Carbon Credits: What are they actually doing for our planet?

Carbon Credits: What are they actually doing for our planet?

Understanding how carbon credits are created and traded and what benefits they bring to our planet and portfolios.

Jack Casady

ESG data
May 19, 2022

The demand for carbon markets is expected to grow 15-fold by 2030, and 100-fold by 2050. A 2020 study from the NewClimate Institute reported that over 1,565 companies representing over $12.5 trillion in revenue have set net-zero targets. With these ambitious goals in mind, we look back at understanding carbon credits, how are they created and traded, and most importantly, are they creating the impact they were designed for. 

What are carbon credits?

A carbon credit acts as a ticket to allow the emission of one ton of carbon dioxide or an equal amount of greenhouse gases. These credits are part of a cap and trade regulation system where a company only has a set amount of emissions they’re allowed to produce before the need for carbon offsets comes into play. If a company produces under its allotted credits it can sell its excess units to another company that can’t produce under their mandate.

Carbon credits act a function to create less short-term financial burdens on a company, while also propelling environmental progress as a company progresses to reach a zero-emissions business. An example done by Forbes helps to think about this in practice:

“Under a business-as-usual scenario, a cement company could expect to emit 120 units of greenhouse gas emissions(GHGs). In the long-term, the goal is for the manufacturer to find ways to produce cement without emitting as many GHGs, to meet its regulatory burden in the short term, it will need to buy carbon offset to bring its emissions down to its mandate of 100 units.”

In the example above, the corporation has a few options to offset their emissions to their mandate. The company could:

  1. Find ways to make their business more energy efficient by updating their building, producing less waste, and developing new processes for cleaner production.
  2. Work with a carbon offset project that can produce carbon credits, such as creating carbon land sinks to mitigate their emissions.
  3. Purchase carbon credits from other businesses, projects, or on the carbon market. 

How are carbon credits produced?

A carbon credit project stays focused on reducing, removing, or storing GHGs emissions so that we can work to compensate for emissions we still can’t completely remove from business operations. The term, net-zero, is a great way to envision this; a company must offset their GHGs either by clean alternatives to their business, or by finding carbon offset projects on voluntary or compliance carbon markets.

Carbon credits for sale are tested, monitored, and checked, on an annual basis to be sure that their accreditation is still current. For example, if a carbon credit project was to work on planting trees in an area to reduce the amount of GHG emissions, the initial setup of the project’s methodology for GHG reduction would be checked along with certain progress marks such as: Did the trees get planted, are they still alive post-planting, was the project abandoned post-launch. The credits are also registered in a database to monitor many different projects and record kept to show how many credits are issued, canceled, or retired. 

Carbon Credit projects often also carry co-benefits for the communities they’re located in. For instance, many projects focused on lowering GHG emissions also address other Sustainable Development Goals such as clean water access, remission of poverty, or bettering local living conditions in developing areas. 

Opportunities for Carbon Credit Producers

In their most ideal state, carbon credits are a function to incentivize development to better our plant. On a whole, the world isn’t prepared to stop the production of gas, ground all flights, and halt global trade, so creating emission limits helps to drive companies to spend more to fund projects to create a better planet as they work to develop clean energy alternatives.

The need for carbon credits from larger, emissions-driven businesses, helps create a market tension for these projects to find ways to produce as many carbon credits as possible to help offset current needs. 

Some might argue that couldn’t this practice of creating carbon credits and selling them be ripe for misuse, and the early answer was sadly, yes. Many people found ways around loopholes in early carbon credits to charge more than the credit was worth, produce or find excess credits from other countries that didn’t have adequate monitoring set up, among a few of the early issues. Now, however, the carbon credit process is much more robust in all stages, from creation, production, and monitoring and many mistakes of the past have been addressed. 

Companies such as bluesource, and native, are leaders in the carbon credit management space so the projects can maximize their credit production to generate revenue to create better carbon removal projects while also applying strict monitoring and guidelines to make corporations feel confident that their credits are worth the price and they are creating the change they set out to make. They help provide innovation for companies looking for energy efficiencies, fostering environmental stewardship, and funding and managing carbon credit projects across all carbon markets to meet the need to lower GHGs. 

The verdict

The carbon credit system can be viewed as a helpful tool to reach our climate goals to maintain a sustainable planet. Though the credit system and market is somewhat imperfect, the added benefits of propelling new green energy developments, saving and growing sustainable land areas, as well as protecting forested land is an essential part of balancing the global needs and mitigating a worsening climate. 

As corporations address, develop, and find new ways to build their business more sustainable these credits can help make the needed changes now, while also uplifting communities and providing access to opportunities in other areas. Credits are an imperfect way to start making changes and provide a monetary value to our carbon use so that we can still live much of our daily lives, but also give a carbon value to our choices. Many consumer companies are now offering carbon offset fees for renting cars and staying at hotels, individuals can even purchase carbon credits themselves.  Investing in companies that are also addressing climate issues, or companies that are staying committed to their net-zero statements are another way to create change for our planet.

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