Understanding Carbon Credits

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Key takeaways

  1. Carbon Credits and Offsets: Carbon credits represent the reduction or removal of one metric tonne of CO2 or other GHGs, while carbon offsets are credits bought by companies to compensate for their emissions.
  2. Nature vs Tech-based Solutions: Nature-based solutions (NbS) utilise ecosystems for carbon avoidance or removal, while technology-based solutions (TbS) involve novel technologies for direct carbon removal, often with longer storage durations but higher costs.
  3. Avoidance vs Removal Credits: Carbon avoidance credits are generated by projects that prevent new emissions, crucial for immediate climate impact, whereas carbon removal credits physically remove greenhouse gases from the atmosphere, essential for achieving net-zero emissions.
  4. “Nature-based projects, including forestry and land-use and agriculture projects, made up almost half of the market share at 46%” — Forest trends report

What are carbon credits?

  • Carbon credits are certificates which represent the reduction or removal of one metric tonne of Carbon Dioxide (CO2) or other Greenhouse Gases (GHGs) from the atmosphere. Carbon Credits can be issued to avoid or remove any greenhouse gas, not just carbon. Carbon credits are the umbrella term often used to cover all greenhouse gases, and other greenhouse gases can be converted into a CO2 equivalent (CO2e).
  • Carbon Offsets refer specifically to carbon credits bought to retire them to compensate a company's emissions, so it can meet its emission reduction goals.
  • Carbon Credit Retirement is the process of purchasing and then permanently removing a carbon credit from circulation to ensure that the associated reduction in emissions is counted only once and cannot be resold or claimed by another entity

In the VCM, the following statement is commonly used way and shows you how to use these terms together: ”Companies buy Carbon Credits from Carbon Projects to Offset their Emissions.”

What are the characteristics of a carbon credit?

Carbon credits are not all the same. They have several elements which means that although two different carbon credits will both represent 1 Tonne of CO2, their characteristics will differ and people will buy them for different reasons. Understanding these differences is crucial to choosing credits that meet your objectives and minimise your risk.

Below is an overview of these key characteristics, in this chapter, we will deep dive into credit and project type as these are the most important to understand when creating a carbon credit strategy. The next chapter is then entirely focussed on quality as this is the most important characteristic to understand to mitigate risk in a carbon credit strategy.

  • Credit type: Avoidance or removal, nature-based or tech-based
  • Project type or sector: Reforestation, Biochar, etc.
  • Location of credit: Most carbon credits come from the global south, due to the majority of the market consisting of Nature-based solutions, and the majority of these natural carbon sinks are being utilised in developing nations.
  • Price of credit: Prices of credits can range from $4 to $1,000. This mainly depends on the project type, its quality assessment, and how durable the storage of the carbon is.
  • Vintage: The year that the credit was issued
  • Quality Carbon credit quality is increasingly being displayed in ratings. These are scores given to projects and their credits by agencies who rate the projects according to strict frameworks.

Below is an example of a project on the Senken Marketplace and its associated carbon credits. You will note that most of the attributes mentioned above are present here.

Senken marketplace carbon credit project in Germany

Type of credit

There are two types of carbon projects and their associated credits:

Carbon avoidance credits are generated by projects that prevent emissions from being released into the atmosphere. These projects avoid additional emissions rather than removing existing emissions.

  • Avoidance credits were created initially for the protection of the Amazon, preventing land owners from selling trees on their land for agricultural and forestry activities. This helped to put a price on preservation. Soon after that, Cookstoves, Renewables and other Land Use and Management projects that avoid the emotion of GHGs evolved and became recognised, becoming a part of the carbon credit sphere.
  • Avoidance credits have to be able to prove that they prevented emissions that would have occurred without an intervention e.g. That a group of trees would have been cut down if it hadn't been prevented through

Carbon removal credits are generated by projects that physically remove carbon dioxide (CO2) or other greenhouse gases from the atmosphere. This process results in a net decrease in atmospheric greenhouse gases.

Importance of removal credits

Removal credits are essential for achieving Net Zero emissions, especially for addressing legacy emissions, while avoidance credits are crucial in the transition to a low-carbon economy by preventing new emissions.

Example of a company's net zero pathway

Nature-based Solutions (NbS)

Refers to the credits that use natural organisms and ecosystems to assist in the avoidance or removal of carbon dioxide in the atmosphere. This can range from the use of natural carbon sinks such as forests, mangroves, algae, and kelp

NbS projects include categories such as: Agriculture, Forestry and Other Land Use (AFOLU), Blue Carbon, and Regenerative agriculture. Nature-based projects, including forestry and land-use and agriculture projects, made up 46% of the current voluntary carbon market.

