What is a carbon credit?

A carbon credit is a term for any tradable credit or allowance representing the right to emit one tonne of carbon dioxide equivalent (tCO2e) into the atmosphere.

How are carbon credits generated?

Carbon credits can originate from GHG emission reduction projects that deliver measurable reductions in emissions generated by renewable energy, energy efficiency gains, methane destruction activities, etc. Eligibility of project types is dependent upon the type of carbon standard that is applied to certify realised GHG emission reductions. Under the Kyoto Protocol, carbon credits can also represent allowances that are linked to national registries and can be traded between entities with emission reduction obligations.

What is a carbon market?

A carbon market is a market created from the trading of carbon credits to encourage or help countries and companies to meet their compliance or voluntary GHG emission reduction target in a cost-effective way.

What is the compliance carbon market?

The compliance carbon market is regulated by international agreements defined under the United Nations Framework Convention on Climate Change (UNFCCC). In 1997, the Kyoto Protocol to the Convention was adopted, setting the stage for the development of three ‘flexible mechanisms’ – Joint Implementation (JI), the Clean Development Mechanism (CDM), and emissions trading schemes (ETS). Jointly, these mechanisms make up the largest environmental market in the world and serve to help countries meet their emission reduction obligations by enabling transfers of carbon credits.

What is the voluntary carbon market?

The voluntary carbon market relates to transactions in carbon credits that fall outside the compliance schemes created under the Kyoto Protocol and the EU ETS. Demand for voluntary emission reductions (VERs) is driven by companies that pursue voluntary greenhouse gas emissions targets and intend to demonstrate climate leadership within the industry. The leading market standards in terms of transaction volume are the Verified Carbon Standard (VCS) and the Gold Standard.

How are GHG emission reductions monitored?

Each carbon standard imposes monitoring methodologies that set out the approach for calculating the emission reductions associated with a specific intervention. Methodologies can include parameters that are fixed upfront (defaults) as well as parameters that need to be monitored over the lifetime of the project activity. Across larger programmes, sampling of data points can be applied to reduce the costs associated with monitoring activities. Monitored performance data is compared against a baseline scenario, which is the scenario that reasonably represents the anthropogenic emissions that would occur in the absence of the proposed project activity (i.e. the business-as-usual scenario).

How are carbon credits issued?

Each carbon standard imposes its own procedures relating to the issuance of carbon credits. Information gathered through periodic monitoring activities is required to be submitted in a monitoring report. To ensure consistency, conservativeness and accuracy, this report is subsequently verified by a third-party auditor. When all eligibility criteria have been met, a positive verification opinion is then issued to the governing body of the respective carbon standard, which makes the final decision and issues carbon credits to the account of the project sponsor.

What is CORSIA?

The Carbon Offsetting and Reduction Scheme (CORSIA) is a market-based compensation scheme developed by the International Civil Aviation Organization (ICAO) and adopted in October 2016. The scheme aims to stabilise net CO2 emissions from international aviation from 2020 onwards by allowing covered airlines to compensate their emissions through the purchase of carbon offsets. The initial two phases of the scheme are voluntary; from 2027 onwards, the scheme becomes mandatory for all international flights occurring between ICAO member states.

What is Article 6?

Article 6 of the Paris Agreement provides countries with a framework for cooperation in their efforts to limit climate change, including through the proposal of two key market-based mechanisms. The first, article 6.2, details a mechanism by which countries which overachieve their NDCs can ‘sell’ excess outcomes to another party that is falling short of its goals. The second, 6.4, proposes the creation of an international carbon market to replace the current Clean Development Mechanism, which would facilitate the trading of emissions reductions created anywhere across the globe by the public or private sector.

What is the CBAM?

The roadmap of the European Green New Deal foresees the introduction of a Carbon Border Adjustment Mechanism (CBAM) – an import tax proportionate to the carbon content of goods imported from countries without adequate carbon pricing – in order to guard against carbon leakage.