5 Questions to Better Understand Carbon Credits

'Carbon credit' is a phrase that's popping up more and more these days, and it often leaves people scratching their heads, trying to figure out what it really means. To help clear things up, we've put together this handy guide to answer the top five questions we most often hear about carbon credits. Our goal? To clear up any confusion and make understanding carbon credits a breeze.

We’ll answer the following:

1. What are carbon credits?
2. How do Carbon Credits work?
3. What is the difference between a carbon credit and a carbon offset? 
4. What are the pros and cons of investing in carbon credits?
5. How can you invest in carbon credits?
   

👉 In this article, we've answered five of the most common questions surrounding carbon credits to help you better understand what they are and how they work.

The concept of carbon credits is rooted in the international commitment to reduce greenhouse gas emissions and mitigate the worst impacts of climate change. As a financial tool designed to offset the carbon emissions produced by individuals and corporations, carbon credits are an important element in the broader strategy to combat climate change.

Generally speaking, one carbon credit represents the avoidance or removal of one metric tonne of carbon dioxide (CO2) from the atmosphere. Therefore, when you buy a carbon credit, you're financially supporting efforts to prevent or reduce an equivalent amount of emissions elsewhere.

In practice, carbon credits fund a wide range of initiatives aimed at reducing greenhouse gas emissions. Some projects involve the direct absorption of carbon dioxide, such as afforestation (planting new forests), or reforestation (replanting existing forests). 

Other projects might involve the development and implementation of renewable energy sources like wind or solar power, which produce electricity without generating carbon dioxide emissions. Or it could be a project involving methane capture at landfills or farms, preventing this greenhouse gas from being released into the atmosphere in the first place. The list of potential projects is long and varied.

👉 To read more about carbon offsetting and removal projects, why not check out our article.

Ultimately, carbon credits represent a growing awareness of our individual and collective responsibilities to the planet and future generations. By buying a carbon credit, you're not just compensating for your personal carbon emissions - you're also investing in a cleaner, more sustainable future. It's a way of saying, "I recognise the impact of my actions, and I'm willing to take responsibility for them." While it's not a perfect solution, it is a step in the right direction towards a world that is more conscious of its carbon footprint and more dedicated to mitigating the effects of climate change.

Here's how carbon credits usually work:

• Setting a baseline - A baseline is established to determine the amount of greenhouse gas emissions that would have occurred without any mitigation efforts. This baseline serves as a reference point to calculate the reductions achieved.
  
• Identify emission reduction projects - Various projects can generate carbon credits by reducing emissions or removing greenhouse gases. These can vary widely and include projects such as renewable energy installations (e.g., wind farms, solar power), energy efficiency initiatives, reforestation efforts, or projects that capture and store carbon dioxide (known as carbon sequestration).
  
• Verification and certification - Carbon reduction projects must undergo a rigorous process of verification and certification by independent third-party organisations. These organisations ensure that the projects meet specific standards and that the emission reductions claimed are accurate and additional to what would have occurred without the project.
  
• Issuance of carbon credits - Once a project is verified and certified, it is allocated a certain number of carbon credits. Each carbon credit usually represents one metric ton of carbon dioxide equivalent (CO2e) reduced or removed.
  
• Trading and offsetting - Carbon credits can be bought and sold on carbon markets. Buyers, such as companies or individuals, purchase carbon credits to offset their own greenhouse gas emissions. By buying carbon credits, they effectively invest in emission reduction projects.
  
• Retirement or cancellation - Once a carbon credit is purchased and used for offsetting, it is retired or cancelled, ensuring that it cannot be used again. This mechanism prevents double counting and ensures the integrity of the system.

A carbon credit is a tradable request, that represents a certain amount of carbon dioxide being removed from the atmosphere, in exchange for a carbon footprint that’s already been made.

A carbon offset, on the other hand, refers to the action of compensating for greenhouse gas emissions by supporting projects that reduce emissions or remove carbon dioxide from the atmosphere. Offsetting involves purchasing carbon offsets to counterbalance one's own emissions, effectively balancing the carbon footprint.

Let’s take a closer look at the key differences:

Carbon Credits:

• Carbon credits are generated through specific projects or activities that reduce, avoid, or remove greenhouse gas emissions;
• These projects are typically verified and certified by independent third-party organisations to ensure their legitimacy and the accuracy of the emission reductions claimed;
• Carbon credits are assigned a financial value and can be bought and sold on carbon markets; 
• They are often used by companies or individuals to offset their own greenhouse gas emissions;
• The primary focus of carbon credits is on the quantifiable reduction or removal of greenhouse gases.

Carbon Offsets:

• While carbon credits are generated through specific projects, carbon offsets can also include the purchase of previously generated carbon credits on the market;
• Carbon offsets can be achieved through projects like renewable energy installations, forest conservation, methane capture from landfills, or investment in carbon sequestration initiatives;
• Offsetting can be done by individuals, organisations, or governments to take responsibility for their emissions and support sustainable practices.

👉 To learn more about carbon offsets, why not check out our article.

