Carbon Credits Explained

What are carbon credits and why are they important?

  • A carbon credit (or “offset”) is a certificate representing one metric ton of carbon dioxide equivalent that is either prevented from being emitted into the atmosphere or removed from the atmosphere as the result of a carbon-reduction project. 
  • Carbon credits can be used by buyers to compensate emissions by financially enabling projects that avoid emissions or remove carbon dioxide.
  • Hence, carbon credits are an important market-oriented mechanism to reduce greenhouse gas emissions and tackle climate change.

How do carbon markets work?

  • Supply is created by project developers that develop an emissions avoidance/ reduction or removal project
  • Projects are certified by independent third-party auditors that validate against a methodology as defined by standard/ certification body (e.g. Verra, Gold Standard)
  • Buyers purchase and retire the credits so their impact can be claimed towards a climate target
  • Intermediaries bring supply and demand together and maintain records of the creation and sale of credits on central registries
  • Carbon pricing compares with other commodity pricing, ie. subject to market forces.  
  • Two type of markets:
    • Compliance markets are based on government regulations and allow firms to reduce emissions for compliance purposes 
    • Voluntary markets are non-regulated with participation based on self-imposed emission goals (have grown to 95 MtCo2e in 2020)

How can carbon credits be generated in agriculture?

  • Global farm decarbonization can reduce annual carbon emissions by up to 1 gigaton
  • Two ways to generate credits:
    • Additional emissions avoidance/ reduction, e.g. variable rate fertilization, controlled-release and stabilized fertilizers and improved fertilization timing 
    • Nature based sequestration e.g. trees in cropland, regenerative agriculture (low/ no till to maintain integrity of top soil structure) or cover crops
  • Besides additional revenues from carbon credits conservation practices increase yield and soil health

Published on: November 24, 2020