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The Different Types of Carbon Credits

types of carbon credits

How much does one ton of carbon emissions cost? And we mean in dollars, not in detriment to the planet! It might seem strange to put a price on carbon pollution, but that’s the premise of the carbon credit system — and it works to combat climate change.

Carbon taxes encourage companies to limit their carbon emissions by putting a price on the amount of carbon produced. Carbon credits exist in carbon markets — where businesses either have regulated limits on how much carbon they can emit, or are trying to voluntarily reduce their ecological impact.

Predictable, limited carbon emissions… how do different types of carbon credits achieve these goals? Let’s find out together.

What are carbon credits?

There’s a lot to learn about carbon credits, let’s get started!

First, in a cap-and-trade system, there is a limit on how much carbon pollution a company can create — their allowable emissions. If that company emits more carbon than its allowance, it’s responsible for making up the difference by purchasing carbon credits.

Carbon credits are a tradable certificate that represents one ton of CO2e (carbon dioxide equivalent) taken from the atmosphere.

If it seems like the cap-and-trade system allows companies to buy or trade their way out of meeting their carbon emissions allotment, you’re not alone in your concerns. Fortunately, compliance carbon markets are highly controlled — and the price of a carbon credit is growing exponentially — making it easier and more profitable for corporations to just reduce their emissions.

Another benefit to carbon allowances is that the net carbon emissions are predictable, with some companies staying under and some going over. Over time, the regulatory body reduces the carbon allowances, ensuring businesses can keep pace and consistently reduce their carbon output year over year.

 And customers are taking notice; 92% think carbon-neutral products are more sustainable and of higher quality. That’s good news for sustainable businesses! Find out more about how carbon credits can help your business attract and retain more customers.

Carbon Credits vs. Carbon Offsets: What’s the difference?

Similar names, different concepts! Carbon offsets are carbon reduction projects that remove greenhouse gases from the atmosphere. Purchasing credits from carbon offsets (like the ones in our carbon offset services) is a popular way for eco-conscious businesses to reduce the harm done to the planet by their operations, while they work to improve their business practices and make them sustainable.

For buyers, it’s critical to purchase carbon offsets that have been approved by a third-party organization against verified carbon standards. That way, you can be confident you’ll have the impact you want. Here at Ecocart, we only support verified carbon projects that meet rigorous standards to give our clients that same peace of mind!

As we mentioned, carbon credits are a standardized unit to measure carbon emissions. Carbon credits are available for purchase in both compliance and voluntary carbon markets. So for example, a corporation operating in a compliance market meets its emissions target and uses all its carbon credits. That same corporation could still buy credits from carbon offset projects in the voluntary market to increase its impact! Many companies buy carbon offsets to further their corporate social responsibility (CSR) commitments or their environmental, social, and governance (ESG) goals.

types of carbon credits

What are the Different Types of Carbon Credits?

For the carbon credit connoisseur, it’s more important to know the two different carbon markets that credits are traded on! There is the compliance and voluntary market — and your location and industry determine whether you must participate in the compliance market. 

Global Compliance Market

Compliance markets are regulated systems where the government limits how much carbon industries can emit — AKA their carbon cap. Then, the companies in that industry must stay under the allowed amount.

If a company emits more carbon than its allowance, it can buy two different types of carbon credits — permits to pollute or reduction credits. Permits to pollute are hefty fees per excess metric ton that over-emitters can purchase from their government or other companies. Buying reduction credits — carbon credits produced by carbon offset projects — is more cost-effective and is generally the preferred option (reducing greenhouse gases and all that good stuff).

The Voluntary Carbon Market

The voluntary carbon market is similar to the compliance market — there are still rules and standards for what can be called a carbon credit and the validity of the carbon offset projects’ claims. But in the voluntary markets, anyone can buy carbon credit. Businesses, charities, and individuals can all participate in reducing global emissions!

Companies buy carbon credits created by carbon-sequestering projects — one credit still equals one metric ton of carbon removed from the atmosphere. Eco-aware organizations do this to meet their sustainability targets and reduce their carbon footprint.

Emission Reduction Credits (ERCs)

Emission Reduction Credits fall into two categories, removal and avoidance offsets. They could be generated from the same carbon project, but removal offsets are created from activities that pull carbon out of the atmosphere (like reforestation), while avoidance offsets reduce emissions by preventing the carbon from being released in the first place (like preventing deforestation).

So, where do these types of carbon credits come from? We’ll get into that next.

How Large is the Carbon Market?

The short answer? It’s huge — and it’s growing. There are 32 emissions trading systems or carbon markets globally with a market value of USD 270 billion. Not only that, carbon credits traded in 2021 had a market value of USD 851 billion — a 164% increase from the previous year. That’s a whole lot of carbon! 

According to the World Bank, those 32 emissions trading systems are in 39 nations, including Canada, Mexico, Brazil, Nigeria, the EU, China, and Indonesia, to name just a few. 

