Carbon Credits Explained

Understanding Carbon Credits

Carbon credits, also known as carbon offsets, are permits that allow the holder to emit a specified amount of carbon dioxide or equivalent greenhouse gases (GHGs). Each credit typically represents the authorisation to emit one ton of carbon dioxide. These credits are a crucial part of the cap-and-trade system, where companies that exceed their emission caps can buy credits from those that emit less than their allocated limit. This system provides a financial incentive for companies to reduce their emissions: they can avoid the cost of buying additional credits or profit by selling their surplus credits.

‍

How Carbon Credits Work

The primary goal of carbon credits is to reduce GHG emissions. Companies or nations are allotted a certain number of credits which they can trade, helping to balance global emissions. Over time, the number of available credits is reduced, encouraging innovation and more effective emission reduction strategies.

‍

Carbon Credit Initiatives in the U.S. and Worldwide

In the U.S., various states have adopted market-based approaches to reduce GHG emissions. For instance, California's cap-and-trade program, initiated in 2013, is one of the largest in the world and targets major polluters like power plants and fuel distributors. On a global scale, agreements like the Kyoto Protocol and the Paris Climate Agreement have established frameworks for emissions trading and set binding reduction targets for participating countries.

‍

High-Quality Carbon Credits and Their Importance

The effectiveness of carbon credits heavily relies on their quality. High-quality carbon credits ensure true GHG integrity, meaning they represent real, verifiable emission reductions that wouldn't occur without the project that generates the credit. These credits also provide broader environmental and social benefits, such as ecosystem protection and job creation in local communities.

Recent data highlights the growing reliance on high-quality carbon credits in the voluntary carbon market (VCM). For instance, in December 2023 alone, companies retired a record 37 million credits, showing a significant surge in market activity. Companies that use high-quality credits are found to be 1.8 times more likely to decarbonise year over year, underscoring the role of these credits in corporate climate strategies.

‍

The Case for a Carbon Tax in the U.S.

Despite the significant role of carbon credits, some experts argue for a more direct approach: a carbon tax. This aligns with the views of the late economist Milton Friedman, who advocated taxing polluters until they clean up their act. Currently, over 50 countries have systems for pricing carbon, covering about 24% of global emissions. The U.S., however, lags behind with no national carbon pricing mechanism in place.

Implementing a carbon tax in the U.S. could drive substantial emission reductions and generate significant revenue. Estimates suggest that combining a carbon tax with the Inflation Reduction Act's clean-energy incentives could cut U.S. carbon emissions by 66% by 2035, surpassing the Biden administration's goals.

‍

Shifting Away from Carbon Offsets

Some companies are moving away from relying solely on carbon credits. For example, Telstra, a major Australian telecommunications company, recently decided to ditch its carbon credit offset scheme in favour of direct investments in renewable projects and energy efficiency improvements. This shift aims to achieve more significant and tangible reductions in carbon emissions, reflecting a growing preference for direct decarbonisation actions over offsetting strategies.

‍

Conclusion

Carbon credits play a vital role in global efforts to reduce greenhouse gas emissions. High-quality credits ensure genuine emission reductions and offer additional environmental and social benefits. However, the debate over the best mechanisms to achieve climate goals continues, with some advocating for more direct approaches like carbon taxes. As the urgency to address climate change grows, it is crucial for companies and governments to leverage all available tools, including high-quality carbon credits, direct decarbonisation efforts, and robust carbon pricing mechanisms.