What is carbon credit?
A carbon credit represents one tonne of carbon dioxide equivalent either removed, avoided or sequestered
How are carbon credits created?
The carbon market can be divided into two: the voluntary market and the regulatory (compliance) market.
In the compliance market, carbon credits are generated by projects that operate under one of the United Nations Framework Convention on Climate Change (UNFCCC) approved mechanisms such as the Clean Development Mechanism (CDM). Credits generated under this mechanism are known as Certified Emissions Reductions (CERs). In the voluntary market, carbon credits are generated by projects that are accredited to independent international standards such as the Verified Carbon Standard (VCS). These credits are known as Verified Emission Reductions (VERs). Carbon Trade Exchange supports the trading of both voluntary and compliance credits. It is important to note that carbon credits differ from carbon allowances although the term carbon credit is interchangeably used to represent both. Although in most cases they both represent one tonne of carbon dioxide equivalent, allowances do not originate from carbon projects but are allocated to companies under a ‘cap and trade’ system such as the EU Emissions Trading Scheme – therefore, they represent the right to emit.
How do carbon credits impact global emissions?
Carbon credits are an immediate answer to reducing the amount of Green House Gas (GHGs) emissions in the atmosphere. The generation and sale of carbon credits funds carbon projects which would not have gone ahead i.e additional to business as usual. Carbon credits also help lower the costs of renewable and low carbon technologies as well as assisting in the technology transfer to developing countries.
What are the different types of carbon projects?
Carbon credits can be generated from various types of projects including:
- Renewable energy: a switch from fossil fuels to a ‘clean’ energy e.g. wind and solar energy
- Forestation and Afforestation: The planting of new trees as trees sequester and store CO2 e.g. forest regeneration
- Energy efficiency: reducing emissions though an increase in energy efficiency e.g. installation of energy-efficient machinery
- Methane capture: avoiding methane emissions through capture and burning to create energy e.g. landfill methane capture
- Project eligibility for carbon credits depends on whether a project follows one of the Kyoto Protocol’s project-based mechanisms or
an independent voluntary standard.
How are carbon credits issued?
All projects listed on CTX are certified, verified and registered, ensuring that actual emission reductions take place before the credits are issued thus providing a secure and transparent environment for carbon trading. The process of getting credits issued varies depending on the credit type i.e (CERs vs VERs). However, below is a very general overview of the process a project developer needs to follow before credits can be issued:
- The selection of a approved methodology which quantifies the GHG benefits of a project
- The development of a Project Design Document (PDD) which describes the whole project in detail including the project crediting period and the demonstration of additionality
- An independent auditor reviews the PDD and validates the project
- The project is monitored to ensure that GHG reductions are occurring
- The monitoring reports are verified by an independent auditor
- The project gets credits issued into a appropriate registry account
Where are carbon credits held?
Carbon credits are stored electronically in ‘registries’. Registries are essential for issuing, holding, and transferring carbon credits. Once a carbon project is issued with credits, the registry gives each one a unique serial number so that they can be tracked through their entire life-cycle. Registries also facilitate the retirement (surrendering) of credits for carbon neutrality purposes, ensuring credits are not resold at a later date.
In the voluntary carbon market, the largest registry is the Markit Environmental Registry which CTX is directly connected to. In the compliance markets, each scheme has its own arrangements with regards to registries. CTX is connected to various national registries in the EU via CDC Climat’s Registry Electronic Interface (REI) .
What is the current supply / demand for voluntary carbon credits?
The report State of the Voluntary Carbon Markets 2011 sponsored by Carbon TradeXchange and published by Ecosystem Marketplace and Bloomberg New Energy Finance gives a good overview of the voluntary market and the major trends that were seen in 2010. The next edition will published in the coming months which will look back at 2011. Carbon Trade Exchange provides its members with real time market data including all previous transactions which can be filtered by standard, location, vintage and project type.