This is because nature-based projects that remove carbon, such as reforestation, involve trees that can only sequester(store) carbon for as long as they can stay rooted and alive, meaning they are often referred to as non-durable. Below you can see the different types of credits in this category.

Nature-based solution Description Type
Afforestation, Reforestation, and Revegetation (ARR) Converting degraded and barren land through tree-planting and local vegetation uses. Removal
Agricultural Land Management (ALM) Reducing greenhouse gas emissions through various eligible land use and management practices, including increasing carbon stocks in soils and biomass. Avoidance/Removal
Improved Forest Management (IFM) Better maintaining current forest stock during logging activities to increase carbon sequestration. Avoidance
Reduced Emissions from Deforestation and Degradation (REDD+) Jurisdictional initiatives aiming to establish forest baselines at jurisdictional levels for accuracy and scale of impact. Avoidance
Avoided Conversion of Grasslands and Shrublands (ACoGS) Estimating emissions avoided by preventing the conversion of grasslands and shrublands to commodity crop production. Avoidance
Blue Carbon Carbon is captured and stored by oceanic and coastal ecosystems, through seagrasses, mangroves, and salt marshes. Removal
Regenerative Agriculture Farming practices that restore soil health, enhance biodiversity and increase carbon sequestration in the soil. Removal

Tech-based Solutions (TbS)

Refers to credit that uses novel technologies to remove carbon dioxide straight out of the atmosphere. TbS are more costly than NbS, and these projects generally perform better in terms of the storage durability of the removed carbon.

Tech-based Solution projects include categories such as Renewables, Biochar, Direct Air Capture (DAC), Enhanced Rock Weathering (ERW), Bioenergy with Carbon Capture and Storage (BECCS), Mineralisation, Marine carbon capture and Gas Capture.

TbS projects storage generally store carbon from 100 to 1000 years, meaning they are durable. These projects are also more expensive to develop and operate, which is why their prices are considerably higher. Below you can see the different types of credits in this category.

Tech-based solution Description Type
Renewables Renewable energy sources, such as solar, wind, and hydropower, generate electricity without emitting greenhouse gases, reducing reliance on fossil fuels. Avoidance
Clean cookstoves The main objective of clean cookstove projects is to reduce the reliance on these harmful cooking methods by introducing more efficient stoves that significantly lower emissions of greenhouse gases. Avoidance
Biochar Biochar is a stable form of carbon made by heating organic material in a low-oxygen environment (pyrolysis). It can sequester carbon in the soil for centuries. Removal
Enhanced Rock Weathering This method uses finely ground silicate rocks, like basalt, on land to speed up natural mineral weathering, which absorbs CO2 from the atmosphere. Removal
Bioenergy with Carbon Capture and Storage (BECCS) Combines biomass energy production with carbon capture and storage technology, capturing CO2 during biomass energy generation. Removal
Mineralisation A process where CO2 reacts with certain minerals to form stable carbonate compounds, such as carbonated cement, locking away CO2 in a solid form. Removal
Marine Carbon Capture Achieved through ocean alkalinity enhancement, adding alkaline substances to seawater to increase the ocean's natural carbon sink. Removal
Gas Capture Involves capturing greenhouse gases like landfill gas, methane gas, and refrigerant gas, preventing their release into the atmosphere. Removal

Note: there are other project categories that you may explore. The above lists include most of the well-established and recognised methodologies. You can use these tables whenever you are in the phase of exploring which projects to support and buy carbon credits from.

How to use carbon credits in the net zero journey

Where are carbon projects located?

Global distribution of carbon credit projects
Source: Sylvera Report

What are the non-carbon benefits of carbon credits?

Co-benefits are any positive impacts, other than direct GHG emissions mitigation, resulting from carbon offset projects. If a project has co-benefits, its value is perceived as higher and its impact greater.  The Sustainable Development Goals (17) listed below are mostly realised in Nature-based Solutions (although it is prevalent in Biochar projects) and carbon credit buyers should be on the lookout for projects that reach as many of the goals as possible, showing their influence is above and beyond carbon reduction.

It’s most fundamental to understand that carbon offsets are an incredible incentivisation tool, to accelerate climate action. What does this look like? Well, now finally a land owner can get remuneration for their efforts to protect a forest under threat from agricultural practices, or a project for extracting CO2 from the atmosphere and storing it in Cement, or a group of academics for inventing a way to turn excess forestry materials into a charcoal that stores carbon for 100’s of years. Moreover, companies buying carbon credits are among the frontrunners in making a difference to the climate crisis, due to their contributions to these projects.

The 17 United Nations Sustainable Development Goals (SDGs)