Carbon credits are units of measurement that track emissions reductions in metric tonnes of carbon-dioxide equivalent (MtCO2e). They can be created by companies, individuals or other groups of investors, and they represent the exclusive right to claim one tonne of CO2e reduced from a project.
A credit can be purchased to offset a company’s own emissions or for an entirely new purpose, such as supporting a clean energy project that is creating additional benefits, like local job creation. These transactions are facilitated by carbon market trading platforms, known as exchanges. There are currently a handful of environmental commodity exchanges operating in North America and Europe, with registries that allow traders to buy and sell. There are also a growing number of over-the-counter markets that allow buyers to engage directly with projects.
The five main players in carbon.credit markets are standards, brokers, project developers, financiers and end buyers. Each of these roles has a unique set of challenges and responsibilities.
Standards are organizations, often NGOs, that verify that a carbon project meets its stated objectives and volume of emissions reductions. They also have a range of rules, known as methodologies, that a project must follow to generate credits. Methodologies are specific to each type of project – for example, how a reforestation or forestry project captures and absorbs carbon.
Most project types are designed with a carbon credit in mind from the outset, and may even be marketed as “carbon neutral.” To qualify for the exchanges or over-the-counter markets, they must be backed by a valid carbon credit standard, a reputable registrar and a certified audit.
Once verified, projects are registered with the appropriate carbon credit issuance program. The registries are massive databases that hold information on each carbon credit, including its standard, methodology, geography, vintage, date of issue and more. Typically, a single carbon credit can be held in multiple registries and traded on several exchanges at the same time.
Carbon credits are created by projects that reduce greenhouse gas emissions by either natural means – like reforestation or wetland restoration – or through mechanical means, such as investing in new technology that increases efficiency or lowers emissions, like renewable energy projects. The resulting reductions can be sold on the voluntary market, which is growing rapidly. The credits are sold to buyers that want to meet more ambitious climate targets than they can deliver through internal reductions alone.
In the future, it is likely that a large proportion of the world’s emissions will need to be addressed by using carbon credits. As such, the global voluntary market could be a huge source of funding for new technologies and scalable solutions that are needed to combat climate change. For this reason, it is essential that the regulatory environment is right to facilitate and support the growth of the voluntary market. This includes ensuring that carbon pricing is stable, flexible and aligned with other environmental regulations to ensure the success of the sector.