The Ultimate Guide to Understanding Carbon Credits
A carbon market allows investors and corporations to trade both carbon credits and carbon offsets simultaneously. This mitigates the environmental crisis, while also creating new market opportunities.
New challenges nearly always produce new markets, and the ongoing climate crisis and rising global emissions are no exception.
The renewed interest in carbon markets is relatively new. International carbon trading markets have been around since the 1997 Kyoto Protocols, but the emergence of new regional markets have prompted a surge of investment.
In the United States, no national carbon market exists, and only one state – California – has a formal cap-and-trade program.
The advent of new mandatory emissions trading programs and growing consumer pressure have driven companies to turn to the voluntary market for carbon offsets. Changing public attitudes on climate change and carbon emissions have added a public policy incentive. Despite an ever-shifting background of state, federal, and international regulations, there’s more need than ever for companies and investors to understand carbon credits.
This guide will introduce you to carbon credits and outline the current state of the market. It will also explain how credits and offsets work in currently existing frameworks and highlight the potential for growth.
What are Carbon Credits and How Do They Work?
Carbon credits may offer just the incentives we want emitters to seek. We explore what are carbon credits and whether carbon credit offsets work.
With COP26 ending in November 2021, if there was much of a display of intent to act, it was in the many net-zero declarations made by nation states and corporations. For us to have a real chance at avoiding the much-feared inevitability of irreversible climate change, sweeping changes to the global economy are needed. As per a McKinsey estimate, it would require USD$9.2 trillion in annual average spending on physical assets for net-zero results globally by 2050.
Despite energy prices continuing their rise, fossil fuels remain an important source of energy the world over. In its 2021 report on World Energy Outlook, the International Energy Agency (IEA) says that more than USD$1 trillion of capital has yet to be recovered in younger plants in the existing coal fleet; and further investments in coal continue to be backed by large investors. In a scenario where alternatives such as renewable energy are viewed as not being cheaper than fossil-based power due to the price of investment and storage, the only way therein to incentivise the world to shift to this more expensive yet low-carbon future is to make fossil fuels costlier.
Similar is the case with the cement industry, which is responsible for about a quarter of all industry CO2 emissions. With much of the world on the path towards economic development, cement will continue to play a key role in the growth story, particularly in the Global South. Major technological changes and innovation are required to shift to a “sustainable” form of cement.
Across industries, it is a question of hastening technological progress, investments, and reducing the lead time to shift away from carbon-intensive processes and practices while at the same time managing transitions for workforces, communities, assets, and the environment, all in tandem.
While large-scale transformation is planned and executed across industries around the globe, in the more immediate term, carbon pricing as an economic instrument forces nation states and enterprises to tread within certain guardrails. Cap-and-trade and levying carbon taxes on emitters are two such well-known and widely adopted mechanisms. A cap-and-trade market mechanism enforces a ceiling on allowed emissions beyond which the emitters would need to purchase the right to pollute further. On the other hand, carbon taxes fix a price on the emitted carbon and allows investors and businesses to invest without the fear of price fluctuations, thus incentivising reductions.
At South Pole we see solving climate change as a puzzle, as with any puzzle there are multiple pieces that fit together in order to complete the picture.
Reducing emissions and decarbonising economies is urgently required, however time is running out and the technology to do so is not always available. That’s where carbon credits come in.
Companies and individuals can account for their unavoidable emissions by buying carbon credits from certified activities that support community development, protect ecosystems or install efficient technology to reduce or remove emissions from the atmosphere. Read on to find out more!
A tradable permit or certificate that gives the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas
What is a Carbon Credit?
A carbon credit is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas – it’s essentially an offset for producers of such gases. The main goal for the creation of carbon credits is the reduction of emissions of carbon dioxide and other greenhouse gases from industrial activities to reduce the effects of global warming.
Carbon credits are market mechanisms for the minimization of greenhouse gases emission. Governments or regulatory authorities set the caps on greenhouse gas emissions. For some companies, the immediate reduction of the emission is not economically viable. Therefore, they can purchase carbon credits to comply with the emission cap.
Companies that achieve the carbon offsets (reducing the emissions of greenhouse gases) are usually rewarded with additional carbon credits. The sale of credit surpluses may be used to subsidize future projects for the reduction of emissions.
The introduction of such credits was ratified in the Kyoto Protocol. The Paris Agreement validates the application of carbon credits and sets the provisions for the further facilitation of the carbon credits markets.
