In recent years, the issue of climate change has become a global priority. With carbon emissions driving up global temperatures and creating environmental instability, finding effective solutions has never been more critical. One of the most innovative solutions in the fight against climate change is the use of carbon credits. But what exactly are carbon credits? How do they work? And why are they considered essential for both environmental sustainability and nature-based solutions? Let’s take a deeper look.
What are carbon credits & how do they work?
At its core, a carbon credit is a market-based tool used to mitigate climate change by reducing greenhouse gas (GHG) emissions. Carbon credits are certificates that represent the reduction or removal of one tonne of Carbon Dioxide (CO₂) or other GHGs from the atmosphere.
Carbon credits can be seen as a “permission slip” that allows a company to emit a specific amount of CO₂ within a given year.
How do Carbon Credits Work?
The idea is simple: if an entity—whether a company, government, or individual—emits a certain amount of CO₂ into the atmosphere, they can offset this by purchasing carbon credits. This system encourages industries to find innovative ways to reduce emissions, thus making carbon reduction a financial incentive. By reducing their emissions and selling the excess credits, companies not only help the environment but also generate revenue.
Carbon credits function within a cap-and-trade system. Governments or international bodies set an overall cap or limit on the total amount of GHGs that can be emitted by participating entities, such as corporations or countries. These entities are allocated a certain number of carbon credits based on their emissions. If an entity emits less than its allocated amount, it can sell the excess credits to others who exceed their limits. Carbon credits can be traded in both regulated and voluntary markets. In the regulated market, governments control the emission limits, while in the voluntary market, individuals and organizations purchase credits to offset their carbon footprints. The price of a carbon credit can change a lot depending on location, time, and market conditions. Factors like government policies, regulations, and demand for carbon offsets also affect its value. In 2024, carbon credits were expected to cost around $42 per metric ton in California and $76 per ton in Europe, according to BloombergNEF, a commodities research service.
Why Are Carbon Credits Useful?
1. Encouraging Emission Reduction: The primary aim of carbon credits is to incentivize the reduction of greenhouse gas emissions. They create a financial mechanism to motivate businesses and organizations to reduce their carbon footprints and implement sustainable practices.
2. Flexibility for Companies: Not all companies are equally equipped to reduce emissions. For some, achieving significant emissions reductions may be cost-prohibitive or technically difficult. Carbon credits provide these companies with a cost-effective way to offset their emissions by investing in projects elsewhere.
3. Economic Growth through Innovation: By creating a market for carbon credits, companies and individuals are motivated to innovate in green technologies, renewable energy, and other low-carbon solutions. This drives economic growth while simultaneously reducing emissions.
4. Global Cooperation: Carbon credits create a global market for emissions reductions, making it easier for countries and organizations to collaborate on climate action. Through the trade of carbon credits, nations and companies can work together to meet international climate targets, such as those set by the Paris Agreement.
Challenges and Criticisms of Carbon Credits
While carbon credits offer a promising solution to reducing emissions, they are not without their challenges.
- Verification and Transparency: Not all carbon credits are created equal. The effectiveness of a carbon credit depends on rigorous monitoring, reporting, and verification (MRV). Without proper standards and transparency, there’s a risk that credits may be sold for projects that do not deliver real or additional emissions reductions.
- Over-Reliance on Offsetting: Some critics argue that carbon credits can be a convenient way for companies to delay making real changes to their operations. It’s crucial that carbon credits complement, rather than replace, direct emissions reductions.
- Environmental Impact of Projects: Some projects that generate carbon credits, such as large-scale tree plantations, may have negative ecological consequences. For example, monoculture plantations can deplete biodiversity or strain local water resources.
The Future of Carbon Credits
The future of carbon credits hinges on improving the integrity and transparency of carbon markets. With the right policies, standards, and technologies, carbon credits can play a vital role in addressing climate change. As Nature-based Solutions (NbS) continue to gain traction, they offer one of the most promising ways to both sequester carbon and restore vital ecosystems. The BIOFIN-EU project plays a crucial role in unlocking financial flows for NbS—solutions that not only sequester carbon but also enhance biodiversity, improve water security, and strengthen climate resilience. Through this, carbon credits can drive positive environmental change while creating sustainable economic opportunities.
