July 5, 2024

Carbon Credits: Everything You Need to Know

Carbon Credits: Everything You Need to Know

What are carbon credits? 

Carbon credits are certificates that permit a company to emit one tonne of CO2 or other greenhouse gases (GHG) and the permissions reduce every year. There is a reduction quota within the schemes so businesses cannot emit unlimited GHGs into the atmosphere. The carbon credits are then used towards carbon offsetting projects to remove CO2 from the residual emissions organizations have left over in conjunction with reductions. 

Key points about carbon credits

  • Carbon credits are market-oriented to reduce GHG emissions.
  • The amount of carbon credits allocated to each company is reduced over time.
  • A carbon credit is worth one tonne of CO2 equivalent (tCO2e) emissions which is equivalent to 556.2m³ of volume.
  • “Carbon dioxide equivalent (tCO2e)” is the standard unit for counting greenhouse gas emissions whether they're from carbon dioxide or another GHG.

Some say carbon credits are an excuse to emit more carbon but in reality, the point of carbon credits is to permit a certain amount of greenhouse gas emissions, namely carbon dioxide, to be emitted in a longer scheme to then be reduced over time while implementing measures to sustain the environment, the economy, and the industry responsibly. It's limiting, with the amounts permitted being reduced every year.

As we can agree the goal is to eliminate CO2 emissions, fossil fuels will not be eradicated overnight. Until they are responsibly replaced, carbon credits allow a limited amount of CO2 to be emitted, and every year that allowance decreases usually by 2-3%. 

In this article, we'll tell you all about what carbon credits are, answer common questions about them, talk about various trading schemes, and give some examples of international acts to keep you informed.

Types of carbon credits

There are two types of carbon credits:

  1. Voluntary emissions reduction (VER): A carbon credit from an offsetting project that has a third-party certification standard such as the Gold Standard and many others, but isn't certified by the UN schemes such as the Clean Development Mechanism (CDM). It is exchanged in the over-the-counter voluntary market for credits. This can't be used to achieve obligations under the Kyoto Protocol. VER projects are certified but are not traded through a central government system.
  2. Certified emissions reduction (CER): A carbon credit that is backed by the UN and issues a permit for one unit (tonne) of carbon emissions. They are issued to UN member states for offsetting projects through the CDM, regulated by the Kyoto Protocol, which is an offset scheme that allows a member state to offset emissions in another country because internationally, it is offset in the atmosphere anyways. 

How do carbon credits work?

Carbon credits can be purchased with the intention of contributing to offsetting projects. Companies are to set lower emissions targets every year so they can reduce the emissions and not only purchase offsets. After mitigating carbon emissions, they offset the residuals. Contributing to offsetting projects is important so you can remove the carbon already in the atmosphere, fund projects for a carbon-free future, and offset the present residuals. 

Where can businesses buy carbon credits?

The easiest way to buy credits comes from an emissions management platform. With Net0, you can purchase credits in the platform to offset emissions with any of our 140 + certified climate programs in the same place. The credits in our platform are equivalent to money to contribute to certified offsetting projects so you don't need to deal directly with agents and government markets to trade carbon credits and you still succeed in fulfilling the regional obligations for reporting and offsetting accurately under the Greenhouse Gas Protocol Standards.

How much does a carbon credit cost?

Carbon prices are different depending on what you want to contribute to. They can go from roughly $10 to hundreds depending on the offsetting project and the market that it's bought from. 

  • VERs go from about $10 to $100 per tonne on average
  • CERs are over $300

We'll discuss the trading programs below. Fortunately, Net0 emissions management software includes carbon credit purchasing and offsetting directly in the platform so you wouldn't need to get involved with complicated markets and outside agents yourself. You can do it in minutes with Net0 which complies with the GHGP and localized regulations, automatically providing organizations a legal certificate with the offset tonnage that has been made. 

nature based carbon offset price
Image source: Carboncredits.com

Above is an example of carbon pricing in the Voluntary Market. If you would like to see "live" details with frequent updates, you can check out the link, but with Net0 it isn't something you would need to study or continue monitoring in order to purchase credits and make certified offsets. Net0 offers all VER projects on our platform. For CERs entities would need to deal directly with that market, but we could help.

How large is the carbon credit market?

There isn't one carbon credit market which we will explain below. There are regional markets. For example, GlobeNewswire reports, “Global Voluntary Carbon Offsets market size is projected to reach US$ 700.5 million by 2027, from US$ 305.8 million in 2020, at a CAGR of 11.7% during 2021-2027.” The voluntary market is certified but not traded through government systems. The offsetting projects Net0 offers are certified in the voluntary market.

The larger market is the Mandatory Compliance Market which is for CERs. This market exists to enable organizations to fulfill the obligations of the Kyoto Protocol. An example would be liable entities under the EU Emission Trading Scheme.

Carbon credit regulations

Compliance offsets are put together and regulated by government carbon reduction schemes like the CDM. 

VERs are independent and not regulated by the UN or government but are certified by third-party auditors.

Trading programs

There are 17 emissions trading programs in the world, operating in 35 countries, 12 states, and 7 cities. Trading programs/systems/schemes are a regional effort that normally uses a cap-and-trade system that allows a certain amount of carbon credits to be bought and that number decreases yearly to lower emissions. Trading can happen between entities if one uses less and another needs to utilize more. Overall, the systems as a whole are designed so there are checks and balances for integrity and that decreases are successful every year. We'll go into detail about some of the largest trading systems here and give a brief overview of some others below.

