissions.
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A Little About Carbon Offset Projects
Industries that produce fossil fuels like natural gas, coal, and oil, such as those in the cement, steel, fertiliser, power, and textile sectors, among many others, release greenhouse gases. However, businesses in the biomass, wind, solar, and geothermal energy sectors work hard to market carbon offsets.
As a result, many businesses are resorting to carbon offset initiatives, increasing demand for carbon credits and presenting expansion potential for these development projects.
Although carbon offsets and credits are two distinct concepts, the terms are sometimes used synonymously. It is called "generating a voluntary carbon credit" when a carbon offsetting initiative makes money from its efforts within the voluntary carbon market.
The phrases can be difficult to understand for those not immersed in the compliance business. However, if you want to use the voluntary market to lessen your carbon footprint, the credits you purchase will probably involve carbon offsetting activities.
The Act to Reduce Inflation
The Inflation Reduction Act, a historic measure signed into law on August 16, 2022, aims to fight inflation, decrease the deficit and reduce carbon emissions, is the most recent development anticipated to impact the carbon credit market.
The law, which strongly emphasises environmental improvement, contains a clause that rewards high-emitting businesses that deposit their greenhouse gas emissions underground or utilise them to make other products.
The benefits come in the form of significantly increased tax credits, which have risen from $35 to $60 for each metric ton of captured carbon employed in other production methods or for oil recovery and from $50 to $85 for each metric ton of captured carbon buried underground.
Also Read: Exact Meaning of Fiscal Year (FY) Explained with Examples
Why Should Atmospheric Carbon and Greenhouse Gas Concentrations Be Lowered?
Increased concentrations of greenhouse gases (GHG) in the atmosphere have been shown by scientists at the Intergovernmental Panel on Climate Change (IPCC) of the United Nations to be warming the globe. Extreme weather changes result from this all across the planet.
Burning fossil fuels, such as coal, oil, and gas, produces carbon dioxide, which is currently the principal GHG. We might prevent additional harm to our climate by limiting the quantity of carbon dioxide we emit.
The Price of a Carbon Credit
Carbon credits have varying pricing depending on the place and carbon credit market where they are exchanged. The average cost of carbon credits in 2019 was $4.33 per ton. During the first eight months of the following year, this price averaged $4.73 per ton after rising as high as $5.60 per ton in 2020.
Where Can Carbon Credits be Purchased?
Many private businesses provide carbon offsets to organisations or people looking to lower their net carbon impact. These offsets are financial investments in or donations to forestry initiatives or other initiatives with low carbon footprints. Additionally, buyers can buy transferable credits on a carbon exchange like Singapore's AirCarbon Exchange or New York's Xpansive CBL.
How Big Is the Market for Carbon Credits?
Due to the various restrictions in each market and other regional differences, estimates of the overall scope of the carbon credit market vary greatly. According to some estimates, the voluntary carbon market, primarily made up of businesses that purchase carbon offsets for corporate social responsibility (CSR) purposes, was worth $1 billion in 2021.
Estimates for the market for conformance credits, which are connected to regulated carbon restrictions, range up to $272 billion for 2020.
Measures to Reduce Carbon Emissions
An organisation can take the following three actions to reduce its carbon emissions:
1. Measure and compute emissions – There are particular protocols to assist businesses in doing this.
For instance, the GHG Protocol is a widely accepted accounting standard that aids in organisations' measurement and management of GHG emissions. The protocol for emissions defines three categories or scopes:
- Emissions that come directly from sources an organisation owns or controls fall within the scope.
- Indirect emissions from the energy, steam, heating, and conditioning resources the scope covers an organisation purchases.
- Other indirect emissions from a company's value chain are under the scope.
The emissions, including other GHGs like methane and nitrous oxide, are measured in tons of carbon dioxide equivalent. Companies should frequently evaluate their carbon footprints and account for them in financial and sustainability reports.
2. Whenever feasible, lower emissions – An organisation can create a sustainability strategy after measuring its emissions and determining its sources. The science-based target initiative (site) supports the Paris Agreement's goals and provides emission reduction guidelines.
By 2025, the site recommends businesses use eighty percent renewable electricity. Individual actions such as converting to healthier eating habits or using greener modes of transportation like electric cars and trains using hybrid locomotives can also help reduce carbon emissions in minor ways.
3. Delete any leftover emissions – They can be compensated if they cannot be eliminated. Projects that absorb or eliminate carbon dioxide are referred to as reduction projects.
Before issuing carbon credits, a project must be certified.
The following are some instances of international certifications:
- Gold Standard
- Climate Action Reserve
- Plan Vivo
Conclusion
By creating a market where businesses can exchange emissions permits, carbon credits were developed to lower greenhouse gas emissions. Companies are given a predetermined quantity of carbon credits under the system, which decreases over time. Any surplus can be sold to another business.
Thanks to carbon credits, companies have a financial incentive to cut their carbon emissions. Those who find it difficult to minimise emissions can continue to operate, but it will cost them more money.
According to its proponents, the carbon credit system results in quantifiable, independent emission reductions.
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