Have you heard of carbon credits but aren’t sure what they are or how they work? Read this comprehensive guide to find out all you need to know about them.
What Are Carbon Credits?
Carbon credits are a way to reduce greenhouse gas emissions by trading or purchasing the right to emit a certain amount of carbon dioxide or its equivalent. This system encourages companies and individuals to limit their own emissions while giving them the incentive to reduce their environmental impact.
What Are They?
They represent specific amounts of greenhouse gas (GHG) emissions. One credit is equivalent to one metric tonne of CO2-equivalent—or the amount of carbon dioxide or other GHGs with the same global warming potential as one tonne of CO2. The market allows companies and individuals to purchase and trade them, enabling emissions reductions while providing an incentive to reduce environmental impact.
Benefits of Carbon Credits:
These are a market-based approach that offers the potential for scaling up GHG reductions. They provide businesses, organizations, and individuals with cost-efficient ways to invest in emissions reductions without having to reduce their own emissions directly. Monetization also rewards those who invest in reductions by providing them with additional revenue from the sale of credits. They also create incentives for investments in clean technologies and renewable energy sources.
Risks of Carbon Credits:
A downside is that they may not adequately reflect the true cost of emissions reductions. The system could also create perverse incentives, such as companies or individuals gaming it to generate additional revenue without reducing their emissions. Furthermore, they are not a complete solution for addressing climate change–more must be done to reduce global emissions alongside these programs.
There are also financial risks, including currency risk, political risk, project-related risk, counterparty risk, and liquidity risks. Currency risk is especially relevant given the scope of these investments and international regimes that use tradable credits as currency. Market uncertainty exists about how carbon pricing will be implemented, which could affect costs for developing countries and industries. Inefficiencies in markets could mean higher costs for consumers or reduced environmental benefits. It’s crucial to assess potential risks when considering investments in offsets.
Different Types of Programs:
Several programs around the world are in place. These include national and regional cap-and-trade systems, offsetting schemes, voluntary markets, and sectorial agreements. Governments or organizations set up a trading system whereby businesses or individuals can ‘trade’ to reduce emissions.
A credit is a tradable certificate that represents the reduction of one tonne of CO2. The EU Emissions Trading System (EU ETS) is the largest system for trading carbon, aiming to reduce GHG emissions. It works by setting a limit on total emissions from large companies in certain sectors. Companies must then purchase credits to cover any excess beyond their quota. Organizations or countries paying for emission reductions elsewhere to meet their own targets are credited. This creates a market for carbon, rewarding those who reduce emissions.
Interested in learning about the various types of carbon credits? Read the blog for a detailed guide https://climeto.com/a-guide-to-the-different-types-of-carbon-credits/