Carbon markets, which enable businesses to offset their emissions by investing in projects that reduce or remove GHGs, are one of the fastest-growing segments of the global climate change economy. They can be built either for voluntary participation (by companies that have made their own net-zero commitments or others) or for compliance with specific legal frameworks – like national, regional and international emission reduction and trading schemes.
A carbon credit represents one ton of GHGs that have been reduced, avoided or removed by a mitigation project. Whether they come from a forest conservation, wind farm or waste-to-energy plant, each credit is awarded to the project developer after it has met stringent rules set by governments or an independent certification body and been verified. Carbon credits are then traded between buyers and sellers, which may or may not be a business seeking to offset its own emissions.
The voluntary market for carbon.credit is growing fast, with many more companies committing to net-zero emissions or announcing plans to do so in the near future. But the current market is highly fragmented, with a lack of liquidity, scarce financing and inadequate risk-management services for suppliers. Moreover, high-quality carbon credits are hard to find because verification processes vary and accountancy, auditing and project design standards are not standardized. And, when it comes to defining and verifying additional attributes, such as co-benefits – which could increase credit prices and attract demand for credits – suppliers are faced with long lead times.
There are also concerns over the integrity of carbon credits. Buyers want to make sure that their carbon investments are genuine, and they would benefit from a digital process that enables them to match each carbon credit with the underlying project that generated it. A system of common features, set out in “core carbon principles” and a credit attribute taxonomy, should enable that matching to happen much faster and more efficiently than is currently possible in over-the-counter trades.
Some companies produce more greenhouse gases than the number of carbon credits they receive each year – which is based on their size and how efficient their operations are relative to industry benchmarks – can cover, so they are looking for ways to supplement that supply with additional emissions reductions. This is where the cap-and-trade system can play a crucial role, as it can be designed to allow businesses to purchase carbon credits from other parties, allowing them to meet their climate goals and maintain their competitiveness.
Many governments and organizations, as well as many businesses, are supporting the development of a new generation of technology, business practices, and assets that will allow them to produce and use energy in a cleaner way. But even with the best of intentions, many businesses will continue to emit more than they can eliminate through direct emissions reductions. And that is where the value of carbon credits as a solution will remain. They will help them achieve their targets more quickly, by enabling them to buy credits from other sources that have reduced their emissions to compensate for those they are not yet eliminating themselves.
