Carbon Credits Are Generated
A carbon credit is a measurement of emission reductions that is exchanged in the carbon market – either as part of a regulatory program or voluntarily. It is a unit of one ton of carbon dioxide equivalents (CO2e) that can be used by a buyer to offset their emissions by funding projects that reduce greenhouse gas emissions. Typically, carbon credits are generated through agricultural or forestry practices. But they can also be created through nearly any project that reduces, avoids, destroys, or captures greenhouse gases. Companies that are committed to achieving net-zero emissions goals use carbon credits as a way of balancing their own emitted CO2 and contributing to the reduction of global carbon dioxide levels.
The demand for carbon.credit is expected to continue to rise. According to the McKinsey Institute, annual demand in 2030 for carbon credits could reach 1.5 to 2.0 gigatons of CO2e.
This is because limiting global warming to just under two degrees Celsius will require an extraordinary reduction in emissions – and many businesses will need to buy carbon credits to supplement their own abatement efforts. To do this, they will need to find reliable, transparent sources of carbon credits, and the only way to do this is through a robust and effective voluntary carbon marketplace.
How Carbon Credits Are Generated
Carbon credits are issued through what is called a “cap and trade” program. These programs allow companies to emit a set amount of carbon emissions each year, but if they are over their cap they must purchase additional emissions reductions from another source. This is done through a trading system, where credits are purchased and sold between parties on the open market.
For example, one of the most valuable types of carbon credits is generated from avoiding deforestation. This is because cutting down trees to use for fuel causes carbon dioxide to be released into the air. In a market governed by a cap and trade program, the forest landowner can sell those credits to buyers that want to cut down their own carbon emissions.
Other carbon credit opportunities exist in renewable energy and nature-based sequestration, such as reforestation or ocean tidal lagoons. In these types of projects, carbon is captured by plants and stored in the form of biomass or buried underground. When the carbon is extracted, it can be sold for credit, as well.
A well-functioning voluntary carbon market would enable these types of projects to thrive by ensuring that they are verified and verified again in accordance with the rules and regulations of the market. It would also allow a consistent definition of “quality,” or the attributes that must be met for a credit to be considered a genuine emission reduction. This, in turn, will facilitate the matching of buyers and sellers.
A key step in this process is establishing a core set of features for carbon credits that is hosted and curated by an independent third party. These core features, which include a set of core carbon principles and an attribute taxonomy, would enable buyers and suppliers to identify the characteristics of credits that meet their needs. This will help match carbon credits to their intended uses, enabling the growth of the market for carbon credits.