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Carbon Credits
Tunley Environmental8 May 20245 min read

What Are Carbon Credits: Explained

Explained: Carbon Credits

Carbon credits are a unique currency that represent the reduction or removal of carbon dioxide (CO2) and its equivalents from the atmosphere. These credits are generated through a variety of projects, ranging from renewable energy initiatives to forest conservation efforts, and can be traded on specialised markets. After completing a net zero carbon assessment project, people and businesses can become verified net zero organisations by offsetting their carbon footprint through the purchase of carbon credits.

The Concept of Carbon Offsetting

Carbon offsetting is the process of compensating for emissions generated by funding an equivalent emissions reduction or removal elsewhere. This approach allows individuals and businesses to take responsibility for their environmental impact and work towards achieving net-zero emissions. Investing in carbon offset projects can help organisations to effectively "balance out" their unavoidable emissions for a more sustainable business model.

Two key principles that underpin the validity of carbon credits are additionality and permanence. Additionality refers to the requirement that the emissions reductions or removals achieved through a project must be beyond what would have occurred in the absence of the project. Permanence, on the other hand, ensures that the carbon stored or sequestered remains out of the atmosphere for an extended period, typically measured in decades or centuries.

The Significance of Carbon Credits

Providing a financial incentive for emissions reduction and removal, carbon credits encourage the development of innovative technologies, the preservation of natural carbon sinks, and the implementation of sustainable practices across various industries. As governments and corporations alike strive to meet ambitious emissions reduction targets, carbon credits have become an indispensable component of their environmental strategies.

The Evolution of Carbon Markets

The concept of carbon markets has its roots in the Kyoto Protocol, an international agreement adopted in 1997 to address the growing threat of climate change. This landmark accord laid the foundation for the creation of compliance-based carbon markets, where governments and regulated entities could trade emissions allowances to meet their mandated emissions reduction goals.

Many countries and regions are expected to establish or expand their compliance-based carbon markets, further driving the demand for high-quality carbon credits. This trend will likely lead to the harmonisation of carbon pricing mechanisms and the development of linked, international carbon markets, creating a more unified and efficient global system.

The Compliance Carbon Market vs. the Voluntary Carbon Market

The compliance carbon market is a regulated system in which governments or supranational bodies, such as the European Union, set mandatory emissions caps for specific industries or regions. Within this framework, organisations that exceed their allotted emissions allowances must purchase additional credits from those who have reduced their emissions below their targets. This market-driven approach incentivises businesses to invest in emissions-reducing technologies and practices, ultimately contributing to the overall reduction of greenhouse gas emissions.

Alongside the compliance carbon market, a voluntary carbon market has emerged, catering to individuals, businesses, and organisations that choose to offset their emissions out of their own volition. This market allows for the trading of carbon credits generated through a wide range of projects, including renewable energy initiatives, forest conservation efforts, and direct air capture technologies. The voluntary carbon market provides a platform for those who are committed to sustainability to take tangible steps towards reducing their carbon footprint.

The Mechanics of Carbon Credit Generation

Carbon credits are generated through a variety of projects that either reduce greenhouse gas emissions or actively remove carbon dioxide from the atmosphere. These projects are carefully evaluated and verified by independent third-party organisations to ensure the integrity and additionality of the emissions reductions or removals. Projects include but aren’t limited to:

  • Renewable Energy Projects: One of the most prominent sources of carbon credits is the development of renewable energy projects, such as wind farms, solar power plants, and hydroelectric facilities. These generate electricity from clean, sustainable sources, displacing the need for fossil fuel-based power generation, resulting in significant emission reductions.
  • Forestry and Land Use Projects: The protection and restoration of natural carbon sinks, such as forests, wetlands, and grasslands, also play a crucial role in carbon credit generation. These projects, often referred to as "nature-based solutions," harness the natural ability of vegetation and soil to sequester and store atmospheric carbon dioxide, providing a valuable source of carbon credits.
  • Technological Carbon Removal Solutions: Emerging technologies, such as carbon capture and storage (CCS) and direct air capture (DAC), have also become a source of carbon credits. These solutions physically remove carbon dioxide from the atmosphere or industrial exhaust streams and store it safely underground or utilise it in various industrial processes, effectively reducing the overall concentration of greenhouse gases in the atmosphere.
Verifying and Validating Carbon Credits

Ensuring the integrity and credibility of carbon credits is paramount to the success of carbon markets. This is achieved through a rigorous verification and validation process overseen by independent, accredited third-party organisations.

Organisations like the Verified Carbon Standard (VCS), the Gold Standard, and the Climate Action Reserve are responsible for establishing robust protocols and methodologies for the generation, verification, and issuance of carbon credits. These certifying bodies ensure that each credit represents a genuine and measurable emissions reduction or removal, providing assurance to buyers and investors.

Monitoring and Reporting

Ongoing monitoring and reporting are essential components of the carbon credit verification process. Project developers are required to continuously track and document the emissions reductions or removals achieved, which are then independently audited and validated by the certifying bodies. This rigorous process ensures transparency and builds trust in the carbon credit market.

The Voluntary Carbon Market: Navigating Greenwashing Concerns

The voluntary carbon market has experienced significant growth in recent years, as businesses and individuals increasingly seek to offset their carbon footprints. However, the voluntary carbon market is not without its challenges. The risk of "greenwashing," where organisations make misleading or exaggerated claims about their environmental impact, has raised concerns among consumers and regulators. Ensuring the transparency and integrity of carbon offset projects is essential to maintaining the credibility of the voluntary carbon market.

The Importance of Holistic Emissions Reduction Strategies

While carbon credits can play a valuable role in offsetting emissions, they should not be viewed as a standalone solution. Businesses and individuals must first focus on actively reducing their carbon footprint by establishing a baseline through a carbon assessment, working to reduce overall carbon emissions by implementing sustainable practices and then offsetting at the end of the project. Carbon credits should be considered the final step in a comprehensive emissions reduction strategy, complementing these primary efforts.

The Bottom Line

Embracing the carbon credit revolution requires a proactive, holistic approach that prioritises emissions reduction, selects high-quality credits, amplifies co-benefits, and upholds transparency and accountability. This strategy unlocks the full potential of carbon credits, transforming the way we address the climate crisis.