What are Carbon Credits?

“Carbon Credits”, “Carbon Offsets”, “Metric Tons of CO2”…. The terminology can be confusing but in reality they are all the same.  1 Carbon Credit = 1 Carbon Offset = 1 Metric Ton of CO2 that offsets the production of carbon dioxide someplace else.

Offset means “neutralize,” “balance,” or “cancel out.” When we do certain activities like drive, fly or heat our homes we emit carbon dioxide. Carbon offsets counteract these activities by funding projects that remove or prevent the release of carbon dioxide from the atmosphere. When you buy a carbon offset, therefore, you are paying to reduce the net amount of carbon dioxide in the atmosphere.  Carbon offsets are an easy and affordable way to compensate for our contribution to climate change. They are a critical piece of the solution to global warming because they push investments into new technologies and programs that make a difference today.

How are Carbon Offset Credits generated?

Many types of activities can generate carbon offset credits. In general they can be divided into two types:

1.  Projects that prevent carbon from entering the atmosphere and

2.  Projects that remove carbon from the atmosphere after it has been released (carbon sequestration)

Renewable energy such as installations of solar, small hydro, geothermal, and biomass energy fit into the first category because they are displacing the use of fossil fuels.   Other types of preventative offsets available for sale on the market include those resulting from energy efficiency projects, methane capture from landfills or livestock, and destruction of potent greenhouse gases such as halocarbons.

Biological carbon sequestration works after the fact.  Through the process of photosynthesis, all plants absorb carbon dioxide from the atmosphere; release oxygen molecules; and store carbon in plant tissues, especially roots. As plants die, carbon molecules remain underground unless disturbed by tillage or any operation allowing carbon atoms to combine with oxygen and escape into the atmosphere as carbon dioxide.

Many soils in our region were native grasslands or forests prior to cultivation, containing high amounts of carbon. After years of tillage, a lowered equilibrium level of carbon in the soil has been attained, where the amount of carbon sequestered by plants annually is about equal to the amount lost in the atmosphere.

Converting to no-till crop production, long-term grass seeding practices, implementing prescribed grazing, planting trees, and sustainably managing forests result in higher levels of carbon being stored in the soil.  Landowners now can earn income in the carbon credit market for storing carbon, thereby reducing greenhouse gas emissions.

How are Carbon Offset Credits marketed? 

At Natural Capital, we develop projects for both the Chicago Climate Exchange and the Voluntary Carbon Standard protocols.  We are an aggregator member of the CCX and a registry member for the VCS.  Each protocol has distinctive eligibility and trading requirements that make them suitable for particular projects.  

• The Chicago Climate Exchange (CCX) is North America's only, and the world's first, greenhouse gas (GHG) emission registry, reduction and trading system for all six greenhouse gases (GHGs) - carbon dioxide, nitrous oxide, methane, hydrofluorocarbons, perfluorocarbons and sulfur hexaflouride.  CCX is a self-regulatory, rules-based exchange designed and governed by CCX members. Members make a voluntary but legally binding commitment to reduce GHG emissions.
  
  Project carbon credits are certified to CCX specifications and bundled into 100 metric ton units called Carbon Financial Instruments CFI’s that are exclusively traded on the exchange platform or through over the counter transactions.  The Chicago Climate Exchange offers a classic commodity trading platform to efficiently buy and sell carbon offset credits

• The Voluntary Carbon Standard (VCS) program provides a robust, new global standard and program for approval of credible voluntary offsets.   VCS offsets must be real (have happened), additional (beyond business-as-usual activities), measurable, permanent (not temporarily displace emissions), independently verified and unique (not used more than once to offset emissions).    Projects developed to VCS standards generate Voluntary Carbon Units (VCU’s) which are defined as 1 metric ton carbon dioxide.  These types of credits are certified to VCS standards and entered onto a registry where they are tracked through the life of the credit.

Aren’t companies just “paying to pollute”? 

At first glance purchasing carbon offset credit seems like a way to “pay to pollute”.   In reality a carbon offset credit market can actually give incentives for companies to invest in cleaner technologies. 

A cap-and-trade system uses financial incentives to encourage companies to reduce the amount of carbon dioxide they emit. A regulatory body sets an overall limit, or cap, on annual carbon-dioxide emissions and then assigns shares of that total to major polluters. If a company wants to emit more than its individual cap allows, it must buy carbon offset credits from other businesses or from independent projects that have created them.  Over time the pollution caps are ratcheted down, making businesses either reduce their own emissions or buy more credits.   If credits remain cheap business will obviously do this.  But if the demand for cheap credits increases the price of those credits will eventually rise to a point where it’s actually cheaper to invest in clean technology.

The idea is that this system will cut pollution more effectively and at a lower overall cost than other regulatory approaches. For instance, cap-and-trade provides more certainty on emissions levels than a carbon tax because it sets firm limits on pollutants. Cap-and-trade is also thought to be more cost-effective than other policies because it allows each company to decide how to reduce its emissions, and companies presumably will choose the cheapest way to achieve their goals. By contrast, measures imposed by the government, like a requirement to adopt a certain cleaner technology, might not be the most cost-effective method for every company.

What does the future of the carbon market in the US look like?

With the development of RGGI (Regional Greenhouse Gas Initiative), the Western Climate Initiative, AB 32, the voluntary cap and trade system and a few other systems currently in the development stage, the future of the carbon market promises to continue growing. Both presidential candidates have stated that they plan to reduce greenhouse gas emissions through a form of a federally mandated system. In addition, both candidates are supportive of legislation to increase our alternative energy focus and become energy independent in the year to come. This will leave a lot of opportunity in the carbon market in the years to come.