Product Code Database
A carbon credit is a tradable instrument (typically a virtual certificate) that conveys a claim to avoided GHG emissions or to the enhanced removal of greenhouse gas (GHG) from the atmosphere." One carbon credit represents the avoided or enhanced removal of one metric tonne of carbon dioxide or its carbon dioxide-equivalent (CO2e).
Carbon offsetting is the practice of using carbon credits to offset or counter an entities greenhoue gas (GHG) inventory emissions in line with reporting programs or institutional emissions targets/goals. Carbon credit trading mechanisms (i.e., crediting programs), enable project developers to implement projects that mitigate GHGs and receive carbon credits which can be sold to interested buyers who may use the credits to claim they have offset their inventory GHG emissions. Similar to "offsetting" carbon credits that are permitted as compliance instruments within regulatory compliance markets (e.g., The European Union Emission Trading Scheme or the California Cap-n-Trade program) can be used by regulated entities to report lower emissions and achieve compliance status (with limitations around their use that vary by compliance program). Aside from "offsetting" carbon credits can also be used to make contributions toward global net zero GHG-level targets. It is an individual buyer's choice how to use, or "retire", the carbon credit.
Projects entail mitigation actions that avoid or enhance the removal of GHG emissions. Projects are implemented in line with the standards of crediting programs, including their methodologies, rules, and requirements. Methodologies are approved for each specific project type (e.g., tree planting, mangrove restoration, early retirement of coal powerplants). Provided a project fulfills all of the requirements and provisions of a crediting program, it will be issued credits that can be sold to buyers. Each crediting program typically has its own carbon credit 'label' such as CDM's Certified Emission Reductions (CERs), Article 6.4 Mechanism Emission Reductions (A6.4ERs), VCS' Verified Emission Reductions (VERs), ACR's Emission Reduction Tonnes, Climate Action Reserves' Climate Reserve Tonnes (CRTs), etc.
Hundreds of GHG mitigation project types exist and have approved methodologies with established crediting programs. The program that defined the first phase of carbon market development, the Clean Development Mechanism (CDM) provides a summary booklet of its many approved methodologies. But each crediting program has its own list of approved methodologies, for example unless explicitly stated, an ACR approved methodology could not be used by someone trying to work through Verra's VCS crediting program. Carbon credits are a form of Carbon price, along with , and . Carbon credits are intended to be fungible across different markets, but some compliance markets and reporting programs limit eligibility to specified carbon credit types or characteristics (e.g., vintage, project origin, project type).
The essential elements of carbon credit quality can be distilled to five criteria. Higher-quality carbon credits are those associated with avoided emissions or enhanced removals that are: (2025). 9780143136972, Penguin Books. ISBN 9780143136972
Carbon credit quality is possible to assess and in response to the growing concerns related to credit quality, many credit ratings initiatives began to form around 2020 to aid buyers and crediting programs in discerning high-quality from low-quality projects and to make improvements to crediting methodologies so that future credits will only be issued if they meet more rigorous requirements. These credit ratings initiatives have taken the form of open access resources like OffsetGuide.org, labeling initiatives like the Integrity Council for the Voluntary Carbon Market that works to assess methodologies and determine if they meet the threshold of quality (determined by applying an assessment framework) to receive the Core Carbon Principle (CCP) label or not, or the Carbon Credit Quality Initiative which conducts deep analysis (an exhaustive assessment framework) and assigns a score of 1-5 representing the holistic quality of a methodology. For profit credit ratings companies have also sprung up that provide quality ratings for individual projects by reviewing their project documents.
The vintage of a carbon credit is the year in which a carbon credit was issued by a crediting program, which usually corresponds to the year in which a third party auditor reviews the project — generates the carbon offset credit is known as the vintage.
A registry is a core function of a carbon crediting program. Through a typically publicly accessible registry, carbon credits are tracked for their ownership and retirement. Registries may contain project information such as project status, project documents, credits generated, ownership, sale, and retirement.
In 1997, the original international compliance carbon markets emerged from the Kyoto Protocol, which established three mechanisms that enable countries or operators in developed countries to acquire offset credits. One mechanism was the Clean Development Mechanism (CDM), which expanded the concept of carbon emissions trading to a global scale, focusing on the major greenhouse gases that cause climate change: carbon dioxide (), methane, nitrous oxide (N2O), perfluorocarbons, hydrofluorocarbons, and sulfur hexafluoride. The Kyoto Protocol was to expire in 2020, to be superseded by the Paris Agreement. Countries are still determining the role of carbon offsets in the Paris Agreement through international negotiations on the agreement's Article 6.
