Carbon credits support renewable energy projects by providing the finance needed to reduce CO2 emissions from fossil fuels and to replace them with zero-carbon energy. The project developer is awarded a certificate or unit of measure representing the avoided or removed emission. These units of measured emission reduction are purchased by entities looking to offset their own GHG emissions. These buyers include governments and companies like oil majors, airlines, car manufacturers, shippers, power producers, and retailers of green energy and products.
Companies often need to purchase carbon credits in order to stay within their regulatory “emissions cap.” As a company emits more CO2 than it is allowed to, they can purchase the right to continue emitting that same amount of CO2 by purchasing a credit from another company which has excess emission reductions it can sell. The process is called emissions trading, and it can be seen in action every time you buy an electric vehicle, book a cruise, or pay your power bill.
The carbon.credit market operates under two different structures: the voluntary and the regulatory markets. The regulatory market requires that entities who wish to buy or sell carbon credits be members of a program, and have their projects independently audited to ensure that the project meets the standard it has been set to meet. There are currently a number of leading programs, such as Verra (which hosts the Voluntary Carbon Standard), Gold Standard, the American Carbon Registry, and Climate Action Reserve that have set carbon standards, compile and store the emissions reductions they certify, and allow members to buy or sell credits.
There are also a number of non-governmental organizations that manage and regulate carbon programs in different countries. These programs are typically based on the principle that companies and other large emitters must be held accountable for their greenhouse gas emissions, and that these emissions should be monitored, controlled, and reduced.
As a result of these programs, large companies are incentivized to reduce their emissions, and those that are not can be punished with fines or extra taxes. While these are effective in some cases, there are still plenty of companies that emit a significant amount of CO2 each year, and which have yet to make substantial technological advancements to reduce their emission levels significantly. These companies can find relief in the voluntary carbon market, where they are allowed to purchase credits to remain emissions-neutral.
A carbon credit represents a ton of CO2 that was avoided or removed from the atmosphere, and that is what makes them so valuable to those seeking to neutralize their emissions. They can be obtained from a wide range of projects, from nature-based solutions (like reforestation and ecosystem restoration) to technical projects such as energy efficiency upgrades, or even engineered solutions like direct air capture.
The first step in creating a carbon credit begins with an idea for a project that avoids or removes GHG emissions through one of the following categories: