What are carbon credits?
Carbon credits are intangible, tradable assets that represent 1 tonne of CO2e removed (or prevented when it otherwise would have ended up in the atmosphere) from the atmosphere. Organisations can produce carbon credits when they can prove that their operations can remove / prevent 1 CO2e from the earth’s atmosphere following a complex calculation and audited process. These credits can then be traded with organisations that emit CO2e so they can reduce their net emissions either by law where these laws exist or voluntarily. This is achieved by buying and then retiring (deleting the carbon credit from existence so it can’t be used again) these carbon credits e.g. if your business emitted 1000 tonnes of CO2e in a year you could purchase 1000 carbon credits and retire them to become carbon neutral.
The four key myths:
Carbon credits are likely to cause businesses / individuals to stop reducing their emissions
The primary argument in regards to this statement is that if company x emitted 1000 tonnes of CO2e then they could buy and retire 1000 carbon credits and become carbon neutral without having to focus on reducing their emissions. The ideal situation would be that any individual and business would reduce as many of their emissions as possible before using carbon credits. From our experience is this the most common outcome as the majority of those who choose to offset do at as part of a well-balanced sustainability strategy. There will be many emissions that are very difficult and costly to avoid emitting such as air travel. It is key to remember that many of those deciding to offset their emissions are often doing it voluntarily. They are deciding to spend their own cash on reducing their carbon footprint when they could have provided that money to shareholders. This usually indicates that if a business if offsetting its footprint, it is highly likely that they are also actively engaging in reducing their emissions as well.
One of the key points that should be accounted for in carbon offsetting is that if a business is offsetting by law or voluntarily it provides them with a direct incentive to reduce their emissions. This is because they will be spending a fixed amount per tonnes of CO2e to purchase carbon credits and if they manage to reduce their emissions they can reduce their spending on offsets.
Let’s consider the business case for a company looking to install a solar panel to reduce the carbon footprint from their energy consumption. If this business is currently emitting 1000 tonnes of CO2e and offsetting this for £15 per tonnes that would cost the business £15,000 per year. If the business were to install solar panels that reduce their carbon footprint by 300 tonnes per year this would provide an additional saving of £4500 per year by reducing the need for the business to purchase carbon credits, this is on top of the money saved by generating cheap electricity. All of a sudden the business case for making this investment to reduce emissions provides a much larger return on investment and therefore would be more likely to happen for a business already offsetting their emissions.
Therefore, if you are already offsetting your emissions you should be more likely to invest in reducing your emissions.
*This though is dependent on a company setting a responsible internal carbon price investing in high quality carbon offsets.
Carbon credits don’t really achieve anything
Carbon credits are one of the most powerful tools available to combat climate change for two reasons:
- They create a market in which increased demand for carbon credits will increase the amount of CO2 removed from the atmosphere. This is because as demand for carbon credits increase, when individuals and businesses decide to offset their footprint, the price of carbon credits begins to increase due to increased supply scarcity. The net effect on this increase in price is that it provides incentive for the increased production of carbon credits and therefore an increase in the amount of CO2e that is removed from, or stopped from entering the atmosphere. This is common place now for tree planting projects that produce carbon credits; due to their high demand the price for these credits is high which is resulting in more investment into tree planting projects
- They directly incentivise technologies and projects that are reducing emissions / removing CO2e from the atmosphere by transferring money from those who emit to those who reduce / remove. I recently wrote an article that describes how carbon credits are impacting the automotive industry by incentivising the development of electric cars so please check this out: https://www.mycarbon.co.uk/blog/carbon-credits-and-tesla. This impact can potentially be massive…. TESLA is a perfect example of how carbon credits can help support businesses / technologies that can drive global change. They have proven to investors that electric cars can make them money and at the moment carbon credits provide a huge financial incentive for this.
Carbon credits are expensive
Carbon credits vary significantly in price. Credits produced by renewable energy projects are available in large quantities and therefore tend to be low cost. Credits produced by technologies that pull CO2 directly from the atmosphere tend to be very expensive as the technology is currently in its infancy.
As high cost technologies advance their cost will likely decrease which will could easily snowball into a mass uptake in vital technologies such as direct carbon capture or carbon storage. These are the technologies that will be vital to reversing a lot of the damage that greenhouse gas emissions have already caused and carbon credits are one of the most effective way of funding their development.
When deciding on a budget for carbon offsetting you should consider a few key questions.
- How much do I emit?
- How much money does my business make? If you are achieving high shareholder value (e.g. EPS) then you likely have money that can be invested in a higher price of carbon. Current trends indicate that investing in sustainability, emissions reduction and offsetting can provide additional shareholder value by increasing external investment into the business and therefore increasing share price.
- What's the price of carbon according to the country I operate in?
- What price of carbon do my competitors apply?
How can I trust a carbon credit?
As well as varying in price, carbon credits can also vary in quality. This can make it very difficult to decide on what to purchase. It is worth knowing that there are rigorous certification standards that define how carbon credits are measured and created. The most prominent certification standards for voluntary carbon credits include UN-CDM, Gold Standard and Verra-VCS. All of these standards have strict guidance on how credits should be measured and require clear evidence that the carbon credit results in a reduction or removal of 1 tonne of CO2e. All of these certification standards require independent review from a third party.
The decisions you should make when purchasing a carbon credit are:
- What certification standard does it adhere to?
- How much am I willing to pay? You can purchase a variety of credits at different prices to fit your budget.
- What projects would I like to support? Many project that produce carbon credits also have other social benefits as well.
More information on the robust principles that MyCarbon apply to selecting Carbon Credit projects can be found here:
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