What are carbon credits?
Carbon credits are tradable, digital certificates, each one representing the reduction, avoidance, or removal of one tonne of carbon dioxide equivalent (CO2e). Companies, governments, and other organisations buy carbon credits to support global climate action beyond their own value chain. In doing so, they finance climate projects such as renewable energy or forest protection projects that avoid or remove emissions from the atmosphere.
How do carbon credits work?
Certified climate projects, also known as carbon offset projects, that verifiably reduce, avoid, or remove carbon emissions from the atmosphere generate carbon credits. These are technically referred to as Verified Emission Reductions (VERs). The calculation of the emissions reduced, avoided, or removed by a climate project is based on the methodology specified in the relevant project standard. An accredited verifier of the project standard reviews this calculation. Once verified, the climate project can issue carbon credits to the verified amount.
Each carbon credit is assigned a unique number and is registered in the standard registry. Once a carbon credit is used, for example when companies engage in beyond value chain mitigation (BVCM), it is retired in the registry and cannot be used again. This process avoids double counting carbon credits.
What are carbon credit markets?
Carbon credits reflect actual reductions in carbon emissions that have already occurred. Carbon credits are traded through various markets; companies engaging in climate action buy VERs on the voluntary carbon market (VCM). On the other hand, to meet national climate targets, the European Union Emissions Trading System (EU ETS) is used to trade emission allowances on a global scale. Carbon trading is just one of the responses of the international community to the challenges posed by climate change.
How is a carbon credits price developed?
One carbon credit equals one tonne of CO2e. However, the price per carbon credit on the VCM varies considerably. This is partly because the price depends on the technology and size of the climate project. For example, carbon credits from nature-based solutions projects tend to be more expensive than others because they require more money and time to develop. Climate projects that aim to permanently remove carbon from the atmosphere currently generate the most expensive carbon credits, as these technologies are still at an early stage of development.
The location of the project also affects prices: implementation costs in some parts of the world, in India or Bangladesh for example, are generally lower than in industrialised countries. As a result, the carbon credits generated there are also less expensive. Other price differences can arise from supply and demand.
Carbon credits vs. carbon offsets
Previously, carbon credits were typically used by companies or organisations to offset carbon emissions in order to become carbon neutral. However, the VCM is currently in transition. While companies need to reduce emissions as much as possible and should avoid negative environmental impacts in the first place, it is still almost impossible for them to reduce their emissions to zero. Therefore, funding climate projects continues to play a central role in companies' climate change strategies.
Supporting climate projects is about more than offsetting emissions. It is about contributing to the reduction of global greenhouse gas emissions beyond a company's own value chain. For this reason, contribution claims are becoming increasingly relevant. With this, companies can not only support certified climate projects, but also contribute to project development or promote new and innovative technologies. The focus is on both the company's contribution to climate action and its social commitment.
What is the value of carbon credits?
The verification of carbon credits is proof that climate projects are reducing global emissions. At the same time, they generate the necessary funds for the projects to continue. This makes them a valuable tool for mitigating the effects of climate change.
The value of carbon credits goes beyond the reduction of global greenhouse gases: the investments that carbon credits enable also advance other social, environmental, and economic objectives of the United Nations Sustainable Development Goals (SDGs). Through the VCM, companies can make a global commitment to a more sustainable future.
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