Reforestation: Our Guide to Sustainable Companies
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Increasing numbers of individuals, companies and governments are waking up to climate change and pledging to reduce their own carbon footprint. However, many find that they can’t fully eliminate their emissions. Voluntary carbon markets allow carbon emitters to offset their unavoidable emissions by purchasing carbon credits. In recent years there’s been a big surge in demand from those looking to take part in voluntary carbon markets, but how exactly do they work?
👉In this article we’ll explore what voluntary carbon markets actually are, how they operate, and the benefits and challenges of their current structure.
Voluntary carbon markets are markets where carbon credits are purchased on a voluntary basis, rather than because an organisation (this might be a company, individual, NGO or a government) needs to comply with mandatory legal emission reduction obligations. They allow carbon emitters to offset their unavoidable emissions via the purchase of carbon credits.
❓What is a carbon credit? A carbon credit is a permit that allows a country or organisation to produce a certain amount of carbon emissions that can be traded if the full allowance is not used. Each credit corresponds to one metric ton of reduced, avoided or removed CO2 (or equivalent greenhouse gas emissions) and can be used by an organisation to compensate for their unavoidable carbon emissions. When a credit is purchased by an organisation and used for this purpose, it becomes an offset and is moved to a register for retired credits, meaning that it is no longer tradeable.
The money that goes into the purchase of these carbon credits is then funnelled into climate-action projects that might otherwise not get off the ground. In addition to carbon offsetting, the projects may also benefit things such as biodiversity protection, pollution prevention, public-health improvements, employment creation, or the development of green technology.
Organisations can participate in a voluntary carbon market either individually or as part of an industry-wide scheme.
Compliance carbon markets, also known as the regulatory carbon market, are carbon markets that are regulated by national, regional or international carbon reduction regimes. Examples include the EU Emissions Trading Scheme and the UK ETS.
These markets operate a cap-and-trade system where organisations are given a certain amount of ‘allowances’ (think of this as a permit that allows them to emit greenhouse gases). The cap represents a finite supply of allowance - ie. new ones can’t be created. However, organisations can sell and buy credits. This incentivises organisations to cut down on their emissions because if they don't, they risk having to purchase surplus carbon credits.
Voluntary carbon markets on the other hand, are completely discretionary. Organisations participate in it because they want to, not because they have to. Many companies participate in it for example because they want to contribute to the climate change fight, or perhaps more cynically, because they think it's a good PR move.
Unlike the compliance carbon market, the voluntary carbon market uses a project-based system in which there is no finite supply of allowances. More carbon credits can be created through the development of additional projects that help to avoid, reduce, or remove carbon emissions.
The pricing of carbon credits under a voluntary carbon market is a bit more complex than that of the compliance carbon market credits. This is because the types of projects funded by the credits vary hugely. Generally speaking the following factors are considered when determining the price of a credit:
As it stands there’s no centralised voluntary carbon market and so project developers can sell their credits directly to buyers, through a broker, or via a retail trader. While most carbon credit transactions take place directly there are some exchanges that are starting to emerge, these aim to simplify and speed up the rate of carbon credit trading.
To ensure that the credits meet a minimum standard, they must first be verified by an independent third party. This third party will consider the following factors when awarding a standards certification:
So how exactly do projects under the voluntary carbon market contribute to the fight against global warming?
The whole point of the voluntary carbon market is to provide an investment mechanism for the offsetting of unavoidable carbon emissions. Carbon credits fund carbon offsetting projects (though there may very well be other benefits to the project too).These projects will fall under either carbon avoidance and reduction, or carbon removal or sequestration. Let’s explore what these terms mean in a bit more detail below:
Voluntary carbon markets support a wide variety of environmental projects. However, the aim is always to reduce or remove greenhouse gas emissions or carbon dioxide from the air. These projects can be anything from small local initiatives to large-scale industrial projects.
Common examples of projects are reforestation projects, wetland management programs, carbon capture and storage, the development of renewable energy and green technology, regenerative agriculture programs… the list goes on.
More often than not these projects also drive additional benefits - something that’s known as ‘co-benefits’. Co-benefits of the different projects can vary hugely and include things like improving water quality, presenting deforestation, creating local jobs and businesses. Project developers may design the project in such a way that the co-benefits align with the United Nations Sustainable Development Goals (SDGs), which can in turn increase the overall value of a credit.
❗️ No matter what type of project is created, they all have one requirement: this is that the project, removal, or reduction of emissions would not have otherwise occurred.
Voluntary carbon offset markets are often promoted as one of the best solutions to dealing with unavoidable carbon emissions. But what exactly are the benefits?
Despite the clear benefits that the voluntary carbon market brings it’s not without problems and its critics argue that it is fragmented and complex and that credits do not always accurately represent emissions reductions. Limited pricing data also makes it very different for carbon credit buyers to know if they’re paying a fair price. Let’s take a look at these concerns in a bit more detail below:
The voluntary carbon market has the potential to help us transition to a decarbonised global economy through the redirection of investment into renewable energy and energy efficiency. Not only this, but it can also help us to scale-up the removal of carbon dioxide emissions in an effort to offset unavoidable emissions and reach net zero. However, if it’s going to realise its full potential the voluntary carbon market is going to have to address the challenges it faces.
So, what is needed to overcome these challenges?
Voluntary carbon markets could play a crucial role in the transition to net zero by supporting decarbonisation that goes beyond simply reducing individual emissions. But to realise this potential, significant effort is needed to iron out challenges and scale up the market.
At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. Why not request a free demo with one of our experts - no obligation or commitment required.
If reading this article has inspired you to consider your company’s own carbon footprint, Greenly can help. Learn more about Greenly’s carbon management platform here.
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