Fighting the Climate Crisis with Carbon Credits

Who participates in the carbon market?

Carbon credits can be traded on voluntary or compliance carbon markets.

In voluntary markets, organizations decide on their own to compensate for their carbon footprint.

In compliance markets, demand is driven by government’s mandatory emission reduction requirements.

The voluntary market relies on a complex ecosystem to develop and validate credit-generating activities. These include project developers, project validators, carbon standards bodies, carbon traders and bodies which govern the use of credits by purchasers.

The absence of a single regulatory authority has resulted in carbon credits of variable integrity and quality. Article 6 of the Paris Agreement, which envisages the creation of an international carbon market governed by a United Nations body, will be a crucial driver of future carbon market development.

What is a “high quality” carbon credit?

A number of initiatives seek to bring greater coherence and integrity to voluntary carbon markets. Among them, the Integrity Council for Voluntary Carbon Markets (ICVCM) aims to establish a global benchmark for high integrity, proposing that carbon credit-generating activities should deliver:

• Additionality: Prove that the mitigation activity would not have happened without carbon credit revenues;
• Permanence: Prove that carbon avoidance or removal will be sustained over time,and any reversals will be compensated;
• Robust governance: Provide transparency and accountability to the market;
• Robust quantification: Use conservative approaches and sound science to measure impacts;
• Safeguards: Consider and mitigate impacts on people and the environment while delivering positive sustainable development impacts.

Who buys carbon credits?

Corporations are the main purchasers of credits on voluntary carbon markets. Demand is generated by companies committed to achieving net zero emissions—in other words, balancing the amount of carbon they emit with the amount they remove. As of 2022, over 4,000 companies have committed to net zero targets.

Countries will be an additional source of demand for carbon credits. Sweden, for example, has taken on very ambitious climate targets (achieving “net-zero emissions by 2045), but envisages achieving some of this by supporting “emission reduction efforts outside of Sweden.”

International sectors such as airlines could be another source of demand, as could individuals seeking to reduce their own carbon footprints.

More than 6,500 coal plants are in operation across the world, and at least 941 more are in planning stages. According to our calculations, these would emit 273 billion tons of carbon dioxide combined over their normal operational lifetime of about 40 years. Some 80% of these coal plants are in emerging economies.

Accelerating the transition from dirty to clean power at a rate that averts climate disaster will require catalyzing private finance in emerging and developing economies. Harnessing the power of carbon markets is one such potential solution. If a single coal plant could be mothballed and replaced with clean power decades ahead of its planned retirement date, tens of millions of tons of carbon dioxide emissions would be avoided.

Monetizing these savings by selling them as carbon credits would be instrumental in getting the first replacement projects across the line. These credits would have to reflect real, verifiable emissions reductions, and some of the revenue could be directed to affected workers and communities.