What are carbon credits?
Carbon credit is a certifiable instrument, representing 1 metric tonne of CO2 or an equivalent amount of greenhouse gas (GHG) emissions avoided, reduced or removed from the atmosphere. Carbon credits can be generated using certifiable practices that ensure integrity and permanence of climate projects.
There are two types of carbon credits defined by (1) Certified emission reduction (CER), which relies on carbon credits created through a regulated framework or (2) Voluntary emission reduction (VER), which is exchanged on voluntary markets and has low level or emerging regulation depending on the country.
What is the difference between Certified Emission Reduction (CER) credits and Voluntary Emission Reduction (VER) credits?
Certified emission reduction units (carbon credits) are closely regulated by the appointed bodies, which monitor compliance arising from the Kyoto protocol. EU implemented monitoring, reporting, and trading of CER units under the European Union Emission Trading Scheme (EU ETS). Participation in EU ETS is mandatory for certain industries and organizations due to their level of carbon footprint, e.g. power stations, oil refineries, offshore platforms and industries that produce iron and steel, cement and lime, paper, glass, ceramics and chemicals.
As voluntary emission reduction units (carbon credits) are mined, reported, registered, and monitored by voluntary participants of ecosystem, who are acting according to regulations defined by NGOs such as Gold Standard etc. No industries or organisations are obliged to develop or trade VER carbon credits. However over recent years, due to high demand from customers and society, many organizations are aiming to become carbon neutral. Therefore, VER carbon credits is a solution for organization, which cannot avoid or reduce their carbon footprint.
Who certifies and issues carbon credits?
Carbon credit development path involves multiple parties, which are responsible for a specific function in the value chain. It consists of the following parties: project developers, auditors, verifiers and marketplaces (optional).
Project developers
Project developers define the project scope, which also includes the plan on CO2 savings, impact on society and contribution to other SDGs. Project developers can be both profit and non-profit organizations.
Auditors
Auditors are being contracted by project developers, with a role to visit project development site, make an assessment, check documentation, and provide their opinion on achieved results. Auditors are conducting their work based on methodologies provided by verifiers. Auditors are usually certified consultants, acting in the field of environmental protection.
Verifiers
Verifiers are NGOs, such as Verra or Gold Standard, who are assessing and verifying documentation provided by project developers including audit reports. Verifiers certify and issue carbon credits with an indication of their contribution to SDGs. Verifiers also act as a central regulator, which stores database of registered carbon credits and retired carbon credits.
Marketplaces
Marketplaces are publicly accessible organizations, which provide a possibility to select, acquire and retire carbon credits. They are connecting project developers with potential buyers and retiring carbon credits in case a transaction happens.
How to buy carbon credits?
Carbon credits can be acquired via multiple sources, including verifiers. However, each of them has its pros and cons and usually are designed for a different buyer, depending on required quantities and know-how of the ecosystem. Comparison of the most known channels is provided below.
Project developers
Project developers are the ones, who hold initially developed carbon credits. They provide a possibility to acquire credits. Clients, themselves can choose a project developer, reach out to them, and enquire on the availability of credits and their quality.
Additionally, there is a possibility to acquire/agree on future acquisition of carbon credits to be delivered sometime in the future. Such purchases are structured via “Emission Reduction Purchase Agreements” (ERPAs). This allows the client to secure supply in the long-run and lock the price.
As primary objective of project developers is to focus and deliver projects, most of them do not have specialized/online solutions or dedicated salespeople, who can organize a smooth sales process. Also, usually they do not sell small quantities.
Verifiers
You can acquire carbon credits directly from verifiers. They provide you with a possibility to acquire small quantities (e.g. 1), however, there are no possibilities to acquire credits from projects verified by other verifiers. Also they do not provide additional level of project filtering. Buyers have to decide which project to support themselves.
Marketplaces
Marketplaces provide you with the possibility to source different credits, from different projects, with different SDG contribution and verified by different verifiers. Some marketplaces provide additional value-added services, such as:
Additional screening of projects. Some of them have developed methodologies, on how to select the projects and credits based on their value, contributions and delivered benefits.
Proposing a combination of credits matching different client needs.
Additional quality check on projects developed. E.g. some of the marketplaces are also doing an additional layer of post-implementation screening on how projects are doing after delivery.
Carbon credit exchanges
Carbon credit exchanges are more of a financial institutions, which are focusing on providing the platform for derivative trading of carbon credits. This channel is designed more for an investor, who is focusing on carbon credits as an asset class, betting on price fluctuations. Usually, investments /acquisitions of a single project developed carbon credits are not possible. Large quantities are possible and this comes with extra transaction fees.
Carbon credit acquisition channels
Marketplaces could be the base channel for a standard organization to acquire carbon credits, and get consultations, however, this usually comes with an additional transaction or consulting fees.
How to retire carbon credits?
It is not enough only to buy credits, you have to retire them as well. Retiring means, indicating to the verifier, that these credits were bought by a party and that party wants to retire them or “write-off” as nobody else would be able to retire them once again. Carbon credit retirement is being done in a verifier database, depending on which verifier registered carbon credit.
So, depending on the channel during which carbon credits were acquired, there is also a need to check how retirement is being done. Some platforms retire themselves on behalf of clients, some sellers do not provide these services. When retiring credits, there is a need to make sure, that credits are being retired for the party who actually acquired the credit also indicating the purpose.
If you want to retire your credits yourself, you can do it yourself, however, this requires having an account with a verifier and this costs an additional annual fee approx. 500 USD.