Carbon Credits Start

A carbon credit is a permit or allowance that allows businesses to emit up to a certain amount of greenhouse gases. Credits can be issued by governments and/or private entities in the form of a voluntary carbon market (VCM). Carbon credits purchased voluntarily are often used to support climate-action projects that would not otherwise get off the ground. These projects may include reducing deforestation, creating renewable energy, and/or pollution prevention. In addition, they can generate additional ‘co-benefits’ such as biodiversity protection, community development, and environmental justice. Voluntary carbon markets also direct private financing to climate-action projects that may not have otherwise received it, thereby helping to lower the cost of emerging technologies that can reduce emissions.

As the climate crisis grew in public consciousness, more companies started to offset their own emissions with carbon credits. While some of these were based on bogus calculations, others represented genuine commitments to reducing their carbon footprints. For example, the large environment group The Nature Conservancy sells credits connected with arranging conservation easements to prevent future damage to protected areas. These types of projects are often referred to as “nature-based” carbon.credit offsets, as opposed to those resulting from switching coal burning power plants for renewable energy or planting wind turbines.

In order to create accountability for limiting emissions, some countries created systems whereby they would limit maximum emission levels and allow companies to purchase credits on a compliance carbon market. These systems are known as a cap and trade system. They are now mandatory in a number of jurisdictions around the world, including the European Union Emissions Trading Scheme (EU-ETS) and China’s National Emissions Trading Scheme.

When Did Carbon Credits Start?

The voluntary carbon market is not as regulated as the compliance market. That said, it is still a substantial portion of the overall carbon market. The VCM consists of a variety of carbon credit projects sourced from both the developing and developed world. Projects vary in size, geography, vintage, and delivery date, with each credit type generating a different price. The price of a carbon credit is based on its underlying project, but it can be further influenced by the volume of credits traded at a given time, its geographic location, the age and origin of the originating organization, and whether the credit meets specific requirements such as the Core Carbon Principles (CCPs) set out in the IC-VCM.

The CCPs set standards for a credit to be valid and reliable. But some credit issuers have abused these principles to produce and sell dodgy credits, threatening the credibility of the industry. Trove CEO Guy Turner estimates that more than 60 percent of carbon credits on the market are from projects with questionable additionality claims, including old renewable-energy projects.

Several organizations are working to clean up the VCM, and to scale it. The McKinsey Global Institute’s report on the topic recommends that market participants, standard-setting organizations, financial institutions, and the providers of market-infrastructure address these issues if they want to see the VCM grow faster.