Demystifying Carbon Credit

By John Ouma Director Climate Change Department

Introduction

The concept of carbon credits and offsetting was laid down by the UNFCCC when it was resolved to stabilise greenhouse gases (GHGs) (What Is the Kyoto Protocol? | UNFCCC, n.d.). As a way to trade the right to pollute, The Kyoto Protocol extended the UNFCCC through issuance of carbon credits. Monetisation of pollution is effectively an environmental tax designed to change human behaviour for the better (Taxation, 2011). The credits assign value to actions that reduce, remove or avoid GHG emissions thus amplifying climate actions. The scheme rewards the good guys who clean the environment while imposing the cost on the perpetrators (the bad guys).

What are carbon credits?

Carbon credits are tradable permits that allow the holder to emit one tonne of carbon dioxide or its GHG equivalent. The credits are generated by investing in projects that reduce or avoid the emission of GHGs. They are regulated/standardized by compliance markets such as California Cap-and-Trade program, Regional Greenhouse Gas Initiative (RGGI) and the European Union Emission Trading System. The global carbon credits market is projected to grow to about $100 trillion by 2050 (Mathews, 2008).

Ways of creating carbon credits

Production of renewable energy such as biofuels, and solar-based fuels to serve as alternatives and reduce the reliance on fossil fuels which would otherwise increase carbon footprint. There are innovations around the use of graphene in the production of biofuels. Furthermore, some firms are also testing on the pyrolysis of plastics to yield diesel which could be blended with biodiesel to produce a greener fuel. Other methods include waste valorisation using CO2e wastes as raw materials to generate more useful products e.g., plastics to make cabros and using kitchen waste to produce methane for cooking. At the industrial level, there could be process intensification to ensure efficient consumption of energy and also reduce waste such as mass and energy audits to reduce on the emission of CO2e. This is achieved by doing audits of mass and energy balance within the unit processes in production plants and then implementing suggestions that improve the efficiency of these processes. The most conventional methods of creating carbon sinks have been, afforestation and reafforestation projects to promote natural pathways of carbon capture and improve sustainable forestry. For example, it has been reported that ecosystem restoration of 350 million hectares of degraded terrestrial land and aquatic ecosystems could generate US$9 trillion in ecosystem services while sequestering 13 to 26 gigatons of greenhouse gases from the atmosphere (Environment, 2021). There are also direct carbon capture and storage (CCS) onshore or offshore, in saline or depleted gas fields. These projects must follow certain standards and protocols to ensure that the emission reductions are real, measurable, additional, and permanent (integrity-transparency and accountability). The projects must also be verified by independent third parties and registered in a public database.

Types of Carbon credits

There are two types of carbon credits, the compliance carbon credits and voluntary carbon credits. Compliance carbon credits are obtained by entities that have a legal obligation to reduce their emissions under a cap-and-trade system, such as the European Union Emissions Trading System (EU ETS) or the Regional Greenhouse Gas Initiative (RGGI) in the US. Voluntary carbon credits on the other hand are used by entities that want to reduce their emissions voluntarily, for ethical, social, or business reasons. They can also be purchased by individuals who want to offset their personal carbon footprint. Voluntary carbon credits can come from a variety of sources, such as the Clean Development Mechanism (CDM), the Gold Standard, or the Verified Carbon Standard (VCS). Organisations such as ACORN are helping farmers access carbon markets. These farmers practise sustainable agriculture on their farms, transforming to high carbon stock agroforestry and offering the sequestered carbon as CRUs.

The benefits of Trading Carbon Credits

Trading in carbon credits has been shown to have numerous benefits. For example, the buyers of carbon credits can help them achieve their emission reduction goals, enhance their reputation, attract customers and investors, and support sustainable development. As for the sellers, carbon credits can provide a source of income, create jobs, improve livelihoods, and conserve natural resources. Carbon markets can also foster innovation, collaboration, and transparency in the fight against climate change.

