Environmental commodities
Carbon Credits
What is a Carbon Credit?
Carbon credits and Energy Attribute Certificates (EACs) are both market-based mechanisms that can be used to reduce greenhouse gas emissions. However, there are some key differences between the two with the main difference being that carbon credits are not bound by geographical boundaries.
Carbon credits represent a reduction in greenhouse gas emissions from a specific project or activity. It represents one metric ton of carbon dioxide or carbon dioxide equivalent greenhouse gas emissions that have been avoided or removed from the atmosphere. Carbon credits are created when a project has been certified to reduce or remove greenhouse gas emissions from the atmosphere.
Carbon credits are issued by independent third-party organizations such as Verra or Gold Standard, and they are verified to ensure that they are real, measurable, and permanent. After verification, carbon credits are traded on carbon markets.
Why are Carbon Credits Important?
Carbon credits are an important tool for reducing greenhouse gas emissions and mitigating the effects of climate change. They help promote investments in renewable energy and emissions removal or reduction projects, and they provide a way for businesses and individuals to offset their carbon emissions. Companies often purchase carbon credits to achieve Net Zero goals or reduce their carbon footprint, in addition to implementing internal carbon efficiency measures. Carbon credits can help companies account for and reduce emissions that they cannot immediately eliminate or have difficulty reducing through internal operational changes.
Types of Carbon Credits
The two major types of carbon credits are Voluntary Carbon Credits and Compliance Carbon Credits.
All carbon credits offered on the CnerG Platform are Voluntary Carbon Credits.
Compliance Carbon Credits
These credits are created and traded under a government-regulated cap-and-trade system. Companies are required to buy these credits if they emit more carbon than they are allowed under their cap. Compliance carbon credits are the most common type of carbon credit and they are traded on the largest carbon markets in the world.
Voluntary Carbon Credits
These credits are created and traded on a voluntary basis. Companies and individuals can buy these credits to offset their carbon footprint. Voluntary carbon credits are often used by companies and organizations that have made a commitment to sustainability or that are trying to comply with climate change regulations.
Unlike EACs, which get issued when 1MWh of electricity is generated by
renewable energy sources, carbon credits can be generated by a wide array of projects.
Some of the common types of carbon credits include:
Afforestation and Reforestation Credits
These credits are linked to projects that involve planting trees (afforestation) or restoring forests (reforestation). Trees absorb carbon dioxide from the atmosphere, making them an effective method for carbon sequestration.
Energy Efficiency Credits
These credits are associated with initiatives that improve energy efficiency in various sectors, such as industrial processes, buildings, and transportation. By reducing energy consumption, these projects indirectly lower greenhouse gas emissions.
Cookstove Projects
These projects distribute clean and efficient cookstoves to households in developing countries. Clean cookstoves reduce the amount of wood or other fuels needed for cooking, decreasing indoor air pollution and deforestation.
Renewable Energy Projects
Credits from renewable energy projects can encompass a range of technologies, including wind farms, solar installations, hydroelectric power, and geothermal facilities. These projects generate clean energy and displace the need for fossil fuel-based power generation.
Carbon Farming and Soil Carbon Credits
These credits involve agricultural practices that increase carbon storage in soils, such as no-till farming, cover cropping, and improved land management techniques. They contribute to carbon sequestration in agricultural landscapes.
Community-Based Projects
Some carbon credit projects are community-driven and have social co-benefits, such as providing jobs, improving living conditions, or enhancing local ecosystems.
Find our more about other Carbon Credit Project Types:
Verra’s Carbon Credit Project Types|Gold Standard’s Carbon Credit Project Types
How to Trade Carbon Credits
Similar to EACs, voluntary carbon credits can be traded in several ways:
Over-the-counter (OTC)
This involves trading EACs directly with another company or individual. OTC trading is typically done on a one-off basis, and the price of EACs is negotiated between the two parties.
Aggregator
An aggregator is a company that acts as a middleman between buyers and sellers of EACs. Aggregators typically have a large network of buyers and sellers, which can give companies better prices on EACs.
Exchange or Marketplace
This involves trading Carbon Credits on a centralized exchange or a marketplace. Exchanges and marketplaces provide a platform for buyers and sellers of Carbon Credits to meet and trade. The price of Carbon Credits on an exchange or a Marketplace is determined by supply and demand.
Voluntary carbon credits are typically traded in units of one metric ton of carbon dioxide equivalent (tCO2e). The price of voluntary carbon credits can vary depending on a number of factors, such as the type of credit, vintage, the quality of the credit, and the supply and demand for credits. Just like EACs, when a transaction occurs, the seller typically transfers the carbon credits to the buyer via registries such as Verra, Gold Standard, or Puro.earth. Or, the seller can also choose to retire/redeem the credits on behalf of the buyer or an agreed-upon beneficiary.
A company can only claim to have reduced or removed carbon dioxide or its equivalent emissions if the company retires/redeems the purchased carbon credits in its name. When a carbon credit is retired, it is removed from the registry where it is tracked. This means that the credit can no longer be bought or sold, and it cannot be used to offset emissions again. This ensures that each credit is only used to offset emissions once.
Related Content
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