How Carbon Credits work

How Carbon Credits work

The rise in carbon emissions has led to an urgent need for climate action, and Carbon Credits have emerged as one key part of the solution. So, what exactly are Carbon Credits and how do they work?

Carbon offset credits represent verifiable emission reductions from climate action projects. These are projects that work to reduce, remove, or avoid greenhouse gas (GHG) emissions. For a project to be considered for Carbon Credits, it must meet strict carbon standards criteria set by Governement via the Emissions Trading Scheme (ETS). This requires measurement, reporting and verification (MRV) by third-party agencies to ensure compliance.

ETS operates as a cap-and-trade system providing a market based policy tool used by Government to reduce greenhouse gas emissions.

Government sets a cap on the total amount of emissions allowed from covered entities, such as power plants or factories. Covered entities are permitted an allowance to emit a certain amount of greenhouse gases. Entities that can reduce their emissions below their allocated allowances can sell their excess permits to entities that are unable to meet their emissions cap, allowing the market to determine the most cost-effective means of reducing emissions.

Similarly, emitters can offset their excess by purchasing carbon credits sourced from climate action projects.

A single credit represents one tonne of CO2 reduced or removed from the atmosphere. Once a company or an individual purchases the credit, it is permanently retired, meaning it cannot be reused.

While Carbon Credits trade in the compliance carbon market, they are also traded on the voluntary carbon market. These credits are known as voluntary emissions reductions (VERs) and are not regulated by the government.

Carbon offsets are crucial for scaling up carbon removal technologies and reducing the number of credits over time to incentivize emitters to find ways to cut their footprint.

The price of Carbon Credits can vary depending on the type of project and its location. Typically, Carbon Credits cost around $3 to $5 per ton of CO2. However, this price is expected to rise dramatically in the coming years due to stronger climate policies and market standardization.

Companies and individuals can purchase Carbon Credits in a variety of ways, such as through a broker or online marketplace. Brokers charge a fee based on the emissions level of the company or individual, and a portion of the payment is invested in a carbon reduction or removal project.

Carbon offset credits offer businesses and individuals an opportunity to offset their emissions and support climate action initiatives. By following the necessary steps, companies and individuals can ensure that they are investing in high-quality carbon reduction or removal projects and making a positive impact on the environment.