The Challenges of Participating in Carbon Markets

There have been reports about the challenges of participating in carbon markets. For instance, in the case of buyers, carbon credits can be complex, costly, and risky to acquire and manage. They may face issues such as price volatility, regulatory uncertainty, quality assurance, double counting, or greenwashing. The sellers on the other hand find accessing carbon credits markets to be difficult, time-consuming, and expensive to generate and verify. They may also face barriers such as lack of access to the markets as they are shrouded in a lot of mystery, lack of technical capacity, finance, or market information. Furthermore, carbon markets can also raise ethical, social, and environmental concerns, such as equity, justice, human rights, or biodiversity. This in the wake double counting which has led to green washing and climate capitalism. More specifically, in the voluntary carbon market, challenges include market fragmentation, varying quality standards, and a lack of universally accepted metrics leading to complexity in credit valuation.

Recommendations to the Participants in the Carbon Trade

There is need to carry out periodical carbon audits by both individuals and companies. One can assess their emission sources and reduction potential by measuring their carbon footprint and identifying sources and opportunities for emission reduction. There is also need for companies to set their emission reduction goals and strategies by defining the targets and timeline that align with their values and vision. The companies and individuals seeking to reduce their carbon footprint should select high-quality carbon credits from reputable projects and providers that meet the highest standards for emission reduction, additionality, permanence, verification, and co-benefits. The companies should also monitor and report their emission reduction performance and impact by keeping track of activities and results, as well as measuring the environmental and societal impact of your carbon offsetting.

The trends in the carbon credits markets

Increase corporate adoption of carbon credits as companies voluntarily commit themselves to achieving carbon neutrality. These net-zero targets are being achieved by companies through in-house emissions reductions and purchase of carbon credits. There are also efforts to expand the carbon credits markets globally as the new players enter. This trend has led to nature-based solutions like the blue carbon projects (mangrove forest restoration) which seek to protect and restore coastal ecosystems to sequester carbon.

Recommendations to the Carbon Offset Companies

Ø The more reputable carbon offset companies must also be audited as well as follow a code of practice.

Ø They should also provide the most up to date carbon conversion factors.

How to Participate in Carbon Offsetting

Ø Investors interested in carbon offsetting can engage through direct investment in carbon reduction projects, purchasing carbon credits on voluntary or compliance markets, or supporting ESG-focused funds that prioritize carbon-neutral portfolios.

Ø Purchasing carbon credits from online platforms or brokers, comparing and choosing the ones that fit your needs and pay for them online or offline.

Ø Alternatively, you can support initiatives or organizations that promote or facilitate carbon offsetting, such as NGOs, foundations, associations, or networks by donating, volunteering, or partnering with them.

Ø Lastly, you can start your own carbon offsetting project or program if you have an idea for one. You can apply for funding, certification, or registration from relevant agencies or bodies and seek partners to help implement it.

Ø Whether by technical optimism or radical change, there is a way these two concepts can be harnessed to achieve a more sustainable future. Some players have argued that use of compliance standards is the best activism.

Ø Carbonate buffering in highly alkaline waters distorts the conventional methods of tracking the origin of CO2 in streams. Essentially, rivers and lakes account for about 15% of what humans emit, 5.5 gigatons of CO2 per year.


References

Environment, U. N. (2021, August 12). Decade on Ecosystem Restoration. UNEP - UN Environment Programme. http://www.unep.org/explore-topics/ecosystems-and-biodiversity/what-we-do/decade-ecosystem-restoration

Mathews, J. A. (2008). How carbon credits could drive the emergence of renewable energies. Energy Policy, 36(10), 3633–3639.

Taxation, E. (2011). A Guide for Policy Makers. URL: Http://Www. Oecd. Org/Greengrowth/Tools-Evaluation.

What is the Kyoto Protocol? | UNFCCC. (n.d.). Retrieved 16 March 2024, from https://unfccc.int/kyoto_protocol