Types of Carbon Credits
There are two types of credits:
Voluntary emissions reduction (VER): A carbon offset that is exchanged in the over-the-counter or voluntary market for credits.
Certified emissions reduction (CER): Emission units (or credits) created through a regulatory framework with the purpose of offsetting a project’s emissions. The main difference between the two is that there is a third-party certifying body that regulates the CER as opposed to the VER.
What are carbon credits and how can they help fight climate change?
Carbon credits can help protect the environment
This article is part of the Green Horizon Summit: The Pivotal Role of Finance
Carbon credits allow companies to compensate for their greenhouse gas emissions.
Now a new blueprint offers a route to create a universally comparable standard for much carbon they save.
And lays down the ground rules for transparent carbon credit trading.
The plan will boost funding to developing countries where many projects are located.
To limit global warming to 1.5°C, in line with the Paris Agreement, we need to cut current greenhouse-gas-emission levels in half by 2030 and reduce them to “net zero” by 2050.
But what about activities that can’t be made carbon-free? One answer is carbon credits.
By paying someone else to either reduce their emissions or capture their carbon, companies can compensate for their environmental footprint and even, in the most ambitious cases, use carbon credits to get to carbon-neutral status.
What are carbon credits? 16 things you need to know
Carbon is necessary for life, but carbon emissions have been impacting the planet significantly for the past several decades – which is where carbon credits come in.
Carbon dioxide is the greenhouse gas with the highest levels of emissions into the atmosphere.
In turn, this causes global warming, and ultimately, climate change.
As a result, recent international treaties on climate change like the Paris Agreement have sought to reduce carbon dioxide in our atmosphere.
One proposed solution is carbon credits. What are carbon credits?
Carbon Pricing Explained: How Carbon Credits, Carbon Offsets and Taxes are Priced
Between talk of carbon credits, carbon offsets, and of course carbon emissions, it can feel like carbon is everywhere. But unless you understand carbon pricing, you’ll never understand how – and why – carbon markets work the way they do.
Let’s break down carbon pricing, starting with a simple question: why put a price on carbon at all?
Carbon Pricing Basics
There’s a real-world cost to carbon emissions. The various carbon pricing mechanisms exist to identify that price and (in some cases) to create a carbon market.
The problem lies in measuring carbon pollution and identifying the resulting environmental damage, much of which is tied only indirectly to carbon dioxide emissions.
Different carbon pricing instruments estimate the cost of carbon in slightly different ways. Most of the major carbon pricing tools also handle carbon revenues differently.
Estimating the Cost of Carbon Emissions
carbon pricing GHG emissions
The impact of human-caused CO2 emissions and other GHG emissions is widespread and varied. From global warming to shifting weather patterns, GHG emissions have a lasting negative impact on the environment.
In turn, those changes have knock-on effects, including:
Increased risk of fire and weather-related natural disasters
Heat waves and associated healthcare costs
Rising sea levels and increased risk of flooding
The key takeaway? Putting a price on carbon emissions forces people and companies to emit less carbon, assigning a real-world value to the social cost of CO2 emissions.
Investing in Carbon Credits: 2022 Tutorial
So, you might be wondering, how do you invest in carbon credits? Carbon credits and carbon offsets are a unique way for corporations to reduce their carbon footprint. A carbon credit gives companies the right to emit a measured amount of greenhouse gasses (GHG). Credits are then exchanged in the open market, often referred to as cap-and-trade.
Over the past 12 months, carbon credit ETFs have been on the rise. KraneShares Global Carbon Strategy ETF (KRBN) has close to doubled in price.
But are carbon credits morally just and how can individuals benefit from the rise of carbon credits? Below we will discuss the history of carbon credits, carbon pricing, and if they’re still a good investment in 2022.
History of Carbon Credits
So you might be wondering, what is the purpose of carbon credits and when were they first introduced? The purpose of carbon credits is to provide corporations a means to emit GHG, in an efficient way. The idea of putting a ‘price on carbon’, was used as a means for companies to emit only a certain amount of GHG. This was in hopes that their carbon emissions would be both sustainable and gradually decline over time.
But this is not always the case and carbon credits have caught a lot of slack over the last few years. Climate activist Greta Thunberg, believes that many corporations buying and selling carbon credits are greenwashing. This means that companies are spending more time marketing themselves as environmentally friendly, rather than taking action.
