The world is burning and drowning. In the first half of 2020, more than 90% of the natural disasters were weather-related, costing the world at least $71 billion1. From the Australian wildfires to the Cyclone Amphan, the devastating impacts of climate change are undeniable. However, the world is significantly off track from achieving the Paris climate action targets of limiting global temperature rise to 1.5 or 2 degrees2. More than one-fifth of the world population already lives in regions experiencing warming levels higher than 1.5 degrees. Global warming of 2 degrees over pre-industrial levels would bring dire consequences – be it through coastal flooding, heatwaves, droughts, heavy rainfall or loss of biodiversity3.
With the adverse effects of climate change loud and clear, businesses and consumers alike are warming up towards climate action. Consumers, especially the younger generations, increasingly prefer sustainable life choices and products. As a part of the UN Race to Zero campaign, more than 1,100 businesses from around the globe have joined hands to achieve ‘net-zero carbon emissions by 2050 at the latest’4. However, while the transition to a decarbonized economy materializes, the industrial sector continues to leave a massive environmental footprint, gravely harming the planet. Amidst the climate crisis, carbon credits have emerged as a preferred choice for businesses to compensate for their emissions.
What are carbon credits?
The term ‘carbon credits’ was coined at the Kyoto Protocol. The 1997 international agreement looked for solutions to manage and reduce greenhouse gas emissions. It laid the foundations for the global carbon market by introducing three market-based mechanisms – the Clean Development Mechanism (CDM), the Joint Implementation (JI), and the Emissions Trading (ET). The agreement outlined how the private sector could take part in these mechanisms and contribute to emission reduction in developed and developing countries5. The Marrakesh Accords and the Paris Agreement further cemented the carbon credit-related concepts6.
A carbon credit is a ‘permit that allows the company that holds it to emit a certain amount of carbon dioxide or other greenhouse gases’. As per the Kyoto Protocol, a company purchasing one carbon credit can emit one tonne of carbon dioxide or the equivalent amount of another greenhouse gas. If a company’s emissions surpassed the emissions limit set by the government, the company would need to pay a fine for its violation. Alternatively, it could purchase carbon credits from a company whose emissions fell short of the emissions limit. Emission reductions caused by a carbon credit must be real, measurable, and verifiable6. By setting a cap, the Kyoto Protocol put downward pressure on private sector’s emissions.
Companies in need of carbon credits could purchase them from either compliance or voluntary markets.
Mandatory carbon credits
In the compliance market, carbon credits are generated and issued by the companies and governments as per the carbon accounting laws and regulations. Companies that fail to cap their emissions can purchase Certified Emissions Reductions (CER) from the cap-and-trade markets. CERs are mandatory carbon credits approved by the CDM. Exchanges that facilitate CER trading include the NASDAQ OMX Commodities Europe and the European Climate Exchange.
Voluntary carbon credits
Businesses and individuals often prefer purchasing carbon credits, termed voluntary emission reductions (VER), from the voluntary markets to meet their Corporate Social Responsibility objectives or climate action targets. Though unregulated, the voluntary carbon markets owe their credibility to third-party certifications such as the Gold Standard, Verra’s Verified Carbon Standard program, the Climate Action Reserve, Plan Vivo, SCS Global Services, and the American Carbon Registry.
Carbon offset providers such as atmosfair, NativeEnergy, Cool Effect, and Terrapass offer a platform for companies to purchase carbon offsets. The offset providers, in turn, use the money to buy carbon credits and fund emission-reduction projects on renewable energy, methane collection and combustion, sustainable forestry, energy efficiency, and more.
Sceptics could perceive carbon credits as a band-aid solution to climate change. Indeed, some companies use carbon credits as a license to pollute. However, a well-utilized and genuine carbon credit system can help businesses scale innovative long-term climate action solutions. Companies must not perceive carbon credits as not the only tool for decarbonization. By taking an integrated perspective and coupling carbon credits with other climate action strategies, companies can fulfil net-zero commitments and decelerate the global climate crisis.