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Carbon Credits

My nutshell analysis of carbon credits is a form of controlling participation in the reduction of the carbon footprint that is destroying our planet. Greater participation in its reduction will have significant advantages for future generations.

In layman terms, carbon credits could be considered one more problem for companies that emit excessive carbon dioxide or other greenhouse gases into the atmosphere. Carbon credits, also known as carbon offsets, are permits that allow the owner to emit a certain amount of carbon waste. One credit permits the emission of one ton of carbon dioxide or the equivalent in other greenhouse gases. The carbon credit is half of a so-called cap-and-trade program.

We face a stark reality. We urgently need to slash greenhouse gas emissions to avoid the worst impacts of climate change, but this alone will not be enough to keep global temperatures in line with the Paris Agreement goals.

To hold global temperatures below 1.5°C above pre-industrial levels, the latest science shows we will need to reach net zero emissions globally by 2050 and net negative emissions after that. Achieving this will require accelerating emissions reduction efforts as well as removing carbon directly from the atmosphere.

Getting to understand Carbon Credits, Offsets, and Markets

The Kyoto Protocol of 1997 and the Paris Agreement of 2015 were international accords that laid out international CO2 emissions goals. With the latter ratified by all but six countries, they have given rise to national emissions targets and the regulations to back them.

With these new regulations in force, the pressure on businesses to find ways to reduce their carbon footprint is growing. Most of today’s interim solutions involve the use of the carbon markets.

What the carbon markets do is turn CO2 emissions into a commodity by giving it a price.

These emissions fall into one of two categories: Carbon credits or carbon offsets, and they can both be bought and sold on a carbon market. It’s a simple idea that provides a market-based solution to a tricky problem.

The terms carbon credits and carbon offsets are frequently used interchangeably, but carbon credits and carbon offsets operate on different mechanisms.

Carbon credits, also known as carbon allowances, work like permission slips for emissions. When a company buys a carbon credit, usually from the government, they gain permission to generate one ton of CO2 emissions. With carbon credits, carbon revenue flows vertically from companies to regulators, though companies who end up with excess credits can sell them to other companies.

Offsets flow horizontally, trading carbon revenue between companies. When one company removes a unit of carbon from the atmosphere as part of their normal business activity, they can generate a carbon offset. Other companies can then purchase that carbon offset to reduce their own carbon footprint.

Note that the two terms are sometimes used interchangeably, and carbon offsets are often referred to as “offset credits”. Still, this distinction between regulatory compliance credits and voluntary offsets should be kept in mind.

Credits and offsets form two slightly different markets, although the basic unit traded is the same – the equivalent of one ton of carbon emissions, also known as CO2e.

It’s worth noting that a ton of CO2 does refer to a literal measurement of weight. Just how much CO2 is in a ton?

The average American generates 16 tons of CO2e a year through driving, shopping, using electricity and gas at home, and generally going through the motions of everyday life.

To further put that emission in perspective, you would generate one ton of CO2e by driving your average 22 mpg car from New York to Las Vegas.

Carbon credits are issued by national or international governmental organizations. Mentioned above the Kyoto and Paris agreements created the first international carbon markets.

You might ask if carbon credits are mandatory? There is no regulation that mandates companies to purchase carbon offsets. Doing so is going above and beyond, particularly for companies operating where cap-and-trade programs don't exist yet.

Cap-and-trade is a system that limits aggregate emissions from a group of emitters by setting a “cap” on maximum emissions. It is characterized as a market-based policy to reduce overall emissions of pollutants and encourage business investment in fossil fuel alternatives and energy efficiency.

The best climate policy, environmentally, and economically limits emissions and puts a price on them. Cap-and-trade is one way to do both.

A carbon market allows investors and corporations to trade both carbon credits and carbon offsets simultaneously. This mitigates the environmental crisis, while also creating new market opportunities.

There are many different types of businesses that can create and sell carbon credits by reducing, capturing, and storing emissions through different processes. Some carbon offsetting projects currently in operation include:

  • Renewable energy projects

  • Improving energy efficiency

  • Carbon and methane capture and sequestration

  • Land use and reforestation

Renewable energy projects are in many countries around the world; territories blessed with a natural wealth of renewable energy resources. Countries such as Brazil or Canada that have many lakes and rivers, or nations like Denmark and Germany with lots of windy regions.

