Carbon credits are a way for companies to offset their emissions by buying credits from other organizations that have reduced theirs. Buying and selling these credits is an important part of the overall effort to reduce greenhouse gas (GHG) emissions worldwide. But how are they calculated? The process is complicated.
When it comes to reducing carbon emissions, there are many ways that individuals and companies can make an impact on climate change. These include reforestation projects, renewable energy production, and waste management programs. These initiatives often take a lot of time, however. Planting trees and restoring wildlife habitats, for example, can take years before the benefits are realized. In the end, however, these efforts are well worth it.
These environmental projects create carbon credits that can be bought and sold on a variety of exchanges. The value of these credits depends on the specific projects and their effectiveness in reducing GHGs. A credit is a unit of measurement that indicates one tonne of GHG emission reductions. But not all credits are created equal, and their price can vary widely. This is because not all projects meet certain criteria. Those criteria include additionality, permanence, and measurability.
In addition to their primary purpose of avoiding or removing GHGs from the atmosphere, these projects also generate other ‘co-benefits’ that help achieve some of the UN’s Sustainable Development Goals. These additional benefits can include improving local economic development, generating incomes for local people, and promoting biodiversity conservation. Ultimately, these additional benefits are another reason why the credit market has grown so rapidly over the past decade.
Today’s voluntary carbon market lacks the liquidity needed for efficient trading, in part because of the heterogeneity of carbon credit exchange. Every carbon credit has different attributes that affect its price, and each buyer values those attributes differently. Matching buyers with suppliers is therefore a time-consuming and inefficient process that is often transacted over the counter. This is why we support Gold Standard’s holistic standard, which is designed to reduce this inconsistency and enable buyers to more fully recognize the full value of what these initiatives achieve.
To address this issue, exchanges have tried to simplify and speed up the trading process by creating standardized products for forward delivery. For example, Xpansiv CBL has created a standard product called the Nature-based Global Emission Offset. Credits traded under this label have set characteristics, including a specific type of underlying project, a relatively recent vintage, and certification from a restricted group of standards.
These standardized products are currently preferred by traders and financial players who need to hedge against skyrocketing carbon credit demand. In contrast, end buyers that want to use carbon credits to offset their own GHG emissions tend to prefer non-standardized products. This allows them to carefully examine the specific characteristics of each underlying project and ensure that the credits they buy are genuine emissions reductions. However, this is a long-term strategy that can only be achieved with the continued commitment of all parties involved in the carbon credit market.