Companies are talking about their ESG efforts, and I’ve noticed this term appearing a few times now.
In: 13
2 answers:
First, the “How it’s supposed to work” answer: They are trying to apply the power of “capitalism” to the carbon emission reduction initiatives. And I use the quotes because it’s not really a free market since it would have to be government mandated. But basically the government would say “Company X, you are allowed to produce X tons of carbon emissions”. Company X is currently producing Y tons of carbon emissions, and Y > X. Call the difference Z. So instead of making the massive capital investment that may be required to lower Y and eliminate Z, they could purchase “Carbon Credits” to offset the difference.
The Capitalism part comes in because these Carbon Credits could be bought and sold on an open market. And it allows for a new kind of company to emerge, a company that does nothing but accumulate Carbon Credits via carbon emission reduction activities, and then sells those credits to the companies exceeding their allotted carbon quota. So they net impact to the planet is 0.
Second, the “why companies actually talk about this in their ESG reports” answer: It allows companies to advertise/virtue signal to their ESG driven institutional investors that they “care about the climate” and are “fighting the climate crisis” by just writing a check vs actually investing in anything actually substantive that would lower their carbon emissions because that would cut into their profits.
AFAIK, Each company has a set of carbon credits, respective government will set rules for carbon emissions for each particular companies.
So for example in Company A has carbon credits worth 100 units, 1 carbon credit = x tonnes of carbon emissions (don’t know x).
If their emissions are less than 100 units, they can sell excess credits in the carbon market for moneis.
If their emissions are more than 100 units, they can buy remaining credits from the carbon market for monies.
It’s impossible to completely remove all CO2 emissions and still do business for many companies. So to achieve “net zero” emissions companies can invest in projects that remove CO2, such as planting trees or even just protections for existing forests. That’s what carbon credit is, also called carbon offsets.
The actual effectiveness is questionable. Good deep dives on that [here](https://youtu.be/6p8zAbFKpW0?si=Fhf9Byc2rjg_haZm) or [here](https://youtu.be/AW3gaelBypY?si=awOasrwGVaiROuS_)
So the buyers perspective has kind of been covered so far I think, in short it’s ‘carbon accounting’ – I produce 40 tonnes CO² but I buy credits worth 40 tonnes and therefore have produced *net* zero.
Now this might sound like bullshit and it probably is a bit. But one thing that’s not been covered is the sellers.
Countries that have fast swathes of natural habitats like forest and swamp land who are maybe not as ‘well off’ as big industrial countries are often pretty pissed when places like the USA and Europe have smashed all their natural resources and got rich, and then tell little guys hey don’t cut down your forests to grow produce and earn a living. But now they can be paid to not cut it down. They can auction off carbon credits that represent them not destroying their habitat so they can then have income without destroying nature (like everyone else did in the past). It’s not perfect but it does help distribute the burden of carbon neutrality.
Check out
https://verra.org/programs/verified-carbon-standard/
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