[INFORMATIVE] Carbon credits & offsets: a link between society’s fight against climate change

Carbon credits & offsets: a link between society’s fight against climate change

By: Khyati Sharma

The first page of the guide on carbon credits starts with the Kyoto Protocol, where in 1997 the UN first set the spotlight on the international carbon dioxide emission goals across nations. Along with the Paris Agreement in 2015, new regulations were put in place as solutions to the global rise of carbon footprints.

So, carbon credits are a type of permit for an owner to purchase at prices of a fixed amount of greenhouse gases, like carbon dioxide. So, in simple terms, one carbon credit is equivalent to one-ton emissions of greenhouse gases.

Now, in terms of businesses, the purchase of these carbon credits, aids companies to reach their net zero targets. These are a financial medium for large corporations as they serve as permission slips from the government for a company to gain permission to generate one ton of GHG emissions.

Now in parallel, exists carbon offsets, which are like carbon credits, yet flow in the opposite direction. Meaning, that they are an indication that instead of emitting, a firm is removing a unit of carbon from the atmosphere through projects such as reforestation or direct carbon capture technology. Here, a company generates a carbon offset as through their regular business activity, undergoes the removal of GHGs from the atmosphere.

Globally, more than half of the countries have ratified, and more have at least signed the Paris Agreement, which put this carbon trade system in place as of 2021. This led to the formulation of a carbon marketplace.

Here, business comes into foreplay. Carbon credits and offsets work as monetary incentives for companies to work on re-thinking and lowering their carbon footprint in terms of their GHG emissions. Countries and companies are issued a fixed number of credits, which they can trade within to balance the global GHG emissions. “Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon” the United Nations notes (1).

Now, for firms, these simply work as limits for their GHG emission limits, and if they do exceed, but furthermore do not fulfill their cap, they can sell any “unused” and excess carbon credits to other companies at the need for a price. Yet only in 2021, at the Glasgow COP26 climate change summit, was it finally concluded the potential formulation of a global carbon credit offset trading market, as the process of companies’ trading carbon credits and offsets is still a haze.

So, to reduce any fog around the emission targets and carbon credit and offset correlation, these are issued under a “cap and trade” program. Here, regulators set a limit on GHG emissions; the cap. Now, the cap is to slowly lower periodically, making it more difficult for businesses to stay within “the cap”. Now, these programs exist in Canada, the EU, the UK, China, New Zealand, Japan, and South Korea (2) and many more countries are under consideration to formulate many more.


Image 1: diagram to simplify the carbon credit trade.

Now, the marketplace consists of two distinct markets, the regulated market, works in collaboration with the cap-and-trade programs and their consequent regulations on the state and regional levels. On the other side, a voluntary market is more open for businesses and individuals, allowing the trade of credits and offset for their carbon emissions. In simple words, the regulated market is mandatory while the voluntary market works about its name.

Now, this image amplifies how large the carbon credit market is, yet it simply differs with the country, geographic location, and how strict the regulations for each cap-and-trade program.

In summation, with the extensive rate of climate change and carbon emissions, large firms have quantifiable carbon footprints. This financial incentive, an attractive module of carbon credits and offsets, is allowing these corporations and companies to transform into sustainable businesses and get in line with the UN sustainability goals.

Sources
1. https://www.investopedia.com/terms/c/carbon_credit.asp
2. https://carboncredits.com/the-ultimate-guide-to-understanding-carbon-credits/#1