Are Trade Carbon Credits Good?

Trade Carbon Credits Good

Carbon credit markets are a way for businesses to reduce their greenhouse gas (GHG) emissions, compensate for their carbon footprints and make investments in climate solutions. They are either regulated by governments or voluntary.

Regulated markets, such as the EU Emissions Trading Scheme and California’s cap-and-trade system, require companies to report their carbon emissions and then sell those ‘certificates’ to other businesses that emit less. They also offer a financial reward for reducing emissions.

The most obvious difference is that a trade carbon credits company must meet an obligation or face fines and penalties if they don’t. A good carbon market provides clarity around the purpose and provenance of a company’s GHG emissions and allows the trading of the same carbon credit to be sourced in an efficient manner.

Are Trade Carbon Credits Good?

In the regulated carbon markets, ‘carbon certificates’ (also known as ‘credits’) are issued by governments for a specific objective and then sold to end-users, such as power companies and heavy industry. These can be issued by governments or by private entities (in the case of the European Union’s ETS, the EUA, which is a government-generated carbon credit), based on a clear and enforceable technical standard.

This creates trading liquidity and a clear market for the underlying carbon credit, which can be traded on any of the regulated markets, such as the EU ETS, in which it has been identified as a base ‘currency’. In contrast, the voluntary carbon market, where there is no mandatory requirement to offset emissions, relies on market mechanisms that provide speed and flexibility.

There are five players in the carbon credit market: the project owner, the buyer, the certifying organization, the standards organization and the broker. The project owner may be a landowner or a business with an environmental impact. They might have a conservation project in a rainforest, or plant a forest in a developing country, for example. They might have a project that uses technology to remove carbon dioxide from the atmosphere.

These projects are sometimes backed by large environmental groups, such as The Nature Conservancy and WWF. These groups often use ‘co-benefits’ as part of their carbon projects, which are often designed to contribute towards the UN’s Sustainable Development Goals (SDGs).

Another important player is the standards organization, which certifies that the project meets its objectives and the volume of emissions it is supposed to generate. The standards are a way to ensure that the credits generated by a particular project are not overly generous and do not give too much financial advantage to some companies or NGOs.

A third important factor is the ‘provenance’ of the carbon project. This is often determined by the number of carbon emissions it is credited for and, in some cases, by its size or location. The larger and more complex the project, the higher its ‘provenance’ value and therefore its price in the market.

A major issue with the current unregulated carbon market is that a number of projects that claim to prevent forests from losing their carbon are generating very large volumes of credits, which can be difficult to verify. This has exacerbated the gap between PR and reality, with critics warning of the ‘wishful thinking’ and ‘over-crediting’ of these projects.

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