Hi All,
At a high level, I understand what the purpose of carbon credits are, how the marketplace functions more broadly, and how to pursue issuance of carbon credits.
**But at a very basic level, what IS a carbon credit?** Is it like an NFT or more like a company stock? Are they regulated by the federal government (in the US at least) like a stock? How can one be sure that a carbon credit is legitimate and not a forgery or otherwise worthless?
Thanks in advance for any explanation, especially if you can provide source(s)! Google search has produced vague, mostly unhelpful results.
In: 3
There are two answers.
One is that a carbon credit is one company that is carbon negative makes a deal with another company that is carbon positive so they balance out. They measure their carbon footprints as balance it out
The second is that it’s a scheme by investment bankers to make a commission from being the middle man in another series of transactions.
The second reason is why this has become a big deal.
You can think of carbon credits as a “permission slip” for a company to emit up to a certain set amount of CO2e that year.
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It’s tough to explain because there isn’t really a good definition. In general a carbon credit is a unit that represents 1 ton of carbon pollution. There are two areas where carbon credits come into play:voluntary and compliance markets.
Compliance: you can regulate something by banning an activity (i.e fracking bans). This prevents pollution by ceasing the activity entirely. Another method is by creating a cap and trade program. You cap emissions at a certain level and if a certain corporation needs to increase the amount they pollute they have to pay another corporation to reduce their pollution. This incentivizes people to find ways to cut down on their pollution because now there are monetary rewards to doing so. It also shifts the pollution to the most productive uses. It might be more profitable to expand the refinery and instead shut down 10 local dry cleaners. The mechanism by which entity one pays the others is through the use of carbon credits. Typically in a cap and trade system there is an accounting by the regulating government of how many credits each person has. Credits are bought and sold from entity to entity through brokers who register the transactions with the regulating entity. You can be sure it’s a real credit because you will have the registration of the transaction approved by the government. Carbon isn’t regulated under a cap and trade in the United States (as far as I can really tell. There may be some I’m not familiar with), but there are apparently markets around the world. We do regulate other pollutants such as NOx under cap and trade markets.
Voluntary markets: this is mostly marketing in my opinion. Companies buy offsets from others who reduce pollution for ESG or PR purposes. Example: It’s ok that there’s a bunch of pollution from people flying in for the Olympics because we paid a bunch of farmers to convert their fields into forests and the net carbon emissions between both activities is 0. For voluntary markets there’s no real standards on how the offsets work. Often people will advertise the emissions reductions as being environmentally friendly only for the farmers to cut down all the trees a few months after the Olympics end. There really aren’t strong enforcement mechanisms, but the corporate team’s advertising their ESG policies don’t really care.
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