What are Carbon Credits? Can they help make a sustainable planet?

• Carbon credits are permits that represent carbon emissions removed from the atmosphere.
• These credits can be exchanged voluntarily or in a compliance marketplace.
• The project generating the credit and its longevity is more important than the credit itself.

As nations and organizations race to meet "net-zero" goals, carbon credits will play an important role in determining if these targets can be met.

Carbon credits are intended to reward 'greener' projects for reducing carbon emissions while helping polluting ones to continue their growth until technologies to reduce emissions are further developed. But does such a system really reduce pollution or make activities on the planet more sustainable?

Before we get there, here are a few basics of the system.

What are Carbon Credits?

A carbon credit is a type of certificate or permit that allows the owner to emit a certain amount of carbon dioxide or other greenhouse gases. For example, one credit may allow the emission of one ton of carbon dioxide.

Carbon credits are generally created by governments as part of a 'cap and trade' program. Governments limit the amount of greenhouse gases organizations, or certain industries can emit by placing a cap on them.

Organizations are given a set number of credits, which decline over time. Organizations that bring their emissions below the cap can sell their excess credits on the carbon compliance market.

For example, the European Union (EU) has an Emissions Trading System (ETS) that allows companies to buy carbon credits from other companies; and California runs its own cap-and-trade program for businesses located in the state.

So any organization with excess credits can sell them to other organizations who are looking to offset their emissions to achieve "net zero" emissions.

Carbon credits were devised to create a financial incentive for companies to reduce their carbon emissions; they represent a reduction in GHGs released into the atmosphere. The system allows those that cannot easily reduce emissions to continue operating, but at a higher financial cost.

What are carbon offsets?

Carbon offsets involve the removal of carbon from the atmosphere and are used as an indirect way of reducing emissions from a project or activity when it is not possible to do so directly.

A traveler cannot choose the airplane she/he is traveling in not to generate emissions during the journey. However, she/he can offset their share of emissions by paying for activities like new tree planting drives in a local community.

Similarly, large organizations generating tons of carbon emissions may be limited by technologies available in the market to reduce their carbon footprint.

By funding other 'greener' projects that remove or sequester, a measurable amount of greenhouse gases, the organization can offset its emissions until a time when better technology becomes available. The funding could also be used to develop new technologies for this purpose.

Unlike carbon credits, which are created by governments, carbon offsets are produced by independent companies that run sequestration projects (such as planting forests, removing carbon from the air, capturing methane gas at landfills, creating products from CO2, etc.).

The offsets are then sold to companies that emit CO2. The offset-producing companies can be thought of as being funded by those companies that emit greenhouse gases.

The offset is generally purchased on voluntary carbon marketplaces.

What are the types of carbon marketplaces?

Broadly speaking, there are two types of carbon marketplaces, voluntary and compliance.

As the name suggests, a voluntary marketplace consists of individuals and organizations that are voluntarily working on green projects, creating carbon credits as a result.

Buyers in the system are also participating voluntarily and could be anyone from individuals to large corporations that wish to offset their carbon footprint.

The compliance market, on the other hand, is a highly regulated market with corporations participating in them as part of regional, national, or international regulatory requirements.

Industries are required to comply with the policies outlined by governments or international regulatory bodies to rein in global warming and can either purchase carbon credits to offset their emissions or sell them for profit after having reduced them below targeted limits.

A common example of the compliance markets is the cap-and-trade system introduced in many countries. In such a system, emissions limits are capped for industries based on their size and output. Organizations exceeding these limits must purchase carbon credits.

However, those who reduce their emissions below the capped limits can either sell their accrued credits or save them for use at a future date when they expect to generate more emissions.

What are examples of carbon marketplaces?

In 2005, the EU launched the Emissions Trading System (ETS), the first-ever such system in the world. The Clean Development Mechanism (CDM), an international compliance market, allows for the trading of carbon credits generated by developing countries.

Over the years, many more national and sub-national ETS have begun operations. More recently, China launched the world's largest ETS, which is expected to cover one-seventh of global carbon emissions.

How do you buy Carbon Credits and Offsets? 

Before you purchase carbon credits, you need to first know your carbon footprint and determine what needs to be offset. For large organizations, there are multiple footprint calculators available to help determine carbon emissions from their operations.

Buyers can purchase credits on a carbon exchange such as New York-based Xpansive CBL or Singapore's AirCarbon Exchange. Based on the limits imposed by governments for industries, organizations can also buy carbon offsets and credits from:

• Developers: These are entities that are directly engaged in generating carbon offsets. This allows for a better understanding of the project that is involved in generating the offset and can result in higher engagement with the work being done.
• Brokers: Acting as middlemen between projects and entities looking to buy carbon offsets, brokers can help find suitable projects or a large number of carbon credits. However, a broker usually charges a markup on the credit prices, and this can lead to unfair practices toward developers, who do not get full worth for their work.
• Online marketplaces: This is much like Amazon for carbon offsets and credits, where one can buy from the comfort of their offices by signing up for an online marketplace. Post registration, users can find details about the projects that are generating the credits and pick the provider based on the work or pricing to suit their organizational goals.

Do Carbon offsets help make a sustainable planet?

Carbon credits are aimed at companies and organizations to mitigate their emissions in the short term while working on long-term plans to reduce them. However, the availability of credits to offset emissions allows them to continue their operations without changing anything about them.

For instance, oil companies that profit from the extraction of fossil fuels and subsequently release further carbon into the atmosphere can simply buy more credits at the end of the year. Depending on the markets, the price of the carbon credit can vary anywhere from less than a dollar to $94 or more.

Airlines, cab aggregators, cement manufacturers, and data centers are examples of organizations that fit into this category where, theoretically, the carbon produced is offset, but little is being done to change the polluting behavior for the future. Critics have called this 'greenwashing,' as it allows organizations to claim carbon neutrality even when their emissions remain the same.

Credits generated from planting trees need to be run for decades to see their impact. In some cases, the reforested areas have been logged after the credits were sold. Additionally, carbon credits account for only a tiny fraction of the emissions produced globally. So the need of the hour is to focus more on the reduction of carbon emissions.

If you are looking purchase carbon credits, invest in technologies that will help reduce emissions, especially among heavy polluters. That is truly how it can help the planet become sustainable.