- Carbon credits, at a glance
- What does quality mean for carbon credits?
- What variables determine the quality of carbon credits?
- How does quality affect the price of carbon credits?
- Why should you buy high-quality carbon credits?
Carbon credits, at a glance
Carbon credits are tradable instruments certifying that one equivalent ton of carbon dioxide (CO2e) has been avoided, reduced, or removed from the atmosphere. They are issued by trusted certifying organisations, also known as third-party standards, that follow scientifically sound methodologies to validate the removal and avoidance actions of carbon offsetting projects.
Carbon offsetting projects, in turn, are highly varied and can be classified according to their type of action and specific characteristics.
Reduction or avoidance projects prevent greenhouse gasses from being be released into the atmosphere by substituting pollution sources.
- Renewable energy infrastructure
- Energy efficiency and fuel switching
- Waste handling and disposal
- Others – For example: livestock and manure management, transport electrification, and methane capture in mines
Removal projects pull existing greenhouse gases directly out of the atmosphere. They either harness the carbon sequestering capacity of ecosystems –known as nature-based solutions– or rely on technology that captures emissions from the air.
- Forestry and land use
- Ecosystem restoration
- Direct Air Capture (DAC)
All carbon credits have a similar purpose: offsetting or mitigating equivalent tonnes of carbon dioxide. However, there are differences between the projects that can influence their quality and thus the decision of what credit to buy.
What does ‘quality’ mean for carbon credits?
Since carbon credits are intangible commodities, quality means something different than it would for physical products. In this case, quality is the level of confidence one can have that the credit accounts for the effective offsetting of one ton of carbon dioxide. In other words, can you be sure that greenhouse gases are being sequestered or avoided?
Carbon credits depend on calculations, verifications, methodologies, and predictions that give certainty to a phenomenon we cannot see. Nonetheless, looking at a group of variables allows us to determine if this process is happening or not and how effective any given carbon credit is in mitigating climate change.
What variables determine the quality of carbon credits?
Additionality is a key component of carbon credits. It means that the reduction of GHG emissions would not have occurred in the absence of the carbon market. In other words, carbon is sequestered because carbon credits exist. This characteristic is critical because if GHG reductions are not additional and would have occurred anyway, then buying carbon credits to reduce your emissions has no factual basis and could exacerbate climate change.
Evaluating additionality, however, is complicated. One cannot fully predict what would have happened without carbon finance and must determine the additionality of any given offsetting project based on well-informed predictions and robust protocols.
For example, in a forestry project, one might ask: Would this forest still be here without carbon credits? What are the deforestation trends and causes? Can forest cover loss be stopped or alleviated by the financial incentive that carbon credits provide?
Other criteria can help assess additionality, like demonstrating that a project is not legally mandatory, would otherwise not be financially attractive, or is not an already common practice.
Every carbon offsetting project must calculate how many tonnes of carbon it will sequester or avoid. Errors and omissions during project development can lead to overestimating the amount of carbon captured, which creates void credits. For example, if I issue 40 credits but my project can only absorb 20 tonnes of CO2e, half of my credits will have no effect on reducing greenhouse gases.
Carbon offset standards employ exhaustive methodologies to avoid overestimation. Solid accounting mechanisms ensure that every credit corresponds to one physical tonne of carbon removed or reduced. Moreover, high-quality carbon credits can be verified multiple times by independent third-party standards, giving additional certainty of their mitigating action. As a rule of thumb, the more individual audits a project undergoes with recognised institutions or programmes, the higher its quality.
Permanence is the question of how long and how effectively carbon is stored by an offsetting project. For example, carbon capture and storage (CCS) technologies absorb carbon from the atmosphere and cache it underground – a permanent solution. Conversely, forestry projects are vulnerable to fires or logging, which release the sequestered carbon back into the atmosphere.
Based on risk assessments, carbon credit projects often have buffer reserves, a pool of credits they can use if carbon from retired credits is re-released. Other risk-reducing mechanisms, such as legally binding restrictions on land use, community fire brigades, and other conservation efforts can also increase the permanence of an offsetting project.
Avoiding collateral harms
Carbon offsetting projects can have unwanted outcomes. Restrictions on land use, poor management of reforestation or afforestation programmes, failure to consult with local populations, and other omissions can result in unintended social and environmental harm.
High-quality projects prevent these issues by extensively verifying legal frameworks and consulting with local communities before implementing an offsetting scheme. Leading standards have protocols in place for carefully evaluating concomitant ecological effects and addressing the concerns of all stakeholders through workshops, consultations, and other community engagement mechanisms.
Further, some certifiers require not only avoiding harm but also demonstrating co-benefits for people and nature in line with the UN Sustainable Development Goals (SDGs). When carefully employed, carbon credits are effective tools for conserving threatened ecosystems and provide multiple cascading benefits such as habitat and wildlife protection, resilient livelihoods, and social cohesion.
The term vintage refers to the year when a determined carbon credit was issued. Then, vintage credits, in industry lingo, are all of those released in previous years that were not retired. Leftover credits are not necessarily a sign of inferior quality. However, if a given project project cannot sell most of its credits, it might be the market signalling that something is wrong.
Moreover, organisations often look to offset emissions for a specific year, making newer credits more coveted. One use of vintage credits is compensation for historical emissions. For example, if a company wants to offset its emissions during 2006, it can purchase credits issued in that specific period.
High-quality carbon credits provide confidence throughout their life cycle, from project planning to retirement. They follow rigorous protocols that involve extensive research, multi-stakeholder workgroups, and opportunities for public comment. The goal is for all parties involved to offer transparent and verifiable information that allows buyers to follow the product they are purchasing at every stage.
Most offset project developers rely on independent third-party verifiers and adhere to the requirements of a particular standard, which demands meticulous reporting. They certify that sound methodologies were followed, unique ownership ensured, and that there is a positive impact on the ground. New digital tools based on blockchain further attempt to make the carbon market more transparent, from start to finish.
How does quality influence the price of carbon credits?
Although better performance in key quality metrics can correlate with higher prices, better quality does not necessarily mean more expensive carbon credits. Their price is determined by many factors, chiefly supply and demand.
According to a new report by The World Bank, the average price of carbon credits increased from $2.49 US per CO2e in 2020 to $3.82 US per CO2e in 2021. This happened in response to soaring demand as the volume of credits traded worldwide in the voluntary market rose by 92 per cent in one year. Simultaneously, revenue increased by around 60%, totalling close to $84 billion US.
Other factors play a role, such as the costs of launching an offsetting project, the location, the volume of credits issued, and the type of project. For example, credits from renewable energy schemes are often cheaper than nature-based offsets. Other co-benefits, like protecting wildlife habitats or providing sustainable development opportunities for local populations, can increase the price of the certificates, as well as their positive impact.
Further, carbon removal credits –especially technology-based ones– are often more expensive than those coming from carbon avoidance projects, as the removal action is considered more urgent and relevant in the quest to net zero.
Why should you buy high-quality carbon credits?
In short, because they ensure that you are actually mitigating your emissions. As stated above, quality means confidence. Thus, it is worth asking yourself if the money invested on low certainty is worth investing at all.
Further, what type of carbon credits to purchase should also consider other elements. What impact do you want to have on the ground? What kind of project and geography are closer to your company’s interests? What volume of emissions do you need to compensate for, and how do you plan to reduce it over time?
Carbon credits are valuable instruments on the road to net zero. Deploying them intelligently, nonetheless, requires extensive knowledge and expertise. At ECOHZ, we are ready to provide customised advisory that gets you to the finish line.