Carbon credits offer a number of benefits when it comes to addressing climate change and reducing the levels of harmful greenhouse gases in the atmosphere. Let’s take a closer look at some of the main advantages: 

• Reduction in greenhouse gas emissions - Carbon credits incentivise businesses (and individuals) to invest in projects that help to reduce greenhouse gas emissions. 
• Market-based approach - Carbon credits leverage market mechanisms to tackle climate change by establishing a marketplace that incentivises investment in emission reduction projects. This approach fosters innovation, efficiency, and cost-effectiveness in achieving emissions reduction targets.
• Encourages sustainability - Carbon credits incentivise the adoption of sustainable practices and technologies. Companies and individuals are motivated to reduce their own emissions and invest in renewable energy, energy efficiency, and other clean technologies.
• Economic opportunities - By supporting the growth of green technology and innovation, carbon credits can create economic opportunities, which may also lead to job creation and economic growth. 
• Financing mechanism - Carbon credits help to fund and support projects that may otherwise have failed to get off the ground. 
• Corporate social responsibility (CSR) - By purchasing carbon credits, companies can demonstrate their commitment to sustainability and corporate responsibility. 

❗️ However, it's crucial to acknowledge the limitations of carbon credits. They do not eliminate or reverse the carbon footprint already created. Individuals or companies still generate carbon emissions, and their investment in carbon reduction projects cannot undo the emissions they've already produced. This is why they should be seen as a complement to, not a substitute for, efforts to reduce emissions at their source through sustainable practices and policies.

Some enterprises, particularly airlines, have made it relatively convenient to purchase carbon credits, especially when it relates to your recent travels.

However, there are alternative avenues for investing in carbon credits. You can explore options like stock investments, exchange-traded funds, or participate in a government-controlled auction system, such as the European Union Emissions Trading System.

Let’s take a closer look at some of the different ways to invest in carbon credits:

• Voluntary Carbon Markets - Voluntary carbon markets allow both individuals and companies to purchase carbon credits voluntarily, in order to offset their emissions. These markets offer a variety of projects to invest in, for example renewable energy projects, reforestation initiatives, or methane capture projects.
• Compliance Carbon Markets - Compliance carbon markets operate under government-regulated schemes, such as the European Union Emissions Trading System (EU ETS). These markets require companies to obtain and surrender a certain number of carbon credits to comply with emissions regulations. Investors can take part in these markets by purchasing and trading carbon credits within these frameworks.
• Carbon Funds and Exchanges - Carbon funds and exchanges act as intermediaries between buyers and sellers of carbon credits. These intermediaries use investor funds to invest in various carbon-offsetting projects. They also manage the process of purchasing and retiring carbon credits on behalf of investors.
• Climate-Focused Funds and ETFs - Some investment firms offer climate-focused funds or exchange-traded funds (ETFs) that include exposure to carbon credits and other climate-related investments. They allocate investments to projects that reduce emissions or support green technologies.
• Green Bonds - Green bonds are debt instruments that are issued by governments, or corporations, to finance environmentally sustainable projects (including those that generate carbon credits). Investors can buy green bonds and indirectly support carbon reduction projects.

👉 To learn more about the carbon market, read our article on the topic. 

It's important to note that carbon credits should not be relied upon as the primary strategy to mitigate carbon footprints or address the impact of activities contributing to global warming. 

In addition to acquiring carbon credits, individuals and companies have a range of impactful strategies at their disposal to combat global warming. 

So, apart from investing in carbon credits, what other approaches can you or your company embrace to mitigate the effects of climate change?

1. Turn off Lights and unplug devices and chargers when you aren’t using them

We are all guilty of leaving our laptop chargers in the outlet, or the lights in the kitchen on when we aren’t there. It only takes a minute to scan the room before leaving your house to make sure any lights, devices, or chargers are turned off.

Not to mention – using less electricity isn’t only better for the environment, but it can help lower your electric bill, too!

2. Buy a reusable water bottle

Most of us are guilty of re-purchasing a plastic water bottle every day, but the reality is that there’s no need for this anymore. 

Many cities around the world have made public water fountains easily accessible. So, why spend money on a new, plastic water bottle that will end up going to waste when you could buy a reusable water bottle once – and fill it up for free?

3. Eat more plant-based foods

The plant-based food scene has exploded over the last couple of years, mostly due to the clear health benefits – but did you know that it’s better for the environment, too? 

Animal production contributes to over 65% of the planet’s human-produced nitrous oxide emissions. If more people were vegan or even went for “Meatless Mondays” – less of this detrimental production would occur, and the environment would benefit immensely.

It's also surprising to discover that producing food for a vegan requires only one-third of the water needed to produce food for an omnivore. This means that by reducing your meat consumption, you significantly decrease your water consumption as well.

So, the next time you’re on your lunch break – opt for that oat milk latte and the quinoa salad! 

Not only will you be eating cleaner, but you’ll be reducing your carbon footprint at the same time.

4. Use public transportation

If you live in a busy city, seize the opportunity! There's no reason to endure traffic jams or shell out exorbitant amounts of petrol.

Consider taking advantage of public transportation like the metro, subway, or bus, at least once a week. And if you have the convenience of walking or biking to your school or workplace, what's holding you back?

Not only will you incorporate more physical activity into your routine and save money, but you'll also make a significant impact in reducing your carbon footprint.

5. Go thrift shopping!

The trend of thrift shopping has witnessed a surge in popularity in recent years, and not only is it a fashionable choice, but it also holds significant environmental benefits.

By embracing the practice of purchasing recycled clothing, the demand for newly manufactured garments decreases. As a result, the environmental impact associated with production is reduced.

Thrift shopping proves to be a cost-effective alternative to buying brand-new items and also has the potential to drive major companies to scale down their clothing production.

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.