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Everything You Need To Know About Carbon Credits

How does the carbon credit system work? Learn more about different types of carbon credits and the process of obtaining them.

The effects of climate change are being felt worldwide. Varied communities are forced to deal with an increasing number of natural disasters and are formulating plans for adapting to a changing climate. 

It has never been more critical for corporations to dedicate their efforts to mitigating climate change, minimize their carbon footprint and integrate environmental, social, and governance (ESG) practices. 

As compnies are encouraged to manage their GHG emissions responsibility and transparently, they can either work towards being carbon neutral or achieving net zero

 As carbon neutrality focuses on carbon emissions, net zero focuses on minimizing all greenhouse gas emissions. Companies that report their emissions often refer to the guidelines of the  net zero standard by SBTI, in order to set net-zero targets and improve their impact on the environment. 

The concept of carbon credits originated with the intent to help hold organizations accountable for their greenhouse gas (GHG) emissions. The carbon credit system was formalized in the Kyoto Protocol, signed in 1997, and was introduced at the 21st Conference of the Parties (COP21). 

Each carbon credit is worth one metric tonne of carbon dioxide or the equivalent of any other GHG, such as methane or nitrous oxide. Organizations can purchase credits to counterbalance their current emissions or to further pollute. Companies that emit fewer GHG emissions than their allowance can sell carbon credits to companies with higher emissions. 

This article discusses how the carbon credit system works, the types of carbon credits available, how they’re issued, and what else organizations can do to impact the environment positively. 

A perfect solution?

Even though the system offers a presumably efficient method for financially incentivizing companies to manage and reduce their emissions, it faces a fair share of criticism. One of the main claims against using this mechanism concerns the unreliability of the system and the lack of transparency within the process of trading carbon credits.

A common argument is that carbon credits can be misleading and can cause misrepresentation. Companies that rely on carbon credits might feel free to label themselves as environmentally friendly without pursuing any direct climate action.

Carbon credits allow companies to continue emitting carbon by purchasing credits, therefore resulting in little impact on emissions reduction. For this reason, the net zero standard by SBTI, states that carbon credits may only be used for neutralizing residual emissions or to finance additional climate mitigation but can not be counted as emission reductions. 

How the carbon credit system works

Think of the carbon credit system as a carbon dioxide market. Companies are given a specific number of carbon credits by their government and can sell any excess to other organizations. While carbon credits force organizations to pay for their pollution, carbon offsets allow organizations to help remove carbon dioxide from the atmosphere. Offsets are generated when a company removes or prevents one metric tonne of carbon or other GHG. 

This market allows corporations to buy and trade carbon credits to help prevent environmental disasters and increased global warming. The main objective of the carbon credit system is to incentivize companies to develop plans for reducing their emission production. 

The main difference between credits and offsets is that credits are worth one tonne of pollution, while offsets go directly toward supporting sustainability. When companies can’t reduce their emissions, they use offsets to make up for it. Offsets include investing in renewable energy, reforestation, or waste management practices. 

Types of carbon credits

Carbon credits come from three different kinds of emission control. 

  1. Reduced emissions- These involve projects aiming for emission reductions wherever possible, such as turning corporations toward solar energy and investing in electric vehicles. 
  2. Removed emissions- These focus on removing emissions already in the atmosphere. Carbon capture projects and planting trees both contribute to this type of carbon credit. 
  3. Avoided emissions- These focus on preventing GHGs from entering the atmosphere in the first place. Investing in deforestation and lowering an organization’s overall carbon footprint are both considered avoided emissions. 

How carbon credits are issued

Governmental regulators issue carbon credits through a "cap-and-trade” program. The total amount of GHGs an organization or industry can emit is capped, and this amount is reduced over time. Companies can buy or sell credits as needed to stay within this ever-reducing cap. This metric is reduced to slowly move all organizations closer to net zero

For example, in 2016 the Canadian federal government asked all provincial and territorial governments to put a price on carbon pollution. Nova Scotia chose to create a cap-and-trade program — they “set annual caps that limit how many tonnes of greenhouse gas emissions are allowed from certain activities in the province each year.” High emitters are forced to join this program; other companies can choose. 

Joining the carbon credit market

Anyone can purchase carbon credits and contribute to the collective mitigation of climate change disasters. Joining the carbon credit system is also a great investment. In 2020, the global carbon credit market grew by a staggering 20%, which is only expected to continue increasing. In 2021, the voluntary carbon market, where companies buy offsets for corporate social responsibility (CSR) reasons, was valued at approximately $1 billion

Other ways organizations can help

Purchasing carbon credits is a valuable way of contributing to climate change mitigation and adaptation. Here are some other ways companies can help mitigate the effects of climate change. 

Looking forward

The carbon market isn’t a perfect system. Most organizations aren’t limited by a carbon cap and continue to contribute detrimental amounts of GHGs. But uptake is increasing — by 2030, the carbon credit market, including both voluntary and mandatory buyers and traders, could be worth $50 billion.

This system offers a solution for organizations struggling with their carbon emissions. However, carbon credits on their own are not enough to address climate change and must be combined with other measures and direct climate action in order to have a meaningful impact on the environment.

*Disclaimer: This summary is for general education purposes only and may be subject to change. ESGgo, Inc., and its affiliates (the “Company”, “ESGgo”, “we”, or “us”) cannot guarantee the accuracy of the statements made or conclusions reached in this summary and we expressly disclaim all representations and warranties (whether express or implied by statute or otherwise) whatsoever.