Understanding Carbon Credits

Understanding Carbon Credits

Carbon credits offset Greenhouse Gas (GHG) emissions and come in the form of permits and certificates. The market has quadrupled since 2020, poised to reach $2.4 trillion by 2027.

However, debates surround their use as more companies adopt them. Regulators mandate aviation, oil, and gas sectors in regions like the EU, China, and California to trade carbon credits, while others choose to do so voluntarily. Critics argue carbon credits enable business-as-usual, hindering true decarbonization.

Despite the controversy, carbon credits can aid global decarbonization, especially in fossil fuel-dependent industries. But what are they, why the controversy, and are they effective?

What are Carbon Credits?

Carbon credits, also called carbon allowances, are permits allowing organizations to emit one tonne of CO2e, either removed or prevented from entering the atmosphere. They are a climate currency traded in carbon markets. In "voluntary" markets, buyers can directly purchase them from entities involved in CO2e management. In "mandatory" markets, companies must adhere to sector-specific emission limits and use carbon credits to offset excess emissions. Staying within these limits lets them save or sell their emissions as carbon credits.

Types of Carbon Credits

There are four primary categories for creating and selling carbon credits:

1. Forestry and Land Use:

Activities such as reforestation, deforestation protection, land use changes, and natural resource conservation can generate carbon credits. Farmers and landowners can sell credits based on the amount of CO2e their land sequesters.

2. Renewables: 

Companies involved in wind, solar, and hydroelectric power generation can sell credits for the emissions they avoid. Additionally, businesses can purchase Renewable Energy Credits (RECs) to claim renewable energy sources regardless of their actual energy source.

3. Carbon Capture and Storage: 

Carbon can be directly removed from the air using direct air capture or captured at emission sources and geologically stored for long-term preservation. Companies engaging in carbon capture can sell their captured carbon as credits.

4. Energy Efficiencies: 

Entities can sell carbon credits for every tonne of CO2e energy savings achieved. Energy Efficiency Credits (EECs), also known as "white tags," offer another method for companies to sell credits, measured in energy units (MWh) converted into CO2e savings.

Get set for our upcoming blog: "Exploring Global Carbon Markets: Voluntary vs. Compliance."