This has been a growing phenomena among large corporations. Companies that have been accused of ‘’greenwashing’’ include; Coca Cola, Volkswagen, Exxon Mobil and Starbucks.
Selling Carbon Credits: How Does It Work? Take The First Step
The carbon marketplace has grown tremendously since its inception after the Kyoto Protocol, a United Nations treaty that commits the participating countries to reducing greenhouse gas emissions.
While many are familiar with the demand side of the market, very few people pay attention to the supply side, with selling carbon credits. Yet, both the demand and supply sides must work for the carbon market to deliver its emission reduction targets.
That’s why it’s time to focus on the supply side of the carbon marketplace, to fill this information gap.
Generally, sellers of carbon offsets have three options to consider:
Direct sales to clients
Marketing to offsetting companies
Selling to brokers
Before diving into each one of them, let’s review the process of creating a carbon offset that truly helps the environment…
Carbon Credit Pricing Chart: Updated 2022
There are many ways to value a carbon credit, whether using market dynamics, basing it on the cost of implementation, or the value that the project delivers. Pricing can also vary by project type, size, location, and other determining factors.
The following chart shares a basic snapshot of the pricing of various types of credits:
An 8 Billion Trees graphic charting the prices of all the various types of carbon offsetting.
The World Bank, who compiles a yearly report on carbon credit pricing in the carbon marketplace, also noted the following:
Most prices of carbon credits are below the $40-80 per metric ton of carbon dioxide emitted needed to keep global warming within a 2-point degree, as provided by the Paris agreement.4
Higher prices are required to achieve global emission targets.4
Important to note, however, is that due to the current pandemic, some jurisdictions delayed reporting on price increases.4 The figures may change once all nations send in their data.
To make sense of the figures, we need to understand how the prices of carbon credits are determined. In the following sections, you will learn the process of determining the prices of carbon credits.
Keep reading to find out how you can ensure you pay the correct prices for your credits…
What is Carbon Credit Trading?
When a company exceeds its emissions cap, it can buy credits from a company that has excess credits.
When a company exceeds its emissions cap, it can buy credits from a company that has excess credits.
Carbon credit trading offers a way for companies to reduce their overall carbon dioxide output in order to comply with pollution laws and regulations. In a typical carbon emissions trading scheme, companies buy or sell carbon credits. One ton of carbon is usually equivalent to one carbon credit. Collectively, the trading companies must adhere to an overall total carbon emissions limit. Carbon credit trading is also referred to as a cap and trade transaction, carbon emission trading, CO2 emissions trading, or simply emissions trading.
Collectively, the trading companies must adhere to an overall total carbon emissions limit.
Carbon credit emissions trading occurs both nationally and internationally, and the limits and trading rules that apply to each emissions trade vary from country to country. Some countries promote voluntary emissions trading by offering tax credits or other incentives to companies that participate in the schemes. Other countries make carbon credit trading mandatory. For example, a number of countries have signed an international emissions trading agreement, known as the Kyoto Protocol, which makes carbon credit trading mandatory. Under the Kyoto Protocol, each participating country must adhere to certain caps on greenhouse gas emissions.
Top 4 Carbon Exchanges For 2022
Carbon trading has become extremely popular today among individuals and organizations and carbon exchanges are starting to emerge.
It’s all happening for a simple reason: Reducing carbon emissions is a global initiative and the carbon market offers great options for entities looking to cut emissions.
A polluter can purchase credits to cover the emissions they release into the air. Each credit equals one ton of CO2 equivalent (CO2e).
So, when an entity buys a carbon credit, it can now offset one ton of its own CO2 emissions.
On the other hand, companies with negative emissions that actively reduce the amount of carbon in the atmosphere (like reforestation projects) instead create carbon credits and sell them.
Individuals and companies alike on both sides of the market are looking for the top carbon exchanges to trade carbon credits. And if you’re wondering which exchanges those are, we’re going to identify the top 4 carbon credit exchanges for 2022.
CO₂ and GHG EmissionsCO₂ emissions
You can download our complete Our World in Data CO2 and Greenhouse Gas Emissions database.
Carbon dioxide emissions are the primary driver of global climate change. It’s widely recognised that to avoid the worst impacts of climate change, the world needs to urgently reduce emissions. But, how this responsibility is shared between regions, countries, and individuals has been an endless point of contention in international discussions.
