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The dual role of voluntary carbon credits in addressing climate change

As business leaders make more ambitious goals to reduce the global greenhouse gas (GHG) emissions there is a market that could help in achieving them by supporting businesses’ efforts to cut their own carbon emissions. This is the fast-growing voluntary carbon credit marketplace.

Carbon credits (often called “offsets”) are a key component of carbon credits. They have an important function in the fight for climate-related change. They allow companies to contribute to decarbonization that goes beyond their own carbon footprint, thus speeding up the transition towards low-carbon development. They also help finance projects for removal of carbon dioxide from the atmosphere–delivering negative emissions, which will be needed to neutralize residual emissions that will persist even under the most optimistic scenarios for decarbonization. Although the market for carbon credits that are voluntary is gaining significant growth, it’s very tiny. The report that was recently released by the Taskforce on Scaling Voluntary Carbon Markets seeks to develop an outline for solutions to overcome the barriers to its continued expansion. This article will describe how carbon credits function and how they can aid in the global fight against climate change.

The double role of carbon credits is to address climate change

Carbon credits are a document that represents one metric tons in carbon dioxide equivalent which can be kept from being released into the atmosphere (emissions reduction or avoidance) or eliminated from the atmosphere as a consequence of a carbon-reduction program. In order for a carbon reduction project to earn carbon credits it has be able to prove that the emissions decreases, or the carbon dioxide eliminations are actual, measurable and permanent, as well as independently verified, and distinctive (see the section on “Criteria to be able to issue carbon credit”). If the project is in compliance with these requirements–as defined by standards that are independent, like Gold Standard and Verified Carbon Standard (VCS)–credits are granted. The effect of a carbon credit is only able to be claimed — that is, used to calculate an environmental commitment once the credit is taken off the market (canceled through the registry) following which it is no longer available for sale. A carbon credit is deemed as a “voluntary carbon credit” when it is purchased and then redeemed on a purely voluntary basis, instead of as part of an obligation to comply in accordance with the legal obligation.

The earnings made from selling carbon credits allow the creation of carbon-reduction initiatives across many different projects. They include renewable energy, avoiding carbon emissions from fossil fuel-based alternatives as well as natural climate solutions for example, reforestation or avoided deforestation or agroforestry; efficiency in energy use as well as resource recovery like the reduction of methane emissions coming from landfills or wastewater facilities; and many more.

While the majority of these project kinds, such as renewable energy, avoiding deforestation and resource recovery concentrate on reducing carbon emissions, other types like reforestation are focused on removing CO2 from our atmosphere. This is a significant distinction that demonstrates the dual nature of the role that carbon credits offered by voluntary organizations could play in tackling climate change

In the short-term the short term, carbon credits that are voluntary from projects focusing on emissions reduction or avoidance could help speed up the transition towards a carbon-free global economy, for instance through promoting investments in green energy sources, efficiency in energy use along with natural capital. Reducing emissions is often the most cost-effective method to reduce greenhouse gas concentrations in the atmosphere.

In the medium – to longer term, carbon credits may be a key factor in accelerating emissions of carbon dioxide (or negative emission) required to neutralize emissions that are not reduced further. In a recent study we found that at minimum 5 gigatons (or negative emission) would be required annually to achieve zero net emissions in 2050. This could be achieved by a combination and a combination of climate-related solutions from nature, such as forest reforestation (for instance, storing carbon from trees) and emerging carbon capture and storage, and use solutions like direct air capture using carbon storage (DACCS) as well as bioenergy that incorporates carbon storage and capture (BECCS). Carbon credits from voluntary sources can be used to finance the development of these strategies.

The role of carbon credits in climate commitments of corporations

A credible commitment to climate change by a company starts with setting an emission reduction goal that covers an organization’s indirect and direct greenhouse gas emissions. If an organization does not possess an emission baseline to establish a target setting one, it is the first step.

The alignment of a target’s ambition to the most current climate science is generally regarded as the best way to go. This means that the target should be compatible with the degree of decarbonization that is required to keep global warming less than 2.25 degree Celsius over preindustrial temperatures. At a minimum, it should at a minimum, be in line with the 1.5-degree path that scientists believe will lower the chances of triggering the most harmful and irreparable consequences from climate change. In the Science Based Targets Initiative has created methods for setting the target. These methods have already been adopted by over 1,000 businesses, including a number of major multinationals. To attain the required emission reductions, businesses can make use of levers like improving efficiency of energy, switching to renewable energy sources, and addressing emissions from the value chain.

In the following step, a business may decide to commit to a goal which involves the use of carbon credits to either compensate for emissions that it hasn’t yet been able to eliminate or to offset residual emissions that can’t be diminished due to prohibitive cost or technical limitations. These kinds of targets are available with a variety of names (for instance the carbon-neutral, neutral climate net-zero carbon negative or positive for climate) however they all include a company enhancing reductions made within its carbon footprint through financing reductions elsewhere via the purchase and redemption of carbon credits on a voluntary basis (see the section on sidebars, “Types of carbon targets”). By reducing the emissions of its remaining ones by this method the company can claim that it has reduced its impact on the environment. Certain companies, like Microsoft have gone further and set goals to have a net positive impact upon the environment.

A strong momentum, driven primarily by new corporate commitments as well as points-of-sale products

After three years of booming growth in the carbon market, voluntary carbon was at a record-high in the year 2019, with respect to issuance as well as retirements (exhibit). Issues included 138 million tons of carbon dioxide equivalent–a little more than double volume of 2018 and retirements reached 70 million, which is a 33 percent increase over the year prior. The growth is driven by a combination of brand new corporate climate commitments, including the ones to carbon neutrality as well as net-zero. There are also the so-called “point point of sale” offering of carbon credits such as Shell’s carbon neutral fuel that is a retail offer of gasoline and carbon credits that are voluntary, as well as passenger offset programs for airlines that permit passengers to offset the carbon footprint from their flights via their airline’s web site.

Based on the year-to-date volume and an extrapolation based on with the historical patterns of seasonality We expect the market to set yet another record in 2019 as issuances and retirements each growing by about one-third over the course of the year prior. After years of decreasing costs (from an average of about $7/ton in 2008 to about 3 cents per ton by the end of 2019) because supply has outpaced demand, we are expecting average prices to rise in the near-to-mid time frame, mostly due to a strong increase in demand especially for high-cost projects such as reforestation, and carbon dioxide removal projects generally (see the sidebar under “Issuances as well as retirees”). Although still quite small, the carbon market is gaining significant acceleration and its effect (and the potential for future growth) is attracting more attention.

The Natural Climate Solutions (NCS) is a class comprising project types such as forest reforestation, avoiding deforestation better forest management, and Agroforestry, have seen the most growth than any other project type and significantly influenced the growth of the voluntary carbon market trend. Between 2016 and 2019, issuances within the NCS category increased by more than doubling every year, in average. And in the year 2019, NCS accounted for 53 percent of all issues. In addition, retirements within this sector have also increasing (close to 50% annually, on average). We believe that this may be due to an increased awareness of NCS’s potential (they can provide a third of the emission reductions required to meet the Paris Agreement between now and 2030) as well as a rising awareness of the need to remove carbon dioxide (of the which NCS can be the most efficient and established method) as well as customers’ preferences for benefits that go beyond mitigation of climate change, for example, biodiversity and impacts on local communities.