FAQs: Carbon Credits in the Economy

Who Issues Carbon Credits?

You might be wondering, where do these carbon credits come from? To answer that, we need to go way back in time to 1997 when the Kyoto Protocol established the carbon credit system. This put created quotas on how much greenhouse gasses countries can emit, with industrialized nations getting assigned caps. 

So to answer the question, carbon caps (not credits) are issued by governments or, in some cases, regulatory agencies. The United Nations’ Clean Development Mechanism (CSM), is one example of a non-government issuer. 

How to Produce Carbon Credits?

There are many ways to produce carbon credits, mainly through starting a verified carbon-capture project. Tactics like sustainable agriculture, reforestation, and “blue” carbon (the massive amounts of carbon stored in coastal and marine environments) can become verified as carbon credit creators.

How are Carbon Credits Verified?

Breathe easy, buyers of carbon credits. Carbon credit verification is becoming more and more standardized as the markets grow. The verified carbon standard developed by third-party organization Verra is a widely adopted program, along with the Gold Standard, and the American Carbon Registry. These organizations all require a rigorous assessment before the project is approved and can issue Verified Carbon Units (VCUs), using the same “one metric ton of carbon dioxide removed” scale as the carbon markets.

What is a Carbon Credit Company?

New markets mean new kinds of companies! There’s a need for companies that act as intermediaries between carbon offsetting projects and carbon credit consumers. It’s a bit like being a stock broker but for a carbon market — so you won’t be surprised to learn they’re called carbon brokers. Carbon brokers trade carbon “commodities” (credits or offsets), collecting payment from purchasing companies, and enabling the markets to run smoothly.  

What Companies can Sell Carbon Credits?

If you’re looking to invest in carbon credits, a number of companies can help you get started. Indigo Carbon, Nori, and Truterra Carbon Program are some companies selling carbon credits. You can also find carbon credit companies on Climate Action Reserve’s Carbon Market Directory.

Which Companies Buy the Most Carbon Credits?

In the California compliance carbon market, Walt Disney Company, Microsoft, and Salesforce lead the way in carbon credit purchases. That might change soon, as Shell pledged to become net zero emissions by 2050 and make a major investment in carbon offsets.

Who are the Biggest Carbon Traders?

The EU carbon market is definitely the busiest for carbon credit trading. Emissions trading systems (ETS) like ones in the European Union use the cap-and-trade approach — capping emissions at a specific amount per company and allowing over-polluters to buy unused credits from under-emitters.

Where do Companies Buy Carbon Credits?

That’s a great question — honestly, carbon credits are traded in markets, not unlike a stock exchange. For example, the Carbon Trade eXchange (CTX) is a trading platform for the voluntary market.

How Much do Companies Pay for Carbon Credits?

The cost of a carbon credit can vary due to the market; for example, the low availability of unused credits in a compliance cap-and-trade market could drive the price up. Also, regulators are slowly increasing the cost over time as the allowance for emissions is reduced to ensure businesses are constantly improving their ability to reduce their carbon footprint. Also, some people trade credits to turn a profit, just like any market, so be careful to research the effective carbon rates before your company makes a purchase!

Can Individuals Purchase Carbon Credits?

You sure can! Any eco-conscious person can participate in the voluntary market and purchase carbon credits.

types of carbon credits

Challenges and Opportunities for Global Adoption of Carbon Credits

It’s true, as with any emerging industry, that there are challenges to the carbon pricing uptake globally. Let’s look at what you need to know next.

Defining Shared Principles 

While most carbon pricing schemes agree on the unit of measurement — one metric ton — some of the rest is up in the air. With a proliferation of carbon credit companies, carbon offset projects, and multiple ways to become verified, it’s no wonder businesses are confused. Climate advocates at verification companies and international conferences such as COP27 are pushing for the industry to decide on one global standard before governments get involved!

Standardizing Terms Across contracts

And there are a lot of terms! Some carbon credit brokers sell their version of a carbon credit, like Nori’s “Nori Carbon Removal Tonnes” (NRTs). Others are just credits. But it does make it more complicated to comparison shop!

Maintaining Market Integrity

This is a big one. Without consistent verification integrity, it won’t be long until fake or intentionally misleading carbon credits proliferate the market, breaking trust in the system and possibly undoing the work of the Kyoto and Paris accords that pushed for carbon pricing in the first place. Eco-conscious businesses can’t let this happen! As purchasers of carbon credits, we should also have a voice in regulations as they change. 

What can Businesses do to Help Lower Carbon Emissions? 

Knowledge is power! You can use a tool like EcoCart’s carbon footprint dashboard to uncover the sources of excess carbon emissions that can be eradicated from your business. Or check out eco-friendly apps that can help reduce your brand’s carbon footprint. It’s true that businesses that invest in sustainability see an increase in new and returning customers; learn more about how we can tighten your relationship with customers.  

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