This debate arises from the various ways in which emissions are compared: as annual emissions by country; emissions per person; historical contributions; and whether they adjust for traded goods and services. These metrics can tell very different stories.
We teamed up with the YouTube channel, Kurzgesagt, to produce a video which explored these different metrics in detail: ‘Who is responsible for climate change? – Who needs to fix it?’. All of the data and research featured in this video is contained in this article: below we look in detail at the many ways emissions are broken down.
‘Who is responsible for climate change? – Who needs to fix it?’
This page is just one in our collection of work on CO2 and Greenhouse Gas Emissions. The rest can be explored via the navigation menu at the top of this page. There you can explore emissions of other greenhouse gases; where our emissions come from; what trajectories of future emissions look like; and what is driving emissions across the world.
In the navigation menu you also find Country Profiles, so you can see how your country is doing in reducing emissions, and our CO2 Data Explorer where you can browse all of these metrics in one place.
Greenhouse Gas Emissions by Country 2022
A greenhouse gas (GHG) is a gas that traps heat in the atmosphere. Greenhouse gases are so named because they function similarly to the glass in a greenhouse. They pose no hindrance to sunlight, which passes straight through and generates heat when it reaches the ground. However, when that heat attempts to rise and dissipate, it cannot penetrate the gases/glass and instead builds up, raising the ambient temperature. This phenomenon is known as the greenhouse effect.
Greenhouse gases are actually essential to keeping the Earth warm; without them, the global temperature would average about 0°F. However, human activity—particularly certain agricultural practices and the burning of fossil fuels—has created an overabundance of greenhouse gases in the atmosphere. This is widely understood to be the primary cause of unnatural global warming. The world’s countries produce and release varying amounts of greenhouse gases into the atmosphere. The overall emissions level in a country can be explained by the size of its population, its GDP, its energy sector, and more.
These are the countries best prepared for a green future
Europe leads this year’s Green Future Index, with 16 countries in the top 20.
This ranks 76 economies on their readiness for a low-carbon future.
Countries making progress in the middle of the table include Greece and China.
Iceland, Denmark and the Netherlands are the countries most prepared for a low-carbon future, according to a new report.
Other countries making up the top 10 of the Green Future Index 2022 are the United Kingdom, Norway, Finland, France, Germany, Sweden and South Korea.
The index is a ranking of 76 economies published by MIT Technology Review Insights, the custom publishing division of the bimonthly magazine at Massachusetts Institute of Technology.
World’s first regulated carbon credit trading exchange to launch in UAE
ADGM is set to become the first jurisdiction globally to regulate carbon credits and offsets as emission instruments.
Abu Dhabi Global Market (ADGM), the International Financial Centre in Abu Dhabi, has partnered with AirCarbon Exchange (ACX) to create the world’s first fully regulated carbon trading exchange and carbon clearing house which will be established in Abu Dhabi, the capital of the UAE.
Pursuant to its recently released consultation paper, ADGM is set to become the first jurisdiction globally to regulate carbon credits and offsets as emission instruments, and to issue licenses for exchanges to operate both spot and derivative markets.
The regulatory framework will allow corporates to trade and finance carbon credits like conventional financial assets, thus increasing participation and investment in global carbon reduction and offset programmes.
Expected to launch in 2022, ACX will be established as a Recognised Investment Exchange (RIE) and regulated by ADGM. As a regulated RIE, ACX aims to offer its market participants and customers efficient trading and a regulated transparent price discovery mechanism.
Australian carbon credit units (ACCUs)
- 283,000 ACCUs were voluntarily cancelled in Q1 2022, an increase of 62% on Q1 2021.
- At the 14th ERF Auction 7.6 million tonnes of carbon abatement was contracted for optional delivery at an average price of $17.35.
- There were 122 project registrations in the quarter, potentially delivering up to 34.9 million tonnes of abatement over their project lifetime.
- ACCU transaction volumes in ANREU of 3.2 million set a new quarter record.
- During Q1, there was significant public commentary on announced exit arrangements from Commonwealth fixed delivery contract milestones.
Analysis by some suggested that the market will be flooded with ACCUs and the spot price could fall to around $24, inhibiting investment in new ERF projects. This chapter presents analysis on the milestone exit arrangements and data on how the market responded in Q1 2022 and more recently.