In November 2024, after years of deadlock, governments attending the COP29 conference in Baku, Azerbaijan agreed to rules on creating, trading and registering emission reductions and removals as carbon credits that higher-emission countries can buy, thus providing funding for low-emission technologies.
There is a diverse range of sources of supply and demand as well as trading frameworks that drive offset and credit markets. Demand for offsets and credits derives from a range of compliance obligations, arising from international agreements, national laws, as well as voluntary commitments that companies and governments have adopted. Voluntary carbon markets usually consist of private entities purchasing carbon offset credits to meet voluntary greenhouse gas reduction commitments. In some cases, non-covered participants in an ETS may purchase credits as an alternative to purchasing offsets in a voluntary market.
These programs also have other Externality, or co-benefits, which include better air quality, increased biodiversity, and water and soil protection; community employment opportunities, energy access, and gender equality; and job creation, education opportunities, and technology transfer. Some certification programs have tools and research products to help quantify these benefits.
Prices for offsets and credits vary widely, reflecting the uncertainty associated with verifying the indirect value of carbon offsets. At the same time, uncertainty has caused some companies to become more skeptical about buying offsets .;;;
The International Emissions Trading program enables countries to trade in the international carbon credit market to cover their shortfall in assigned amount units. Countries with surplus units can sell them to countries that are exceeding their emission targets under Annex B of the Kyoto Protocol.
Nuclear energy projects are not eligible for credits under these programs. Country-specific designated national authorities approve projects under the CDM.
The supervisory board under Article 6.4 is responsible for approving methodologies, setting guidance, and implementing procedures. The preparation work for this is expected to last until the end of 2023. ER credits issued will fall by 2% to ensure that the program as a whole results in an overall Mitigation of Global Emissions. An additional 5% reduction of ERs will go to a fund to finance adaptation. Administrative fees for program management are still under discussion.
CDM projects may transition to the Article 6.4 program subject to approval by the country hosting the project, and if the project meets the new rules, with certain exceptions for rules on methodologies. Projects can generally continue to use the same CDM methodologies through 2025. From 2026 on, they must meet all Article 6 requirements. Up to 2.8 billion credits could potentially become eligible for issuance under Article 6.4 if all CDM projects transition.
Article 6 does not directly regulate the voluntary carbon markets. In principle, it is possible to issue and purchase carbon offsets without reference to Article 6. It is possible that a multi-tier system could emerge with different types of offsets and credits available for investors. Companies may be able to purchase 'adjusted credits' that eliminate the risk of double counting. These may be seen as more valuable if they support science-based targets and net-zero emissions. Other non-adjusted offsets and credits could support claims for other environmental or social indicators. They could also support emission reductions that are seen as less valuable in terms of these goals. Uncertainty remains around Article 6's effects on future voluntary carbon markets. There is also uncertainty about what investors could claim by purchasing various types of carbon credits.
/ref> REDD+ also promotes co-benefits from reducing deforestation such as biodiversity. It was introduced in its basic form at COP11 in 2005 and has grown into a broad policy initiative to address deforestation and forest degradation.
In 2015, REDD+ was incorporated into Article 5 of the Paris Agreement. REDD+ initiatives typically compensate developing countries or their regional administrations for reducing their emissions from deforestation and forest degradation. It consists of several stages: One, achieving REDD+ readiness; two, formalizing an agreement for financing; three, measuring, reporting, and verifying results; and four, receiving results-based payments.
Over 50 countries have national REDD+ initiatives. REDD+ is also taking place through provincial and district governments and at the local level through private landowners. As of 2020, there were over 400 ongoing REDD+ projects globally. Brazil and Colombia account for the largest amount of REDD+ project land area.
Currently several exchanges trade in carbon credits and allowances covering both spot and futures markets. These include the Chicago Mercantile Exchange, CTX Global, the European Energy Exchange, Global Carbon Credit Exchange gCCEx, Intercontinental Exchange, MexiCO2, NASDAQ OMX Commodities Europe and Xpansiv. Many companies now engage in emissions abatement, offsetting, and sequestration programs, which generate credits that can be sold on an exchange.