Energy efficiency improvements complement renewable energy projects by reducing the energy demands of current buildings and infrastructure. Even simple everyday changes like swapping your household lights from incandescent bulbs to LED ones can benefit the environment by reducing power consumption.

Carbon and methane capture involves implementing practices that remove CO2 and methane (which is over 20 times more harmful to the environment than CO2) from the atmosphere.

Land use and reforestation projects use Mother Nature’s carbon sinks, the trees and soil, to absorb carbon from the atmosphere. This includes protecting and restoring old forests, creating new forests, and soil management.

Plants convert CO2 from the atmosphere into organic matter through photosynthesis, which eventually ends up in the ground as dead plant matter. Once absorbed, the CO2 enriched soil helps restore the soil’s natural qualities – enhancing crop production while reducing pollution.

To offset carbon emissions there are several ways to arrive at such a conclusion and a few of these ideas are explained below:

  • Investing in renewable energy by funding wind, hydro, geothermal, and solar power generation projects, or switching to such power sources wherever possible.

  • Improving energy efficiency across the world, for instance by providing more efficient cookstoves to those living in rural or more impoverished regions.

  • Capturing carbon from the atmosphere and using it to create biofuel, which makes it a carbon-neutral fuel source.

  • Returning biomass to the soil as mulch after harvest instead of removing or burning.

This practice reduces evaporation from the soil surface, which helps to preserve water. The biomass also helps feed soil microbes and earthworms, allowing nutrients to cycle and strengthen soil structure.

  • Promoting forest regrowth through tree-planting and reforestation projects.

  • Switching to alternate fuel types, such as lower-carbon biofuels like corn and biomass-derived ethanol and biodiesel.

Corporate Social Responsibility (CSR) plays an important role as consumers are increasingly aware of the importance of carbon emissions. Consequently, they’re increasingly critical of companies that don’t take climate change seriously.

By contributing to carbon offset projects, companies signal to consumers and investors that they’re paying more than just lip service to combat climate change. For many companies, the CSR benefit can often outweigh the actual cost of the offset.

One big advantage with carbon offsets is if a company is selling them, they can be a significant revenue stream! The greatest example is Tesla electric cars who sold carbon credits to legacy car manufacturers to the tune of $518 million in just the first quarter of 2021.

That’s a huge deal, and it’s single-handedly keeping Tesla out of the red. If the market for carbon credits continues to go up, and the pricing of credits keeps increasing, Tesla and other environmentally beneficial businesses could reap huge dividends.

Carbon offsets can’t actually guarantee reduced emissions of CO2; however, reputable carbon offset organizations choose carbon projects carefully and report on them meticulously, and third-party auditors can help ensure such projects measure up to strict standards like those established by UN’s Clean Development Mechanism.

If properly vetted, “high-quality” offsets represent tangible, measurable amounts of reductions in CO2 emissions that companies can use like they reduced their own greenhouse gas emissions themselves.

One specific company, Doji UK (used device tech trading platform) doesn’t reduce their own emissions, but the world is just as well off as if they had actually done so. This makes their operation more environmentally friendly, as the firm contributes to improving the atmosphere via carbon offsetting through the climate action of buying and planting trees with One-Tribe-Global.

The government is putting heavy caps on greenhouse gas emissions, meaning that companies will have to reconfigure their operations to reduce emissions as much as possible. Those that cannot be eliminated will have to be accounted for through the purchase of carbon credits.

Companies like Doji that will be opening its Brazilian branch of business this year, offers reliable sustainability, as the company buy and sell used mobile phones which is making an enormous impact on reducing the carbon footprint.

Have a terrific day!

Prof. Carl Boniface

Vocabulary builder:

In layman terms (idiom) = simple language that anyone can understand. “The process was explained to us in layman's terms.” Cap and trade = is an emissions trading program. The government regulates carbon dioxide emissions and other pollutants. Then, the government uses market forces to ensure that industries go green.

Mulch (n) = material (such as decaying leaves, bark, or compost) spread around or over a plant to enrich or insulate the soil.

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