What Role Do Carbon Credits Play

International climate change agreements are meant to limit the amount of greenhouse gases in the atmosphere and the global temperature increase. They are also meant to make it easier for people and businesses to do their part to help slow climate change.

To do this, they must reduce emissions or capture and store their own carbon dioxide. They can do this by reducing the use of fossil fuels, improving energy efficiency, preserving forests, or other climate-friendly projects. Voluntary and compliance carbon markets exist to trade the carbon.credit generated by these projects. In a voluntary market, the activities that generate credits are vetted by independent standards. The standards are typically set by organizations like Verra, a nonprofit group that helps ensure quality assurance in the voluntary carbon market.

These organizations develop a variety of tools to help countries and enterprises set up and run carbon markets and understand how to create and sell credits. In addition to a number of technical and operational resources, these organizations help with financing and project design.

What Role Do Carbon Credits Play in International Climate Change Agreements?

The World Bank supports a number of carbon credit programs to help developing nations gain practical experience in generating credits from projects. These include the Supporting Bank Operations for Mitigation Outcomes program and Invest4Climate. These projects provide financial and technical assistance to low-income countries for renewable energy, water management and other projects that can produce carbon credits.

Article 6.2 of the Paris Agreement sets guidelines covering internationally transferred mitigation outcomes (ITMOs) between two governments that are Parties to the Agreement. These rules are in place to protect the integrity of the Paris Agreement and countries’ climate commitments.

Moreover, these rules can allow some countries to carry over credits that were created under the Kyoto Protocol to the new Paris regime. Australia, for example, has been using Kyoto credits to meet its new emissions targets. However, this practice could expose the new system to a range of problems and potentially undermine its ability to curb climate change.

These issues are driving the development of new guidelines for the integrity of carbon credits in the voluntary and compliance markets, a process that is underway now and will need to be completed by 2022. The Integrity Council for the Voluntary Carbon Market and the Voluntary Carbon Market Integrity Initiative are working together to draft consensus-based standards that ensure ‘integrity’ in both the supply and demand sides of the voluntary market.

In contrast, the compliance market, known as cap-and-trade, uses a cap to regulate the release of greenhouse gas emissions by private companies. These companies are required to purchase carbon credits if their emissions exceed a certain limit, and can sell their excess credits to other companies that need them.

As the voluntary and compliance carbon markets continue to grow, they are likely to become a key pillar of global efforts to fight climate change. They can help achieve both the ambitious 1.5-degree pathway and the more modest goal of limiting warming to 2 degrees Celsius above preindustrial levels. As such, they have the potential to be a critical source of support for countries and businesses as they transition to a lower-carbon future.