Carbon Credits

Greenhouse gas emissions must fall by 43% compared with 2019 levels to restrict climate change to a 1.5°C rise in global temperature. Currently the combined Nationally Determined Contributions (NDCs), countries’ climate pledges under the Paris Agreement, would mean only a 10% greenhouse gas emission cut, putting the world on track for 2.5°C.

It is also clear that public funds won’t be enough to finance developing countries’ NDCs. Therefore most emission reduction activities need to be implemented and financed by the private sector. In recognition of this reality, Article 6 of the Paris Agreement was introduced.

GHG emission reductions or removals achieved through Voluntary Carbon Market (VCM) projects are captured by national GHG inventories, and VCM activities can assist countries to meet their Nationally Determined Contributions (NDCs) under the Paris Agreement.

Mitigating Emissions In The Short To Medium Term

One way organizations can offset their remaining emissions (carbon liabilities) is by purchasing carbon credits from ecological projects that are transparent and auditable. These projects include initiatives such as tree planting, carbon sequestration, and renewable-energy generation.

A liability, or debit, is a mtCO2e emission in the atmosphere. The Greenhouse Gas Protocol defines a standard by which an organization must allocate and reconcile GHG emissions across different scopes, often tied to a product or organizational standards. See GHG Protocol.

Definition

A carbon credit represent a certain amount of emissions (normally 1 mtCO2e) that have been reduced or avoided through these projects. By purchasing these carbon credits, organizations can offset their remaining emissions and support efforts to reduce atmospheric carbon dioxide (CO2) levels and mitigate climate change. This can be done voluntarily, and organizations can choose the projects they want to support based on their reputations and the verifiability of their emissions reductions.

VCM's allow companies and individuals to offset their carbon emissions by purchasing carbon credits from projects that reduce or avoid greenhouse gas emissions. This can support the transition to a low-carbon economy and provide a financial incentive for organizations to reduce their emissions.

The inclusion of “[voluntary] internationally transferred mitigation outcomes” within Article 6 of the Paris Agreement officially recognizes the complementary role that the VCM can play in global mitigation efforts within the framework of international cooperation. Currently the main instruments in sustainable finance markets and the VCM: green bonds, carbon forwards, and carbon credits.

The VCM is complex and chaotic due to a lack of standards,. Some emerging verification standards exist, such as Verra who has certified over 1,800 Verified Carbon Standard projects, but none have achieved the scale to span isolated regional exchanges and create an interoperable global marketplace.

Each carbon credit represents the reduction of one metric tonne of carbon dioxide or equivalent greenhouse gas (GHG) emission.

DLT and Blockchain Provides A Solution

Carbon credits based on blockchain enable better market access and price transparency by helping sustainable-minded investors to access the fragmented carbon market that still largely relies on over-the-counter trade.

However, these credits also need to be verifiable or measurable if the claims made by the project behind each carbon credit can be trusted. Experts cite this as the main reason why corporations have begun to shy away from climate financing.

Rather than risk being accused of greenwashing after purchasing carbon credits that may later be deemed to have low integrity standards, companies are deciding that inaction may be the safer option.

To get to net zero – when all carbon emissions are completely offset by carbon credits – net emissions must fall by 50 billion tonnes every year.

References

Source: Verra.org, July 12, 2022.