The EU Emissions Trading System

The EU Emissions Trading System (EU ETS) is the world's first major carbon market and the biggest. It operates in all EU nations plus Iceland, Lichtenstein, and Norway. It covers about 40% of the area's GHG emissions and limits emissions from the power, manufacturing, and airline industries. It operates under a cap and trade system meaning entities are allowed a certain amount of emissions allowances or carbon credits and they can trade them within their market.

California Cap-and-Trade Program

California has the fourth largest cap-and-trade program in the world which applies to large electric power plants, industrial plants, and fuel distributors, covering 85% of the state's GHG emissions. The cap means there are a certain amount of credits each business is given. 

The California Air Resources Board (CARB) Trading Program required that GHG levels return to those of 1990 by 2020 per Assembly Bill 32, established in 2008. The level was achieved before the desired date.

The cap also declines 2-3% every year, making carbon credits less available and in turn lowering the dangerous levels of carbon in the atmosphere. Additionally, entities covered must turn in 30% of allowances and offsets for the previous year. The trade means if they don't hit their ceiling they can trade the credits to another company. There are also fines of four credits to one unit emitted if they aren't turned in on time.

More restriction and trade programs today

Here are some of the additional schemes going on in the world:

The Regional Greenhouse Gas Initiative (RRGI) is made up of 9 states on the east coast of the United States. It was the first mandatory cap-and-trade emissions program in the United States.

Quebec's cap-and-trade system is similar to California's in that it applies to power plants, industrial facilities, and fuel distributors. Power plants and fuel distributors must buy their allowances at auction or secondary market. In fact, they share an auction with the California system. Some industries in the Quebec system get a number of free allowances that will diminish eventually. 

Ontario, Canada joined auctions with Quebec and California in 2018, one year after they established their scheme. They have a similar program to both aforementioned.

The UK Emissions Trading System (UK ETS) emphasizes that the polluter is the one who pays for installation permits so they can emit. If entities exceed the height of their allowances they can buy more emissions allowances (EUAs) on the open market. Excesses can be saved for other years or must be traded. It has replaced the UK's participation in the EU ETS.

The Tokyo Metropolitan Government began Japan's mandatory emissions reduction program in 2010. It is called The Tokyo Cap-and-Trade Program. It covers fuel, heat, electricity (at a volume of 1500 kiloliters per year of crude oil equivalent), and large-scale office buildings which make up about 40% of the country's GHG emissions. 

China National Emissions Trading Scheme (ETS) opened in July of 2021 and it is recently rumored to be the new largest market. China plans to peak carbon dioxide emissions by 2030 and eliminate them by 2060 which is later than the rest of the world and has not shared a plan on how they are going to do it. The scheme is run by the Shanghai Environment and Energy Exchange and covers 40% of emissions which are more than 4 billion tCO2e emissions, as they are the highest producers with over 10 billion tCO2e emissions. There also isn't any system of checking their numbers with other systems and countries to ensure integrity like there are with other markets. 

Unlike with other trading systems, there is no cap on emissions so experts are questioning the efficacy. China's Ministry of Ecology and Environment made public monitoring and reporting rules but what is reported and what is done is not the same when there is a lack of checks and balances without outside sources. 

Related content

If you would like to learn more about profitable , please read another article from our academy:

• Article: Choosing the Right Sustainability Initiatives: Not All Choices Are Equal
• Article: A Profitable Decarbonisation Strategy: What Is It and How Do We Achieve It?

International acts for carbon reductions

US Clean Air Act

In 1967 the Air Quality Act or The Clean Air Act (CAA) was established in the United States for the benefit of public safety and a healthy environment.

Since 1990 the US has been regulating emissions after the acid rain problems of the 80s. The Environmental Defense Fund has given the act recognition for reducing sulfur dioxide emissions drastically from coal-fired power plants. 

The UN Kyoto Protocol

In 1997 the Kyoto Protocol was made and committed to by 192 countries to reduce GHGs. It operationalizes the United Nations Framework Convention on Climate Change. It creates targets for industrialized countries and economies to lower GHGs and report periodically. 

In 2012 the Doha Amendment was made as a second commitment period and at the end of 2020, finally, 147 parties (of the 144 needed to enforce it) deposited their acceptances. 

International credits are generated by two mechanisms operating under the Kyoto Protocol: 

Clean Development Mechanism (CDM) for certified emissions reductions (CERs) where industrialized countries can opt for cheaper reductions in developing countries.

Joint Implementation (JI) in which industrialized countries can pay for reduction projects in other industrialized countries and provides for the creation of emission reduction units (ERUs).

The Paris Climate Accords

The Paris Agreement is an international treaty about climate change that was negotiated by 196 parties at the 2015 United Nations Climate Change Conference (COP21) near Paris, France. The premise of the agreement is that climate change is not to exceed 2°C above pre-industrial levels but really should be limited to 1.5°C. It's the first legally binding agreement of its kind. The idea is to peak emissions as soon as possible to begin decreasing them thereafter. 

Final takeaways

Net0 is an AI-first sustainability solution that streamlines emissions management so businesses need no external source to buy carbon credits or get involved in trading schemes. While it's necessary to have knowledge about where your money is going and that the projects are getting done, it isn't necessary to go further than Net0 to manage and offset your emissions.

Getting to net zero can seem complicated but it is simple to do with Net0's AI-first sustainability solution. Book a call with us today and we'll show you how easy it is to plan your reduction strategy, set lower targets every year with our simulator, and contribute to offsetting projects for the residual emissions on your journey.

Written by:

Kristin Irish

As a content writer for Net0, Kristin harnesses her expertise and enthusiasm for carbon emissions reduction, merging it with her other passion: the B2B SaaS industry. Her global outlook and dedication enrich the sustainability sector with insightful perspectives.
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