Carbon credits are similar to carbon offsets and are essential to climate action. They are tradable permits that allow companies to compensate for their greenhouse gas emissions whilst they move closer to their emission reduction targets.
Carbon credits are similar to stocks, except that they are certificates of environmental investment. Each carbon credit represents one metric tonne of carbon dioxide removed, avoided or stored. It can also constitute a comparable amount of equivalent greenhouse gas, such as methane, being prevented, sequestered (i.e. removed) or stored.
Companies can purchase carbon credits and use them as part of their emission reduction plans. They function as permits, allowing the purchaser to emit the specified amount of carbon dioxide (CO2) or carbon dioxide equivalent (CO2e) because they have paid for it to be removed elsewhere. When a company achieves ‘carbon neutrality’ they have measured their historical emissions (usually over the prior 12 months), and then purchased an equivalent number of carbon credits to compensate, or ‘offset’ those emissions.
The demand for carbon credits is increasing as more companies set targets to reduce emissions and improve their Environmental, Social and Governance (ESG) value, however they were originally created to help countries reach their emissions reduction goals.
The Kyoto Protocol, developed by the United Nations' Intergovernmental Panel on Climate Change (IPCC) in 1997, set out a proposal to reduce global greenhouse gas emissions through carbon credits.Since then, Article 6 of the 2015 Paris Agreement, implemented by nearly 200 countries at the Glasgow COP26 Climate Change Summit, has further specified that countries can work towards reaching their climate targets by purchasing carbon offset credits. Negotiators agreed to create a global carbon credit trading market to facilitate this. During this time, the use of carbon credits has expanded to include use by private and publicly traded companies.
Carbon credits work because they support sustainable development initiatives and carbon projects worldwide that reduce emissions. These might include projects that avoid carbon dioxide through renewable energy technology, remove it from the atmosphere (sequestration), or store it in forests or underground.
Trace carefully selects established project developers from which to purchase our carbon credits. These projects are verified and carbon credits are issued for the amount of carbon prevented. Check out our article on choosing carbon credits to learn more about how we select our projects.
Companies can purchase these carbon credits to bring them closer to their emissions goals. This is intended as a short-term solution, with the company incentivised to improve their technology and operations in the long term, so they no longer need to pay for carbon credits. It can also allow heavy polluters who cannot quickly reduce their emissions to work towards carbon neutrality.
You can buy carbon credits with the help of Trace. We can guide you through the process of becoming carbon neutral and ensure that the credits you purchase are certified, high quality and traceable. You can also buy carbon credits directly from land managers, brokers, or the Voluntary Carbon Market (VCM). It is often challenging for an individual or small-medium entity wanting to purchase a small volume of carbon credits to access the market; this is where Trace can help. Trace procures for all of its community together ensuring you get great projects & the power of volume pricing.
Businesses can trade their carbon credits if they are no longer required, to help balance emissions worldwide. This gives companies two financial motives to reduce their emissions: so that they do not have to purchase additional credits; and so they can earn by selling their surplus credits.
If you want to trace your carbon credits back to the project, ensure a well-respected organisation externally verified them under a transparent process. At Trace, we favour projects that have been verified under either Gold Standard or Verra Verified Carbon Standard (VCS). With Trace, you can see the impact of your carbon credits and easily share the certified project stories with your staff, customers and stakeholders.
Carbon credits provide companies with a way to compensate for their carbon footprint by financially supporting emission reduction projects globally. The credits permit businesses to emit a certain amount of carbon dioxide or equivalent greenhouse gas and can be used to help them reach their emissions targets.
Carbon credits produced by projects based in Australia are called Australian Carbon Credit Units (ACCUs). The Clean Energy Regulator (CER) oversees and issues ACCUs to registered projects, as part of the Australian government’s carbon pricing scheme, the Emissions Reduction Fund (ERF). Australia currently works on a trading system where the CER sets a maximum cap for ACCUs, and the market decides the price.
The UK has the Emission Trading Scheme (ETS). This is also a cap-and-trade system, where the maximum level of greenhouse gas emissions is capped, and a carbon market is created. Participants in the scheme receive a free allowance or can buy carbon credits on the secondary market or at auction to be traded with other participants as required.
The price of a carbon credit varies, depending on the market and where you purchase it. According to the State and Trends of Carbon Pricing 2022 report by the World Bank, the average price of a carbon credit in 2021 was US$3.82/tCO2e.
This was up from US$2.49/tCO2e in 2020, which shows how steeply the carbon credit price is rising as demand skyrockets. The price of carbon credits on the VCM is predicted to rise by as much as 50-fold by 2050. Check out our article on carbon pricing for more information and explanations for the rise.
You can sell unused carbon credits if you no longer need them. This may happen if a company has implemented enough changes to reduce its emissions so that offsetting is no longer necessary and it has an excess of credits.
If a carbon credit has been used by an entity to offset emissions it should be retired on a retirement register. Once retired the credit can no longer be resold.
The same also applies to countries. As set out in the Kyoto Protocol, if a country emits less carbon than its target amount, it can sell its excess credits to countries that have not achieved their commitments through an Emission Reduction Purchase Agreement (ERPA).
Using carbon credits to offset your emissions is easy, accessible and worthwhile. Contact Trace today to learn more about using them on your carbon neutral journey.