At the start of 2022 there were 25 operational emissions trading systems around the world. They are in jurisdictions representing 55% of global GDP. These systems cover 17% of global emissions. The European Union Emissions Trading System (EU-ETS) is the second largest trading system in the world after the Chinese national carbon trading scheme. It covers over 40% of European GHG emissions. California's cap-and-trade program covers about 85% of statewide GHG emissions.
Many different groups exist within the voluntary carbon market, including developers, brokers, auditors, and buyers. Certification programs for VCMs establish accounting standards, project eligibility requirements, and monitoring, reporting and verification (MRV) procedures for credit and offset projects. They include the Verified Carbon Standard issued by Verra, the Gold Standard, the Climate Action Reserve, the American Carbon Registry, and Plan Vivo. Puro Standard, the first standard for engineered carbon removal, is verified by DNV GL. Isometric was the first carbon registry to issue credits for enhanced weathering carbon removal. There are also some additional standards for validating co-benefits, including the Climate, Community and Biodiversity Standard (CCB Standard), also issued by Verra, and the Social Carbon Standard, issued by the Ecologica Institute.
The voluntary carbon markets currently represent less than 1% of the reductions pledged in country NDCs by 2030. It represents an even smaller portion of the reductions needed to achieve the 1.5 °C Paris temperature goal pathway in 2030. However, the VCM is growing significantly. Between 2017 and 2021, both the issuance and retirement of VCM carbon offsets more than tripled. Some predictions call for global VCM demand to increase 15-fold between 2021 and 2030, and 100 times by 2050. Carbon removal projects such as forestry and carbon capture and storage are expected to have a larger share of this market in the future, compared to renewable energy projects. However, there is evidence that large companies are becoming more reluctant to use VCM offsets and credits because of a complex web of standards, despite an increased focus on net zero emissions goals.
Prices on the compliance market are generally higher. They vary based on geography, with EU and UK ETS credits trading at higher prices than those in the US in 2022. Lower prices on the VCM are in part due to an excess of supply in relation to demand. Some types of offsets are able to be created at very low costs under present standards. Without this surplus, current VCM prices could be at least $10/tCO2e higher.
Some pricing forecasts predict VCM prices could increase to as much as $47–$210 per tonne by 2050. There could be an even higher spike in the short term in certain scenarios. A major factor in future price models is the extent to which programs that support more permanent removals can influence future global climate policy. This could limit the supply of approvable offsets, and thereby raise prices.
Demand for VCM offsets is expected to increase five to ten-fold over the next decade as more companies adopt Net Zero climate commitments. This could benefit both markets and progress on reducing GHG emissions. If carbon offset prices remain significantly below these forecast levels, companies could be open to criticisms of greenwashing. This is because some might claim credit for emission reduction projects that would have been undertaken anyway. At prices of $100/tCO2e, a variety of carbon removal technologies could deliver around 2 GtCO2e per year of annual emission reductions between now and 2050. These technologies include reducing deforestation, forest restoration, CCS, BECCs and renewables in least developed countries. In addition, as the cost of using offsets and credits rises, investments in reducing supply chain emissions will become more attractive.
Offset certification and carbon trading programs vary by how much they consider specific projects eligible for offsets or credits. The European Union Emission Trading System considers nuclear energy projects, afforestation or reforestation activities, and projects involving destruction of industrial gases ineligible. Industrial gases include HFC-23 and .
Cogeneration plants generate both electricity and heat from the same power source. This improves upon the energy efficiency of most power plants. That is because these plants waste the energy generated as heat. Fuel efficiency projects replace a combustion device with one using less fuel per unit of energy provided. They can do this by optimizing industrial processes, reducing energy costs per unit. They can also optimize individual action, for example making it easier to cycle to work instead of driving.
Deforestation is particularly significant in Brazil, Indonesia, and parts of Africa, accounting for about 20 percent of greenhouse gas emissions. Carbon offsets allow firms to avoid deforestation by paying directly for forest preservation or providing substitutes for forest-based products. Offset schemes using reforestation, such as REDD, are available in developing countries, and are becoming increasingly available in developed countries including the US and the UK.
China has a policy of forestry carbon credits. Forestry carbon credits are based on the measurement of forest growth, which is converted into carbon emission reduction measurements by government ecological and forestry offices. Owners of forests (who are typically rural families or rural villages) receive carbon tickets (碳票; tan piao) which are tradeable securities.
