A Short Guide to Carbon Credits

Photo by Steven Kamenar on Unsplash

A carbon credit is a generic term for any tradable certificate or permit representing the right to emit a set amount of carbon dioxide or the equivalent amount of a different greenhouse gas (tCO2e). — Wikipedia.

Carbon credits are certificates enabling polluting companies to reject more CO2 into the air than their awarded quotas.

Companies buy these credits from a party that owns means of withdrawing CO2 from the air, or from a project built to avoid the release of more CO2 in the air (more on that below).

One carbon credit traditionally equals one ton of CO2.

What Is the Purpose of Carbon Credits

Carbon credits' purpose is to limit the emission of greenhouse gas in the atmosphere.

Each year, big companies and developed countries are awarded a certain amount of carbon credits. This means that each year, companies are given the right to pollute up to a certain point.

If they pollute more than they were allowed, they have the choice to buy carbon credits to offset greenhouse gas emissions.

A carbon credit is a “right to pollute”. Companies buy these credits from forest owners which enable them to get an income to manage the forest and plant more trees.

By buying these credits, companies directly finance the maintenance and plantation of trees.

The more trees they plant, the more CO2 can be filtered off the air, the better it is for the planet.

The History of Carbon Credits

Carbon credits were first included in the Kyoto Protocol in 1997. The idea was to give countries a certain amount of credits they could use for their respective industries in order to compel them to shift to cleaner technologies.

Unfortunately, the initial purpose failed. Instead of investing in new technologies to pollute less, countries with higher greenhouse gas emissions bought credits from countries that were polluting little.

This system came into force for the countries of the European Union in 2005. The system was broadened to every developed country that had signed the Kyoto Protocol in 2008.

As a result, the carbon credit system became a market, with carbon credits sellers, and carbon credits buyers.

When a country did not use all of its credits, it could sell them to another country that needed them because they were polluting more than it had committed.

The first phase of the Kyoto protocol ended in 2012. In 2015, the Paris agreement also set regulations for carbon emissions and carbon credit trading.

The Kyoto Protocol was extended in 2020.

Photo by ActionVance on Unsplash

How Carbon Credits Work

Land and forest owners can submit their proof of ownership of land to receive their carbon credits.

The paperwork must contain a certificate of ownership and different documents outlining what type of trees are on the land, how it is managed, etc.

Once the owner received their carbon credits, they can sell them to a company, or trade them on an exchange.

Are Carbon Credits Profitable?

One fully grown normal tree can absorb roughly 21kg of CO2 per year.

One tree will absorb roughly 1 ton of CO2 over a 100-year lifespan.

At a price going from a few cents to $15/ton of CO2, landowners must own significant areas to make carbon credits a profitable business.

How Are Carbon Credits Priced?

The price of the carbon credit will depend on the type of project that offsets the carbon.

There are two types of projects.

  1. Carbon avoidance.
  2. Carbon removal.

Carbon avoidance projects are projects that aim to avoid the release of more CO2 into the air.

These projects are:

  • Renewable energy projects
  • Anti-deforestation project
  • Soil management practices for carbon capture projects
  • Development of energy-efficient buildings

These projects are financed by the creation of carbon credits which are subsequently sold to companies.

The removal projects aim to, as the name indicates, remove the CO2 from the air.

These are:

  • Reforestation
  • Afforestation
  • Land management
  • Tech

Removal carbon projects are more expensive than avoidance projects because they are more efficient in their fight against climate change.

The price further depends on:

  • The volume of credits bought at once
  • The geography of the project
  • The age of the project
  • The delivery
  • The social impacts of the project

Some carbon projects are developed in underprivileged countries and areas and often have a positive social impact.

The carbon credits sold from these projects usually trade for a higher price as a result.

Overall, the price of carbon credits can vary from a few cents, up to $300/ton for tech removal projects.

Conclusion

The world of carbon credits is a highly-specialized environment accessible almost exclusively by big companies, professionals, and countries.

While the original intention of carbon credit was honourable, the possibility to trade them has not led to the decrease in greenhouse gas emissions that was originally envisioned.

Landowners can monetize their land and forests by emitting carbon credits certificates and selling them.

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