As business leaders make more ambitious goals to reduce the global greenhouse gas (GHG) emissions there is a market which can assist in achieving these goals by assisting firms’ efforts to reduce their own carbon emissions. This is the fast-growing market for carbon credits that are voluntary.
Carbon credits (often called “offsets”) are a key component of carbon credits. They have an important double function in the fight for climate-related change. They allow companies to contribute to decarbonization that goes beyond their own carbon footprint, thus speeding up the transition towards low-carbon development. They also help finance projects for removal of carbon dioxide from the atmosphere–delivering negative emissions, which will be needed to neutralize residual emissions that will persist even under the most optimistic scenarios for decarbonization. Although the carbon credit market that is voluntary is gaining significant growth, it remains very tiny. The report that was recently released by the Taskforce on Scaling Voluntary Carbon Markets is aimed at creating an outline for solutions that can help overcome the barriers to its continued expansion. This article will describe how carbon credits function and how they could aid in the global fight against climate change.
The double role of carbon credits to combat climate change
Carbon credits are a document that represents one metric tons of equivalent carbon dioxide which can be kept from being released into the atmosphere (emissions reduction or avoidance) or eliminated from the air as the result of a carbon reduction project. To create carbon credits, the project must be able to prove that its emissions decreases, or the carbon dioxide eliminations are actual, measurable and lasting, in addition to being independently verified, and distinctive (see the section on “Criteria to be able to issue carbon credit”). If a project can meet the criteria set forth by standards that are independent, like Gold Standard and Verified Carbon Standard (VCS)–credits are granted. The effect of a carbon credit can be claimed only–that is, used to calculate climate-related commitments–once the credit is taken off the carbon credit exchange (canceled by an official registry) and then cannot be sold. Carbon credits are deemed as a “voluntary carbon credit” when it is purchased and resold on a basis of voluntary rather than as part the process of ensuring compliance in accordance with the legal obligation.
The profits generated by the sales of carbon credits allow the creation of carbon-reduction initiatives across various projects. This includes renewable energy, avoiding emissions resulting from fossil fuels and natural climate solutions for example, reforestation or avoided deforestation or agroforestry; efficiency in energy use as well as resource recovery like eliminating methane emissions coming from landfills or wastewater facilities, among other things.
While the majority of these project varieties, including renewable energy, avoiding deforestation and resource recovery are focused on reducing carbon emissions, some like reforestation concentrate on eliminating carbon dioxide out of the air. This is an important distinction that demonstrates the dual importance that carbon credits from voluntary sources can play in combating climate change
In the short-term in the short-term, carbon credits earned through voluntary projects that focus on reducing or eliminating emissions will help in the process of transitioning towards a decarbonized world economy, such as by promoting investment in sustainable energy and energy efficiency as well as natural capital. Eliminating emissions is usually the most cost-effective method to reduce greenhouse gas concentrations in the atmosphere.
In the longer term, carbon credits can be a key factor in accelerating the removal of carbon dioxide (or negative emission) necessary to reduce emissions that are not reduced further. In a recent study we found that at minimum 5 gigatons of emissions would be required annually to achieve zero net emissions in 2050. This could be achieved through a mix with natural solutions to climate change, such as forest reforestation (for instance, storing carbon within trees) and emerging carbon capture and storage, and use solutions like direct air capture using carbon storage (DACCS) as well as bioenergy that incorporates carbon storage and capture (BECCS). Carbon credits from voluntary sources can be used to in the financing of the expansion of these technologies.
The role of carbon credits in climate commitments of corporations
A credible corporate climate pledge starts by setting an emissions reduction goal that covers the indirect and direct greenhouse gas emissions. If an organization does not possess an emission baseline to establish a target setting one, it is a must first step.
The alignment of a target’s ambition level with the most recent research on climate is widely regarded as the best way to go. This means that the goal should be compatible with the amount of decarbonization needed for limiting global warming to less than two degree Celsius over preindustrial temperatures. It should also most importantly, it should be aligned with the 1.5-degree path that scientists believe will lower the chances of triggering the most hazardous and irreversible impacts caused by climate changes. In the Science Based Targets Initiative has created methods for setting the target. These methods have already been adopted by more than a thousand businesses, including a number of major multinationals. To reach the necessary emission reductions, businesses can make use of levers like improving efficiency of energy, switching to renewable energy sources, and addressing emissions from the value chain.
In the following stage, a company could agree to a goal that requires the use of carbon credits, either to offset emissions it hasn’t yet been able to eliminate or to offset residual emissions that are not able to be reduced because of prohibitive costs or technical limitations. These kinds of targets are available with different names (for instance the carbon-neutral, neutral climate net-zero carbon negative and climate positive) however, they all include a company enhancing reductions within its carbon footprint with reductions elsewhere via the purchase and redemption of carbon credits that are voluntary (see the section on sidebars, “Types of carbon targets”). By reducing the emissions of its remaining ones by this method companies can claim that it has reduced its impact on the environment. Certain companies, like Microsoft have gone further, setting goals to have a net-positive effect upon the environment.
A strong momentum, driven primarily by new commitments from corporations and points-of-sale products
After three years of strong growth in the carbon market, voluntary carbon hit a record in the year 2019, with respect to issuance as well as retirements (exhibit). Issues included 138 million tons of carbon dioxide equivalent–a little more than double amount in 2018–and retirements were 70 million, which is a 33 percent increase over the year prior. This increase has been fueled by a combination of brand new corporate climate commitments, including the ones to carbon neutrality as well as net-zero, and what is known as “point at sale” offering of carbon credits such as Shell’s carbon neutral fuel that is a retail offer of gasoline and carbon credits that are voluntary, as well as passenger offset programs for airlines that permit passengers to offset their carbon emissions from their flights via Shell’s site.
Based on year-to date volumes and an extrapolation that is in line with the historical patterns of seasonality We expect that the market will set a new record in 2019 in which issuances and retires each growing by about 1/3 compared to the year prior. After years of falling costs (from an average of about $7/ton in 2008, to around three dollars per ton for 2019) because of the oversupply that is outpacing demand, we anticipate the average price to increase in the near and medium long term, because of the strong growth in demand particularly for projects with higher costs such as reforestation, and carbon removal projects in general (see the sidebar under “Issuances as well as retirees”). Although still quite tiny, the voluntary carbon market is currently gaining acceleration and its effect (and its potential) is attracting more attention.
Nature-based climate solutions (NCS) which is a term used to describe a range of that includes project types like the reforestation process, avoiding deforestation better forest management, and Agroforestry, have seen the most growth than any other category of project and significantly influenced the market’s voluntary carbon trend. In the period 2016-19, issuances in this category have more than doubled every year, in average. And in the year 2019, NCS accounted for 53 percent of all issued. Additionally, retirements in this sector have also increased (close to 50% annually, in average). This may be due to increasing awareness of the potential of NCS (they can provide a third of the emission reductions required to comply with the Paris Agreement between now and 2030) and a greater interest in carbon dioxide reduction (of the which NCS can be the most efficient, technologically tested method) and the customers’ preferences for benefits in addition to climate change mitigation like biodiversity and the impact on local communities.
