05 Dec 2018

Carbon Credits 101

Posted in: Carbon Credits

Carbon Credits 101

Carbon credits balance out (often referred to as ‘offset’) greenhouse gas (also known as carbon) emissions to achieve net zero emissions. While it is important for organisations to reduce overall emissions, credits can offset the balance whilst they are working on reduction strategies.

But there can be confusion about what carbon credits are and how they work. Here are five key facts you need to know about carbon credits.

What is a carbon credit?

A carbon credit is a financial instrument that represents a unit of carbon dioxide equivalent or CO2e. One carbon credit is equal to 1 tonne of CO2e. Carbon credits are awarded for projects that store, avoid or reduce greenhouse gas (GHG) emissions in the atmosphere.

Carbon credits infographic

Why do we need carbon credits?

The everyday activities of businesses, communities and individuals create carbon emissions. The problem is that carbon emissions accumulate in the atmosphere and contribute to climate change. It is vital we all reduce our emissions, but carbon credits are also needed to slow the rate of emissions accumulating in our atmosphere. When you purchase a carbon credit to offset one tonne of CO2e that you’ve emitted, that purchase finances a project specifically designed to store, avoid or reduce GHG emissions – specifically a project that would otherwise not have happened (it’s additional to business as usual). In other words, each purchase helps keep the carbon project going.

How does a project produce carbon credits?

The ‘how’ varies depending on the type of project, but they will all either store, avoid or reduce GHG emissions compared to business as usual.

  • Store: These are usually forestry projects – land specifically set aside for reforestation with strict covenants to ensure the trees remain permanent and are not harvested.
  • Avoid: These are usually energy generation projects that use renewable energy instead of fossil-fuels, such as wind farms, and that would not have been able to be built without carbon credit financing.
  • Reduce: These are usually a form of technology that reduces the usual amount of emissions produced, for example efficient solar cook stoves that replace inefficient fossil-fuel burning stoves.

Find out more about the various carbon credit projects sourced as part of the Toitū carbonzero certification programme.

What makes a carbon credit of high or low quality?

There are a number aspects of a project that can determine whether the credit output is credible, unreliable or anything in between.

There are internationally accepted guidelines for carbon credits: they must be Real, Measurable, Permanent, Additional, Independently Verified and Unique. The assessment process to approve a carbon credit as part of the Toitū carbonzero programme goes above and beyond this best practice and requires further details, including: Transparency, Traceability, and Sustainable Development Performance to name just a few.

There are a range of standards to judge carbon credits against. If a credit is independently verified as meeting one of the most robust standards, like Gold Standard, Clean Development Mechanism and Permanent Forest Sink Initiative, then it can be trusted as high quality.

How does the carbon credit market work?

The carbon credit market works like any other financial market – the price of credits is set by projects who list them on trading exchanges (or via direct sales) and is primarily driven by supply and demand. When the number of credits are low, but lots of organisations want them, then the price goes up. Worldwide, as businesses, governments and other organisations are increasingly trying to reduce their impact, the demand for credits is increasing. This means that prices are likely to increase across the world. It also means availability is becoming more volatile.

It’s important to remember price does not necessarily reflect quality. So long as robust compliance or voluntary standards are met, and the sale and retirement of credits is recorded on an independent registry, then there can be a range of price and project type to choose from. Often, it’s helpful to also think about the project types and what best aligns with your organisation’s ethos.

Want to know more?

These five key facts are just the beginning of the carbon credit story.