By Carbon Credit Originate
In the business world, a carbon credit is an instrument that represents ownership of one metric tonne (using CO2 as a unit to measure different greenhouse gases) that can be traded, sold or retired. The credit is used by businesses regulated in a cap-and-trade system to offset their emissions of carbon dioxide or other greenhouse gases. For example, if Company A has more than its allowed amount of CO2 emissions and can’t reduce those by itself, it will have to either pay a fine or buy the credits from Company B. The process is a win-win for both companies: Company A gets money and positive image feedback, while Company B pays its fine and avoids losing market share.
Carbon credits were created as a way of controlling global emissions of greenhouse and harmful gases that contribute to climate change. The world’s nations agreed that reducing those emissions was important, and they came to an agreement in 1997 in Kyoto, Japan, where they agreed to limit their emissions to a certain level.
They also established the mechanisms that would help regulate the trade of those carbon.credit. The industrialized countries, collectively known as Annex 1 countries, operated in an emissions trading market where they could sell their surplus carbon credits to the developing countries that weren’t meeting their Kyoto levels.
Where Did Carbon Credit Originate?
The concept of carbon trading is gaining popularity among governments around the world as they implement cap-and-trade programs, or other market-oriented initiatives that involve carbon pricing. The goal is to create a price on carbon emissions to encourage companies to find new ways of producing goods and services that don’t produce or emit harmful gases.
A recent McKinsey report found that supply chains account for 90% of a company’s total environmental impact. That’s because a lot of companies have many different suppliers, and those suppliers use trucks, airplanes, trains, and ships to transport their goods. The report concluded that if businesses can make their supply chains more environmentally efficient, it will have an impact on the overall energy use in a country or region.
In addition to the carbon credits purchased under a cap-and-trade program, there is a growing market of carbon credit that is sold on a voluntary basis. The voluntary carbon markets are a global set of exchanges that allow individuals and organizations to account for the unavoidable emissions from their operations by buying credits from projects that cut those emissions or even remove them from the atmosphere, such as renewable energy installations or forest conservation activities.
The prices of these credits can vary depending on the market dynamics, costs associated with the specific project and, in some cases, the brand of the project sponsor. The nonprofit group Verra, for example, has a rigorous certification scheme to ensure the quality of these credits. It includes accounting methodologies that are specific to each type of project and independent auditing. These are all designed to give buyers confidence that the carbon credits they’re purchasing have real value and can be trusted.