Transparency In Developing Carbon Credits
Part 2 – How Are Carbon Credits Created?
ClimeCo recognizes the importance of creating new high-quality methodologies, the steps in the accreditation process, and the data and science on which a project and methodology are built. While we may live and breathe carbon credits, this complex process can be difficult for those on the outside to understand.
This is an especially important moment to examine and demystify that process. Carbon markets have grown rapidly over the past five years. As we exit this phase of early growth, many potential market participants are looking to understand how to assess the risks and opportunities in a more informed way.
In this second part of our four-part editorial series on the transparency of carbon credits, we will share our knowledge on how a carbon credit is created. Whether you have been supporting carbon projects for years or are new to the carbon markets, this piece will educate you on the basics of how a carbon project is developed, how a credit is verified, and how this knowledge can help you make responsible decisions when it comes to your sustainability journey.
What is the voluntary carbon market, and why is it important?
There are two types of carbon markets – compliance and voluntary. Compliance carbon markets are created and managed by governments and require regulated entities to report and reduce their greenhouse gas (GHG) emissions. The California Cap-and-Trade Program and the European Union Emissions Trading System are examples of compliance-based markets. There is also the Voluntary Carbon Market (VCM), which will be our focus in this editorial piece.
The VCM serves two vital purposes. First, it stimulates funding for decarbonization projects in areas that lack sufficient incentives. Governments across the globe are setting goals and deploying more money than ever to combat and adapt to the worsening consequences of climate change, but regulatory incentives alone still fall short. Many financial resources that can help to fund economy-wide decarbonization are tied up within the private sector. The VCM, valued at over $2 billion, can be an effective lever in deploying private capital to help finance the net-zero transition and provide a solution for those wishing to mitigate their carbon footprint.
Secondly, the VCM allows businesses and individuals to voluntarily purchase and retire carbon credits to offset their unavoidable GHG emissions. In 2022 alone, participants retired approximately 166 million credits from the VCM. This is the emissions equivalent of taking over a third of all private cars off the road in the US.  Without the VCM, billions of dollars that could be directed to fund these crediting projects and combat climate change would be lost.
As a global carbon financing tool, the VCM also does the following:
- Accelerates deployment of projects that reduce or remove GHG emissions that may not happen otherwise
- Encourages innovation for new technologies that currently face substantial barriers to scaling
- Allows companies to meet climate targets and reduce emissions that are either too expensive or technically impossible to abate
- Serves as a complement to some regional regulatory programs
What are voluntary carbon credits, and how are they developed?
A voluntary carbon credit (also known as a carbon offset) represents one metric ton of carbon dioxide equivalent that was either removed or prevented from entering the atmosphere. A measurable and verified carbon credit can be traded, sold in the marketplace, or retired for voluntary claims. Each carbon credit has a unique serial number, so once the credit is retired, the same credit can never be used again.
Carbon registries, which are non-profit organizations, set and manage rigorous integrity standards for the VCM and ultimately issue credits. They also host quantitative methodologies (or protocols) which are publicly reviewed and based on international GHG accounting standards (ISO 14064 and the GHG Protocol). These methodologies are framework documents that outline the essential parameters to develop a carbon credit project.
Carbon credits created from these registries abide by these core market principles and should be highly visible when you review a carbon project:
- Durable – emission reduction or removal will not be emitted within the next 100 years
- Additional – activity is beyond business as usual and would not happen without the project
- Verifiable – a third-party organization confirms all claims and calculations are accurate
- Real – quantification uses rigorous, conservative, well-recognized accounting standards
- Only counted once – no two parties can simultaneously claim the emission reduction
The most well-known and respected registries, including the Climate Action Reserve, American Carbon Registry, Verra’s Verified Carbon Standard, and Gold Standard, currently permit credit generation for various industrial and waste-handling processes, low-carbon technologies, and nature-based projects. To develop a credit, an eligible project must collect data, produce project documentation, and conduct a continuous monitoring, reporting, and verification cycle (as required under the methodology). Each project is audited by an accredited independent verifier and undergoes a public comment period to establish full transparency and confirm integrity and accountability. Additionally, key project documents are publicly available on registry websites.
New crediting opportunities are also developed through a public, robust multi-stakeholder engagement process. Industry, academic, market, government, non-profit, and environmental experts use scientific data and reports to determine what the emissions would be without the project (baseline emissions), quantify emission reductions or removals, account for any unintentional increases in emissions (leakage), and prove the activity is above and beyond business as usual. Methodologies are also subject to stringent review and a public comment period to certify that the project guidelines are usable and align with core market principles.
What is the future of the VCM?
Over the past decade, the VCM has experienced tremendous growth. From 2020 to 2022, the value of the voluntary market has increased four-fold. As the number of corporations making sustainability targets surges and the urgency for climate action worsens, the demand for voluntary credits is also expected to rise.
Analysts predict the VCM could be worth over $50 billion by the decade’s end. If appropriately utilized, the ever-evolving and expanding VCM can complement regulatory programs and funnel money to essential decarbonization projects that would otherwise face substantial barriers to scaling.
To ensure the market effectively fulfills its purposes, key stakeholders must revise existing crediting pathways and develop new accounting methodologies that prioritize integrity and usability. Carbon registries must remain transparent, uphold rigorous standards, and constantly improve monitoring requirements. When purchasing or developing carbon credits, participants should work with trusted registries and responsible project developers to certify that they support high-quality projects with an additional and permanent net environmental benefit. Buyers should also work to reduce GHG emissions as much as possible within their value chain and rely on credits to account for the remaining unavoidable emissions.
With constant improvement, the VCM can unleash the necessary capital to help meet global GHG targets and may even act as a stepping stone to compliance-based programs in regions that lack sufficient regulation.
For the next piece in the series, we will define what high-quality carbon credits are and show what steps ClimeCo takes to ensure we develop the highest-quality methodologies and projects that make a positive environmental impact and meet our client’s needs. We will also share with you what is most important to us when we look for success in a carbon project. Click here to read Part 3.
Did you miss “Part 1 – The Role of the Voluntary Carbon Market?” Read it here.