Introduction to Carbon Credits

Posted : March 8, 2023
Buyers of Environmental Commodities

Carbon credits have become an important tool for companies to take climate action and fulfil their corporate social responsibility. Understanding this type of environmental commodity is crucial for businesses aiming to enhance their environmental credentials and comply with evolving regulations and societal expectations.

Overview of Carbon Credits

Carbon credits represent a quantifiable and verifiable reduction in greenhouse gas emissions. Carbon credits are issued on the basis of a tonne of carbon dioxide equivalent (tCO2e), and can be issued for a wide range of emission reduction activities from nature-based solutions to technology-based solutions.

The most common standards for carbon credits are Gold Standard (GS) or Verra’s Verified Carbon Standard (VCS), although there are others. These standards are responsible for the registration, issuance and retirement of carbon credits from their specific standard. The standards work with independent auditors, known as validators and/or verifiers.

Carbon credits are intended to reward new activity that is above ‘business as usual’, so the rules and eligibility criteria for certain emission reduction activities are always evolving and changing. Certain activities that were previously awarded carbon credits may now be considered common practice or otherwise undeserving of the financial incentive, so it is no longer possible to have new activities registered to issue carbon credits.

Prices for carbon credits can vary considerably, mainly due to the wide range of potential emissions reduction activities and the many different standards for carbon credits. Carbon credits for ‘removal’ activities can be much more expensive than carbon credits from ‘avoidance’ activities, although both are very important for our fight against climate change.

The Uses for Carbon Credits

In a broad sense, the purchase and retirement of carbon credits represents a contribution to the fight against climate change. Purchasing carbon credits delivers a financial incentive to those who develop verifiable ‘emission reduction’ projects, incentivising further climate action.

While the priority for a company should be to reduce emissions, this isn’t always possible and offsetting emissions is a necessity to some degree. Carbon credits have traditionally been used to offset a company’s Scope 1 emissions.

The Benefit of Using Carbon Credits

Carbon credits provide a direct pathway for companies to achieve sustainability targets. Being able to certify that your company has reduced its impact on the environment by supporting another activity is an important step on the road to corporate social responsibility.

The offsetting of Scope 1 emissions can have significant benefits to a company’s reputation and public image. Offsetting emissions may be a requirement in some industries or some jurisdictions, or allow the reduction in a financial penalty.

There is also evidence that those companies purchasing carbon credits are those taking higher levels of climate action. That is, the companies that purchase carbon credits are shown to achieve higher levels of emissions reduction than those who do not purchase carbon credits.

Getting Started: How to Use Carbon Credits

Companies will typically calculate their carbon footprint. This will give an estimate of the company’s emission of greenhouse gases (GHG). While there are several different types of GHGs, carbon footprints are expressed as tonnes of carbon dioxide equivalent (tCO2e). This allows companies to standardise their impact on the atmosphere into a single common unit.

Companies will then decide the amount of their total carbon footprint that they will purchase in carbon credits. Some companies focus on the prior year, while others have chosen to make purchases based on their historical or even future GHG emissions. Most large purchases of carbon credits occur through direct negotiation with emission reduction projects, although there are other ways to purchase carbon credits are emerging as the market matures.

There are several frameworks for corporate commitments to fight against climate change. These include Science Based Targets Initiative, Net Zero and the Greenhouse Gas Protocol. Each of these frameworks add rules, suggestions and reporting obligations to assist companies to take meaningful climate action.

What About Renewable Energy Certificates?

Renewable energy certificates (RECs) are a great way to reduce a company’s Scope 2 emissions and a very common starting place for companies looking to reduce their environmental impact. RECs are different to carbon credits: find out more about RECs here or read about the main differences here.

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How could I develop an Emission Reduction Project?

Project developers have many opportunities to develop emission reductions projects and receive carbon credits. This might include renewable energy projects in Least Developed Countries, or any one of dozens of other approaches to soil carbon, environmental restoration or preservation, or technology-based interventions like methane capture or carbon capture and storage.