What are carbon credits?
Definition of carbon credits
As the possibility of universal carbon pricing and a single, international market become ever more likely, a growing number of independent companies are looking to get ahead of the trend and do their part to reduce carbon emissions by participating in voluntary carbon regulation and credit trading.
A carbon credit is a generic term for any tradable certificate or permit representing one tonne of emitted carbon dioxide or the equivalent amount of a different greenhouse gas.
There are two types of carbon credits:
- National or regional emissions trading schemes like EU-ETS in European Union
- Voluntary Carbon Markets (the one we focus on this article)
Voluntary carbon market is a type of carbon credit system that allows businesses and individuals to offset their carbon footprints by investing in projects that reduce or capture greenhouse gas emissions. These projects can include anything from nature-based solutions to developing decarbonization solutions. The credits that are generated can then be sold on a voluntary basis to businesses and individuals looking to offset their own emissions, after reduction measures.
The idea behind carbon credits is to make carbon a tradable asset, to create an incentive to emitting businesses to reduce their footprint, and help decarbonization solutions to deploy. At present, the price of carbon offsets — where organizations compensate for their own emissions by purchasing credits issued by emission reduction projects — remains "unsustainably low" thanks to a surplus of credits on the voluntary carbon offset market built up over many years, according to the study.
Why carbon credit are used for financing low carbon projects?
Carbon credits are a type of market-based mechanism used to finance low carbon projects and help countries meet their emissions reduction targets. Carbon credits are generated when a project reduces emissions or sequesters carbon dioxide. These credits can then be traded in a carbon market, with the proceeds used to finance further low carbon projects.
There are 3 main reasons why carbon credits are used to finance low carbon projects and reduce carbon footprint.
- Firstly, they provide a financial incentive for businesses and individuals to invest in low carbon technologies.
- Secondly, they help to spread the financial burden of reducing emissions across the economy, rather than placing it all on the shoulders of a few businesses or individuals.
- Thirdly, they create a market for low carbon technologies and business, stimulating innovation and investment in this important area.
What determines the price of a carbon credit?
Difference types of carbon credit price
It is important to note there is no define carbon credit price for voluntary carbon markets. However, some benchmarks in tradable schema exists. The 3 most common carbon prices are
- The European Union Allowance (EUA) price for the European Union Emissions Trading Scheme (EU ETS)
- The Chicago Climate Futures Exchange (CCFE) price, good benchmark in the US
- The New York Mercantile Exchange (NYMEX) price, second good benchmark in the US
In the voluntary carbon market, we can define 4 categories:
- Old Clean Mecanism Development credits between 3 and 5€ per ton (few left)
- Nature-Based projects in Africa, Asia or South America between 10 and 20€ per ton
- Decarbonization projects in Europe or North America between 25 and 75€ per ton
- Most ambitious Carbon Dioxide Removal (CDR) solution between 150 and 700€ per ton
Cobenefits impact in carbon credit price
While the primary objective of a carbon credit project is to reduce greenhouse gas emissions, the cobenefits can have a significant impact on the price of the carbon credits. This is because the price of carbon credits is based on the carbon dioxide equivalent emissions reductions that are achieved by the project. Co-benefits are often the deciding factor in carbon offset purchases.
If a project achieves significant emissions reductions, but also delivers significant cobenefits, then the price of the carbon credits will be higher. This is due to the fact that the carbon credits are worth more because they are delivering more environmental benefits.
Cobenefits can therefore have a significant impact on the price of carbon credits. This is something that should be considered when developing carbon credit projects.
Sectors and regions can also have a big impact on price, as it is obviously more expensive to decarbonize mobility in France than plant trees somewhere else. However, for a mobility business, it makes more sense to participate to its sector decarbonation.
Carbon credit evolution price over time
The price of carbon credits has varied over time, depending on the market conditions and the needs of the buyers and sellers.
In the early 2000s, the price of carbon credits was around $5 per ton, but it rose to around $30 per ton in 2008. The price of fell back to around $5 per ton in 2009 due to CDM projects oversupply, but it has since risen again and is now around $20 per ton.
Since the last 3 years, we can observe a clear increase of average carbon credit price. The price is expected to continue to rise in the future as the demand for carbon credits increases and the supply has difficulty to scale.
Why is it important not to buy cheap carbon credit?
Expensive carbon credits enables the development of importants low carbon projects
The lack of high cost of carbon credits has been a barrier to the development of important low carbon projects. However, the recent increase of the overall carbon pricing scheme is expected to enable the development of these projects.
This new carbon pricing scheme will help putting a price on carbon emissions from major industry sectors. This will provide an incentive for companies to invest in low carbon technologies and projects. It is expected that the revenue from the carbon pricing scheme will be used to fund low carbon projects.
The development of low carbon projects is essential in order to meet our emissions reduction targets. For example, the development of low carbon transportation options is essential in order to reduce emissions from the transportation sector.
Internal carbon price accelerate low carbon transition for companies
As the world progresses towards a low carbon future, companies are under increasing pressure to decarbonize their operations. One way to incentivize companies to accelerate their low carbon transition is to implement an internal carbon price.
An internal carbon price is a fee that a company charges itself for its carbon emissions. This price signals to the company that emitting carbon has a cost, and encourages the company to find ways to reduce its emissions.
There are many benefits to implementing an internal carbon price.
- It creates a financial incentive for companies to invest in low carbon technologies and processes.
- It also sends a strong signal to the market that the company is committed to a low carbon future.
Implementing an internal carbon price is not without challenges. There is often resistance from within companies, as it can be seen as a tax on profit. Additionally, setting an appropriate carbon price can be difficult.