Carbon Credits 101: What they are, why they’re controversial, and implications for COP 21

Climate change is now a common topic of conversation, and global society is realising that we need to incorporate climate and broader environmental issues into our social and economic systems.

One of the tools that has been used over the past couple of decades is that of carbon credits.

Understanding carbon credits is important because it is part of a global attempt to mitigate climate change by tieing the cause of the climate change — an economic system dependent on consumption — to reducing emissions. At the same time, the concept and use of carbon credits has come under a lot of scrutiny. The next climate conference–COP21 in Paris–is expected to drastically change the way this and other tools work.

Here’s your chance to finally understand all this business about carbon credits you may have heard floating around occasionally but never got around to getting to grips with!

Where did carbon credits come from?

Carbon credits were introduced under the Clean Development Mechanism (CDM) under the internationally-recognised Kyoto Protocol. The Protocol recognised that developed countries are principally responsible for the current high levels of GHG emissions that cause climate change, and thus placed a greater responsibility on them to address this problem. [4]

Under the mechanism, a country with an emission-reduction or -limitation commitment with the Protocol can implement an emission-reduction project in developing countries to compensate for an emission made elsewhere. These projects would earn saleable certified emission reduction (CER) credits (also called offsets).

What is a carbon credit?

A carbon credit is a financial investment that represents 1 tonne of CO2, or other greenhouse gases whose effects are equivalent to 1 tonne of CO2 (CO2e), that has been removed or reduced from the atmosphere under an emissions reduction project.

Carbon credits are associated with removing existing CO2/CO2e emissions (for example by planting trees) or by reducing future CO2/CO2e emissions by implementing renewable energy or energy efficiency projects that displace fossil-fuel powered generation production or industrial processes (e.g. by constructing a wind farm).  Each activity has a different “methodology” that accounts how much carbon is avoided.

How do carbon credits work?

There are several actors involved in creating a carbon offset project: there is a verification body that validates how many tonnes of CO2 a project avoids, the the registration body that operates the registry where a buyer can look up your projects, and the company that ultimately buys your credits. In general, to get carbon credits a business needs to calculate its carbon savings against a very specific methodology and get an official body to validate the project.

There is some strategy to the way businesses choose their methodologies, or how they assemble carbon-saving activities into verifiable carbon offset projects. A very “green” manufacturer may seem to be constantly coming up with new “projects” every time they make a batch of green goods that saves X amount of carbon.

What are the regulated markets and the voluntary markets?

In addition to the regulated markets under the Clean Development Mechanism and some regional compliance markets in the USA and Australia, there are voluntary markets and compliance schemes. One of the biggest is Verified Carbon Standard (VCS).

The voluntary markets allow individuals, companies, or non-profits to purchase carbon credits on a voluntary basis to satisfy personal or CSR objectives. As a company or non-profit getting carbon credits for the first time, it is generally easier to get credits on the voluntary market. This voluntary market operates similarly to eBay. [5] Unlike the regulated market, carbon credits on the voluntary market are not actively traded. [5]

As of January, the World Bank valued emissions trading at  $30 billion [6]. When including the voluntary market, carbon trading is worth more –about $176 billion in 2012 [6].

What are some of the problems with carbon credits?

The system of carbon credits has historically been criticised for being “essentially a 
permission slip with a cash value that allows a country or company to emit a certain amount of greenhouse gases” [6] and for promoting, rather than preventing, carbon-intensive industrial activities. The argument is that this allows rich countries to feel better about harmful behaviour, rather than encouraging governments to correct that behaviour [6]. Beneficiaries of the CDM included industrial gas producers (nitrous oxide, refrigeration gases) and dam construction projects. [2]

Carbon credits are also vulnerable to fraud, and are susceptible to not delivering on the promises of low emissions in the future [6,9]. This is largely due to the fact that carbon credits are fundamentally based on carbon, which is not really tangible/palpable.

In August 2015, a study from the Stockholm Environment Institute found that the majority of carbon credits generated by Russia and Ukraine did not represent cuts in emissions and that these credits may have actually increased emissions. [7,8]

For these reasons, credits have fallen in price over the past few years. [1] The European Union’s market, which used to be the main outlet for the Clean Development Mechanism, was restricted and then shut down. [2]

What does the COP21 — the climate talks in Paris — mean for carbon credits?

Over the years, the Clean Development Mechanism has been discussed and various amendments and solutions have been proposed. However, little progress has been achieved because positions on the issue are so radically discordant: while wealthy nations that are high emitters endorsed the continuation of market-based mechanisms, developing countries adopted divergent and contrasting stands. [1]

Some groups have suggested the creation of a “New Market Mechanism” (NMM), involving the implementation of sectorial and cross-sectorial measures, thus scaling up market-based mechanisms beyond project level activities. The USA and Japan have supported the “Framework for Various Approaches” (FVA), which aims at ensuring flexibility for Parties to create a set of components and rules that will ensure an individual crediting systems that helps fulfil internationally agreed targets. [1] Other groups have attempted to draw attention to a non-market GHG reduction solution in correlation with REDD. [1] None of these proposals have yet been able to gather broad consensus. [1]

The COP21 is expected to test business and government commitments to tackling climate change, and is seen as the last chance to come up with a deal to avert 2 degree warming that scientists say is the tipping point to irreversible fallout.

References

[1] “COP21 and the Clean Development Mechanism: Deciding the Future of International Carbon Credits.” Climate Policy Observer, 29 July 2015.

[2] Aline Robert (tr. Samuel White). “COP21 Will End a Decade of Failed Climate Finance.” EurActiv, 18 November 2015.

[3] Lauren Hepler, “COP21 and Decoding the Economics of Climate Change.” GreenBiz, 6 August 2015.

[4] “Kyoto Protocol.” United Nations Framework Convention on Climate Change (UNFCCC), n.d.

[5] Chris Lang. “Why You Should Not Buy Voluntary Carbon Credits as an Investment: A Carbon Trader Explains.” REDD Monitor. 22 April 2013.

[6] McKenzie, “The Hack That Warmed The World.” Foreign Policy, 30 January 2015.

[7] McGrath, M. “Carbon Credits Undercut Climate Change Actions Says Report.” BBC News, 25 August 2015.

[8] Arthur Nelsen, “Kyoto Protocol’s Carbon Credit Scheme ‘Increased Emissions by 600m Tonnes.” Guardian, 24 August 2015.

[9] Ryan Jacobs. “The Forest Mafia: How Scammers Steal Millions Through Carbon Markets.” Atlantic, 11 October 2013.

About Savina Venkova

Savina does Marketing and Research for Carbon Analytics. She has a background in biology and sustainable development, and much of her work is informed by her involvement in divestment activism. She has lived on three continents and intends to double that figure.

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