How Do Carbon Credits Encourage Sustainable Practices?

More and more businesses are pledging to put an end to climate change by slashing their own greenhouse gas emissions as much as they can. But some find that they are unable to get rid of their emissions entirely, so they turn to carbon credits to make up the difference. Whether they are buying these credits to offset their own emissions or helping companies that are struggling with their own to reduce them, they serve the important purpose of encouraging sustainable practices.

In the voluntary market, which is growing rapidly thanks to increased corporate interest in net-zero goals and the Paris Agreement’s goal of limiting global warming to 1.5 degrees Celsius over preindustrial levels, buyers can match with suppliers based on their specific needs. The process could be easier, though, if all of the carbon credits that come to market had common features, such as verified accounting methods and other attributes like co-benefits. Standardizing these attributes in a simple taxonomy would help both buyers and sellers to find each other easily, while improving the integrity of the marketplace and making it easier to compare options.

As the industry grows, it is important that companies take steps to ensure that their purchases are legitimate and reflect genuine reductions in emissions. One way to do this is by using a verifier, such as the nonprofit organization Verra, which evaluates projects for compliance with the carbon market’s most widely-used standard and registers, audits and verifies the carbon credits that they issue. Verra’s system includes accounting methodologies specific to the project type, independent auditing and a registry system that provides transparency for all participants. This system helps buyers feel confident that they are purchasing carbon credits that represent true reductions and helps producers know that they have a buyer for their carbon.

A carbon credit is a financial instrument representing the right to emit 1 to 5 gigatons of CO2 into the atmosphere over the course of its lifecycle. A portion of the proceeds from the sale of these credits goes towards financing the development of a variety of nature-based carbon projects that prevent deforestation and/or mitigate climate change by storing or sequestering carbon. These projects might include renewable energy farms, forest conservation (known as afforestation or reforestation), improved agricultural practices or carbon capture and storage technology.

The benefits of these projects go beyond simply reducing emissions; they can also empower communities and provide economic opportunity and biodiversity protection, among other things. However, many of these projects are in developing countries where they face challenges in attracting funding and are sometimes subject to corruption and fraud. A regulated market for carbon credits and improved anti-money-laundering and know-your-customer guidelines can help to address these concerns.

While there is a large potential supply of carbon credits, it can be difficult to bring this to market due to high issuance costs and long lead times. More effective mechanisms for buyers to signal their future demand can help increase the supply of carbon credits by giving developers an incentive to invest in the development of new projects. This could include up-front agreements to purchase emissions reductions in the long term or a registry of commitments to buy carbon credits from future projects.