Other groups are now advocating for new approaches to ensure that offsets and credits have integrity. The Oxford Offsetting Principles state that traditional carbon offsetting schemes are "unlikely to deliver the types of offsetting needed to ultimately reach net zero emissions." These principles focus instead on cutting emissions as a first priority. In terms of offsets, they advocate for shifting to carbon removal offset projects that involve long-term storage. The principles also support the development of offsetting aligned with net zero. The Science Based Targets initiative's net-zero criteria argue that it is important to move beyond offsets based on reduced or avoided emissions. Instead projects should base offsets on carbon that has been sequestered from the atmosphere, such as CO2 Removal Certificates.
Some initiatives focus on improving the quality of current carbon offset and credit projects. The Integrity Council for the Voluntary Carbon Market has published a draft set of principles for determining a high integrity carbon credit. These are known as the Core Carbon Principles. Final guidelines for this program are expected in late 2023. The Voluntary Carbon Markets Integrity Initiative has developed a code of practice that was published in 2022. The UK government partly funds this initiative.
Research from The Australia Institute has suggested that at least 25% of carbon offsets may lack integrity, describing them as "hot air." Additionally, some reports have raised concerns that carbon offsets could be used to justify the continuation or expansion of fossil fuel projects, potentially delaying direct efforts to reduce emissions.Carbon credit trickery: more credits will lead to more emissions — and more climate damage - The Australia Institute
Using projects in this way is called "greenwashing". Pope Francis noted in his 2015 encyclical letter Laudato si' the risk that countries and sectors may use carbon credits as "a ploy which permits maintaining their excessive consumption".Pope Francis, Laudato si', paragraph 171, published 24 May 2015, accessed 21 April 2024
Many projects that give credits for carbon sequestration have received criticism as greenwashing because they overstated their ability to sequester carbon, with some projects being shown to actually increase overall emissions.
In 2023 a civil suit was brought against Delta Airlines based on its use of carbon credits to support claims of carbon neutrality. In 2016 the Öko-Institut analyzed a series of CDM projects. It found that 85% had a low likelihood of being truly additional or were likely to over-estimate emission reductions. In 2023, the University of California all but dropped the purchase of offsets in favor of direct reductions in emissions. An additional challenge is that carbon pricing and existing policies are still inadequate to meet Paris goals. However, there is evidence that companies that invest in offsets and credits tend to make more ambitious emissions cuts compared with companies that do not.
Researchers have raised the concern that the use of carbon offsets – such as by maintaining forests, reforestation or carbon capture – as well as renewable energy certificates allow polluting companies a business-as-usual approach to continue releasing greenhouse gases and for being, inappropriately trusted, untried techno-fixes.
Some experts have estimated that California's cap and trade program has generated between 20 million and 39 million forestry credits that do not achieve real climate benefits. This amounts to nearly one in three credits issued through that program. The Australia Institute shares that while Australia carbon offset system appears to be regulated, it lacks independent verification and transparency. The government doesn’t release the data that would allow independent scrutiny of offset projects.Without reliable data or oversight, there is no way to verify the effectiveness of these projects, which can lead to misleading claims and potentially increase emissions, especially when offsets are used to justify new fossil fuel projects.
Determining additionality can be difficult. This may present risks for buyers of offsets or credits. Carbon projects that yield strong financial returns even in the absence of revenue from carbon credits are usually not considered additional. Another example is projects that are compelled by regulations. Projects representing common practice in an industry are also usually not considered additional. A full determination of additionality requires a careful investigation of proposed carbon offset projects.
Offsets provide a revenue stream for the reduction of some types of emissions, so they can lead to perverse incentives. They may provide incentives to emit more, so that emitting entities can get credit for reducing emissions from an artificially high baseline. Regulatory agencies could address these situations. This could involve setting specific standards for verifiability, uniqueness, and transparency.
Tree planting projects in particular have been problematic. Critics point to a number of concerns. Trees reach maturity over a course of many decades. It is difficult to guarantee how long the forest will last. It may suffer clearing, forest fire, or mismanagement. Some tree-planting projects introduce fast-growing invasive species. These end up damaging native forests and reducing biodiversity. In response, some certification standards such as the Climate Community and Biodiversity Standard require multiple species plantings. Tree planting in high latitude forests may have a net warming effect on the Earth's climate because tree cover absorbs sunlight thus creating a warming effect that balances out their absorption of carbon dioxide. Tree-planting projects can also cause conflicts with local communities and Indigenous people if the project displaces or otherwise curtails their use of forest resources.
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