Carbon Credits – What Is Their Role in Combating Climate Change?
Mitigating and preventing climate change are goals that require decisive and large-scale action. One of the key elements of the global strategy to reduce greenhouse gas emissions is the Carbon Credit system. It serves as an incentive mechanism that promotes the use of renewable energy and reduces the negative environmental impact of businesses.
Carbon Credits – What Are They and How Do They Work?
The idea of controlling carbon dioxide emissions into the atmosphere was born in the 1980s in the United States when The Clean Air Act was passed in 1977. However, it took another 20 years for global regulation. In 1997, under the Kyoto Protocol, the United Nations established the first environmental credit trading system. The treaty expired in 2020, and its principles are now continued under the Paris Agreement.
Carbon Credits, also known as Carbon Offsets or Carbon Allowances, are a way to compensate for carbon dioxide and other greenhouse gas emissions. The system operates by reducing emissions, removing pollution, or avoiding it to offset emissions in another location.
One could say that Carbon Credits are a form of payment companies make for emitting greenhouse gases. The issued certificates can be traded and purchased by other market participants. One carbon credit corresponds to a reduction of one metric ton of greenhouse gas emissions (carbon dioxide or another gas with a similar level of harmfulness).
Depending on the program a company participates in, the reduction labels may vary, such as VER (Verified Emission Reduction) or CER (Certified Emission Reduction).
A buyer of a reduction certificate gains the right to emit a certain amount of greenhouse gases into the atmosphere. In other words, if a company wants to pollute the environment, it must first pay for it.
It is worth noting that the carbon emissions trading system is still not widely used worldwide. As of 2022, most European countries (including Poland), as well as the United States at the state level, Mexico, China, and even small New Zealand, had implemented it. However, it has not been adopted in African countries, Russia, or Australia. Alongside the European CO₂ emissions trading market, several other similar initiatives have emerged globally:
- Australia has implemented the Emissions Reduction Fund,
- Singapore has introduced the AirCarbon Exchange,
- Japan has adopted the Joint Crediting Mechanism and J-Credit at the national level, with additional emission restrictions in individual prefectures.
Carbon Credits – Explanation of Mechanisms and Benefits
The mechanism behind Carbon Credits is quite simple. The United Nations grants each country a certain number of carbon credits. The government of a given country is responsible for monitoring, allocating credits, and regularly reporting on the situation in this area. Each company can emit a limited amount of greenhouse gases before having to pay for additional certificates. If it turns out that a company has purchased more than it needs, the excess Carbon Credits can be sold. This system is known as Cap and Trade.
A significant distinction must be made between Carbon Credits and Carbon Offsets. Credits are issued by governments to businesses and are traded only in regulated markets. In contrast, Carbon Offsets are bought and sold by companies within decentralized markets, known as VCM (Voluntary Carbon Market).
What Are the Goals of Carbon Credits and How Do They Help Reduce Emissions?
The benefits of the carbon credit system can be considered on several levels. First and foremost, it promotes environmentally friendly initiatives. Companies are beginning to realize that it is better to invest in renewable energy than to rely on conventional sources, achieving the same economic outcome with a lower environmental cost. Indirectly, Carbon Credits facilitate the implementation of ESG strategies and help achieve social and environmental goals.
The drive to reduce greenhouse gas emissions also contributes to protecting nature and biodiversity. It is now widely understood that polluted air is harmful not only to humans but also to forests, bodies of water, and the organisms that inhabit them. The funds obtained from Carbon Credits sales also create opportunities for business development and the implementation of innovative technologies.
How Can Companies Use Carbon Credits to Achieve Carbon Neutrality?
In principle, implementing a Carbon Credit system is voluntary. However, it should be considered primarily by companies that have committed to a specific greenhouse gas reduction target. For some market participants, it may be mandatory, particularly for industries that emit large amounts of pollution, such as oil refineries.
Companies buy Carbon Credits primarily to legally produce more carbon dioxide and other greenhouse gases. If a business intends to grow in a way that is harmful to the environment, it will have to pay for it. They also purchase offsets to be able to market themselves as organizations meeting zero carbon emission challenges. More and more business partners and individual customers pay attention to such credentials.
Proper corporate management through investments in green infrastructure allows a company to generate revenue by selling excess carbon credits to competitors struggling to meet emission standards. A notable example of such a transaction is Tesla's record-breaking profit, which in 2022 generated nearly $2 billion in revenue through carbon credit sales.
Of course, you might wonder who actually receives the money from selling carbon credits. In the case of Carbon Credits, the transaction is conducted between two companies, so the funds go to the seller. In the case of Carbon Offsets, the financial boost goes to the entity sponsoring a given project.
Criticism and Challenges of Carbon Credits – What You Should Know?
Although the carbon credit system may seem foolproof, it is not without flaws. Its fundamental weakness is that the prices of certificates and offsets are largely dictated by geopolitical and economic conditions.
During economic booms, when companies are growing rapidly, the prices of emission permits can rise. Conversely, an economic slowdown leads to lower certificate prices. Local legislative actions also influence the value of Carbon Credits and Carbon Offsets. Governments can either restrict or support business development, indirectly affecting the value of certificates.
For some companies, trading Carbon Credits is a means of compliance and survival; for others, it is a lucrative business opportunity. In the grand scheme of things, such initiatives seem to contribute positively to environmental protection.
If you want your company to become part of the carbon emissions trading market or the VCM, contact us. We will help you plan your business development strategy.
