Carbon Credit is Important
Whether you’re an individual or an entire company, carbon credits are a way to help combat climate change. Essentially, they act as a “permission slip” for companies to release greenhouse gases. They also help accelerate a broader transition to a lower-carbon future.
The voluntary carbon.credit market is gaining momentum. Many industry sectors are committing to net-zero targets and are looking for ways to hedge their financial risks associated with the energy transition. With more and more companies set to meet or exceed their targets, the voluntary market is expanding. This allows a greater pool of buyers to become accessible to farmers, ranchers, landowners, and individuals.
There are two main types of carbon markets, the regulatory and the voluntary. The regulatory market is the “cap and trade” market, in which emissions caps are set. Each year, a certain amount of credits are issued for each company that meets their emissions cap. However, some companies will produce more emissions than they’re allotted and will have to buy the remaining credits from another company. These credits can be traded in the same way that you’d trade stocks.
Why Carbon Credit is Important
There are also “compliant” or involuntary markets. These are markets that set limits on carbon emissions for a particular sector, such as electricity or transportation. If a company meets their cap, they may trade the credits in these involuntary markets. The prices of these credits are projected to reach $67 per metric ton by 2030.
There are many factors that affect the price of carbon credits. The geographic location of a project and the vintage of the credit all impact the price. The delivery time can also affect the price. The more credits that are traded at one time, the higher the price.
For example, one of the largest forest-based avoided-emissions projects in the world has prevented the release of 37 million tonnes of CO2. In addition to preventing the release of carbon dioxide, the project has saved 200,000 hectares of rare peat swamp forest. The project is also expected to provide one-third of the emissions reductions needed to align with the Paris Agreement.
The UN Sustainable Development Goals are driving the market for carbon credits. These goals include a reduction of emissions by at least half by 2050, improved forest management, and avoidance of deforestation. The market for natural climate solutions has grown rapidly, close to 50 percent per year. A project that has met these standards can trade at a premium to other projects.
The price of carbon credits depends on a variety of factors, including geography, project size, and the delivery time. Industrial projects tend to produce more credits than other projects, and are often more easily verified as GHG offsets. Community-based projects, on the other hand, are usually managed locally and often generate more co-benefits than industrial projects.
The voluntary carbon market is a crucial tool to reduce global warming. It can supplement companies’ efforts to reduce their carbon emissions or can even be used to create additional revenue.