Insights / What should we use carbon credits for?

What should we use carbon credits for?

As more and more organisations adopt decarbonisation commitments, what role do carbon credits have to play in helping us to reach net zero?

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What are carbon credits?

Carbon credits are certificates representing one tonne of CO2 or equivalent greenhouse gases (GHGs). There are two types of carbon credits:

  • Emission reduction credits reduce the amount CO2 or GHGs released into the atmosphere
  • Carbon removal credits remove existing CO2 from the atmosphere.

Carbon credits are generated by emission reduction or removal projects that meet strict quality criteria as set out by Voluntary Carbon Market (VCM) standards.

The VCM promotes climate action by incentivising the development of projects that reduce or remove emissions, which would not have taken place were it not for the revenue provided by the sale of carbon credits. Buyers of carbon credits use them as a tool within the mitigation hierarchy to drive additional climate action or as a means to address hard to abate emissions i.e. emissions- that are prohibitively costly or technologically impossible to reduce.

What is the mitigation hierarchy?

The GHG mitigation hierarchy is a set of principles for addressing a company’s GHG emissions. Firstly, companies should measure their emissions and set emission reduction targets in line with net zero. Companies should then reduce their emissions as much as possible as they progress to net zero. Simultaneously, carbon credits can be used as an additional contribution to drive climate action. As companies progress their carbon reduction plans, they should transition from reduction credits to carbon removal credits. These can then be used to address hard to abate emissions.

How do carbon credits work?

Carbon credits (both reduction and removal) are generated by a variety of different project types. These could be nature-based, engineered, or a mix/hybrid of the two.

For example, reforestation - projects that plant trees to restore forests- is a nature-based carbon removal credit example. As the trees grow, they remove carbon from the atmosphere. Bioenergy with carbon capture and storage (BECCS) is a type of engineered removal credit example. BECCS takes low grade woody fibre, combusting it to produce renewable electricity, then captures the CO2 generated from combustion and injects it permanently underground.

Certain emission reduction or removal projects that meet strict quality criteria can generate carbon credits to be used in the VCM. This process is overseen by VCM standards that set out rules which projects must follow. Once a project has been approved by a standard and audited by an external party, it issues credits that the project can sell.

Who are carbon credits for?

Carbon credits should be used by organisations who are following the mitigation hierarchy. They should be measuring - and reducing - their Scope 1-3 emissions. Whilst this is being done companies can buy carbon credits to drive additional climate mitigation as long as this is not being prioritised over emission reductions.

The Oxford Offsetting Principles outlines key principles in the use of carbon credits suggesting that organisations should source carbon reduction and carbon removal credits whilst they reduce their own emissions, and transition towards buying high quality carbon dioxide removals (CDRs) as companies progress towards net zero.

Many large companies such as Google and Amazon have purchased reduction and removal credits as part of their commitment to reach net zero. They can then use them to address emissions caused by their own activities (Scope 1) or as a result of activities within their value chain (Scope 3). In 2023, the global value of VCM exceeded $2 billion dollars – an increase of nearly four times from 2020.

As the VCM grows and supports even more projects globally, the range of available credits will also expand. Organisations will have an increased number of purchasing opportunities and more choice in terms of the projects and technologies that best suit their strategies and budgets. Purchasing organisations will have to transition towards buying more credits from carbon removal projects.

What types of carbon credit should you buy?

When assessing carbon credits projects, it’s important to consider key quality criteria such as permanence (i.e. how long will the removed CO2 be stored), and additionality (i.e. would the project have happened without the revenue from carbon markets). Given that carbon credits are generated from different project types, they each have their own strengths and potential weaknesses. For example, efficient cookstove projects that reduce emissions often rely on estimates and modelling for the calculation of the emission reductions they have achieved, sometimes leading to inaccurate quantification of the impact they deliver. The VCM standards that issue the credits put measures in places to mitigate this risk, such as continuously updating the models which are used to quantify a project’s impact.

Because of this, it’s important that organisations have a balanced and diversified portfolio that spreads the risk. Partners like Drax can advise on this.

Why do we need carbon credits?

Carbon credits are one of the many solutions needed to combat climate change. The purchase of carbon credits helps direct funding to climate solutions that remove or reduce emissions that would not have happened otherwise. This therefore drives additional climate mitigation.

Ready for action?

In collaboration with our partner Notch (formerly CBN Expert), we’re currently working with a number of clients to help them with carbon accounting and in creating carbon mitigation plans. And with our product, Carbon Portfolio, you can select the right kind of carbon credit projects for your organisation.

Learn more about our partner offers

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