Carbon Expert – How are Carbon Credits Created?

There are two components to the carbon market: “Cap and Trade” and “Offsets”.

Cap and Trade

A regulating body, such as a government, decides on a target (the target being the “cap”) level for all of the parties participating in the program. Each participant is then allocated a portion of the “cap” in the form of “allowances”. The “cap” would be the maximum amount of pollution allowed for a group of emitters (in a particular sector such as industrial processors) over a given period of time. This target will be less than the amount of pollution these emitters would emit in a “business as usual” situation – thus creating a shortfall. Each participant needs to make a choice – either reduce their emissions or find enough permits (credits) to cover all of their emissions.

Emitters need to calculate the cost of reducing greenhouse gas output levels and then decide whether they will be a “seller” or “buyer”.

Offsets

A carbon offset is:
(a) a unit earned by someone who has implemented a project according to international standards that generates a reduction, removal, storage or avoidance in greenhouse gas emissions than would otherwise have occurred (for example a methane capture plant);
(b) issued by an authority or a Board pursuant to those international standards (one credit is issued for every metric tonne of emissions of carbon dioxide equivalent) that has been reduced, removed, stored or avoided).

Offsets are bought for offsetting purposes, in which case the credit is retired (i.e. taken out of circulation permanently) to offset their own emissions (where one tonne of carbon dioxide can be offset by one unit / credit) or for investment, speculative, retail or trading purposes.

Types of offsetting include:

    * the removal of carbon dioxide from the atmosphere and the storage of it in a “sink” e.g. forest planting, avoided deforestation;
    * the reduction of carbon dioxide emissions by replacing fossil fuels with renewable energy sources e.g. wind and solar energy;
    * the capture of greenhouse gases and alternative use or destruction of them e.g. methane capture at landfills; and
    * the reduction of emissions through energy efficiency, e.g., reduce the amount of fuel or electricity needed, or reduce nitrogen use.

Offset credits can be used in some compliance Cap and Trade schemes and they are the foundation of the voluntary carbon market.

 

Carbon Expert provides access for our clients to the carbon credit trading market in an innovative and forward thinking way, offering OTC trading of VERs via its network of professional carbon brokers.

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