In order to give you a better understanding of what carbon credits are and how they work, this blog will give you a brief introduction to carbon credits, carbon markets and an overview of the main carbon standards.
So, what are carbon credits? These are permits or certificates that represent a greenhouse gas (GHG) emission that was not emitted, or removed from the atmosphere and stored. One carbon credit is equal to a reduction in GHGs of 1 carbon tonne of CO2 equivalent (see our FAQs to find out how much this is). Carbon credits can be bought by any person, company or government that wants to offset the emissions they are generating. These credits are registered (e.g. with a serial number) to avoid counting a carbon credit twice.
Projects that reduce emissions and provide carbon credits can do so in three different ways:
- By avoiding greenhouse gas emissions, for example by replacing fossil-fuel energy sources with renewable energy sources such as solar or wind power.
- By removing emissions from the atmosphere (and storing it), for example by planting trees.
- By capturing and destroying emissions, for example by capturing methane gas from wastewater.
Carbon credits are traded on carbon markets, of which there are two types: the ‘compliance’ market and the ‘voluntary’ market. The compliance market, also known as the regulatory or mandatory market, has its roots in the Kyoto Protocol (1997) of the UN, where emission reduction targets were established for different countries. Three mechanisms were proposed through which this could be done: the Clean Development Mechanism (CDM), International Emissions Trading (IET), and Joint Implementation (JI). The CDM is the most relevant mechanism in the carbon credit context and will therefore be explained in more detail later in this text.
The main difference between the voluntary market and the compliance market is that the participants in the voluntary market are not buying credits to comply with regulations/rules, but because they want to. Credits that are bought on the compliance market are called Certified Emissions Reductions (CERs), and the ones that are bought on the voluntary market are called Voluntary Emissions Reductions (VERs). To clarify, a CER can be bought to meet a reduction target under the Kyoto Protocol, whereas a VER cannot be used for this purpose. However, a company that voluntarily wants to offset their emissions (without doing this to comply with any regulation) can still buy a CER to do so, and in this case this would be on the voluntary market.
Carbon standards indicate that a carbon reduction project has met certain requirements. Most of these have a licensed third party to validate the credits, and ensure that the projects under these standards receive supervision. Moreover, these credits are registered in emission registries. There are many types of carbon standards (e.g. American Carbon Registry, Climate Action Reserve), but the three main ones are summarized here:
The Clean Development Mechanism, established in the Kyoto Protocol, has two goals:
- Help ‘developing’ countries (non-Annex I) that do not have emission targets to develop sustainably.
- Help ‘developed’ countries (Annex-I) that have emission targets reach these goals by giving the chance to buy carbon offsets.
The carbon credit issued for a project according to the CDM is called a certified emissions reduction (CER). CDM projects are regulated by different bodies of the UN. To be more specific, Designated Operational Entities (DOEs) verify, monitor, and certify emission reductions, and the Executive Board (EB) supervises the CDM. CER’s can be purchased in the compliance market, to meet Kyoto commitments for countries or for emission reduction targets for companies, as well as the voluntary market.
The Gold Standard was founded by WWF and other NGOs in 2003. A Gold Standard carbon credit does not only ensure the reduction or removal of one tonne of CO2 equivalents but also has an additional ‘social’ component which is linked to achieving the SDG’s (sustainable development goals). In other words, it aims to achieve both the Paris Agreement and the SDGs.
The Verified Carbon Standard (VCS) is the most widely used voluntary carbon standard. It is administered by Verra, a non-profit organization founded in 2005 by environmental and business leaders. Verra also has other standards: the Jurisdictional and Nested REDD+ (JNR) framework, the Climate, Community & Biodiversity Standard (CCBS) and the Sustainable Development Verified Impact Standard (SD VISta).
The following table compares the different Carbon Standards:
Other Key Concepts
Most standards have methodologies that are based on the following concepts:
Baseline – scenario that represents the GHG emissions that would have been generated without the carbon reduction project, sometimes referred to as the business-as-usual scenario.
Conservativeness – estimations need to be conservative to not overestimate the emission reductions, the above-mentioned standards define the acceptable levels of uncertainty and usually projects tend to claim lower amounts of emission reductions than most likely have occurred.
Additionality – projects must prove that the emission reductions or removals would not have happened without the finance through carbon credits.
Permanence – projects need to show that there is long term mitigation. Most standards have buffer accounts to deal with the risk of non-permanence, in which a percentage of credits are set aside which can be drawn on in case some emission reductions are reversed.
Leakage – this refers to unintentional increases of GHG emissions that are caused by a project. These need to be accounted for to calculate the real emission reductions.
Want to learn more? Check out the following links for more information.
Gold Standard: https://www.goldstandard.org
Comparison carbon crediting schemes: https://www.nefco.org/wp-content/uploads/2019/05/NICA-Crediting-Mechanisms-Final-February-2019.pdf