What is Carbon Credit, How Does It Work?
Increased carbon emissions are the main reason for climate crisis. Fossil fuel utilization, industrial activities, transportation and agriculture, all release billions of tons of carbon dioxide into the atmosphere every year. This situation accelerates global warming and disrupts the natural balance of the planet. Governments and companies have to develop new methods to stop this course of events. And at this exact point, carbon credit is one of the tools that come into play.
Carbon credit is a mechanism that helps governments and private sector to offset their emissions. Some criticize, some see it as promising; as such, this system is actually one of the most controversial tools of climate policies. Our understanding of solutions for climate crisis would remain inadequate without understanding how it exactly works and what it means.
Carbon credit means, in the simplest terms, compensating for one ton of carbon dioxide equivalent (CO₂e) released to the atmosphere in another area. In other words, if a company releases one ton of CO₂ as a result of its activities, it can “purchase” the same amount of emission reduction from another place to offset this. This purchased right is called “carbon credit.”
In the international system, carbon credit is usually produced through certified projects. For instance, when a wind power facility is established in a particular area, it is assumed that the emissions that would have been generated by utilizing fossil fuels for energy production are effectively mitigated. This difference can be measured and put on the market as carbon credit.
The concept of carbon credit comes up in the volunteering efforts of individuals or companies to reduce their carbon footprints. Offsetting emissions through purchasing of carbon credits lie behind many products or services sold with a label of “carbon neutral.”
Click here to check out our blog post titled ‘Carbon Capture Technologies.’
Markets in which carbon credits are bought and sold are called carbon markets. These markets fall into two categories:
● Compliance markets: These are mandatory systems enforced by governments and international agreements. The best-known example is the European Union Emissions Trading System (EU ETS). In this system, companies are obliged to buy carbon credit if they exceed the specified emissions limits.
● Voluntary markets: Here, companies or individuals can buy carbon credits to support their own sustainability goals, without any legal obligation. For instance, if a tech company states, “we will become carbon neutral by 2030”, it can buy carbon credits from the voluntary markets in order to reach this goal.
These markets are increasingly growing. Especially voluntary markets became a significant tool for brands to show consumers their sustainability commitments. Transparency and confidence issues, however, are at the center of the controversy.
Click here to read our blog post titled “Zero Carbon Economy: Road Maps of Countries.”
Carbon credit can be produced from various projects. The following projects are the main ones:
● Renewable energy projects: Investments to wind, solar or hydroelectric power plants reduce fossil fuel utilization, thus producing credits.
● Forestation and forest protection: Creating new forests or protecting the current ones enable carbon sequestration from natural ways.
● Methane reduction projects: Applications involving capturing methane gas generated at the landfills or reducing methane emissions in husbandry can also be turned into credits.
● Energy efficiency: Savings enabled at the factories by the establishment of systems which consume less energy turn into credits as well.
● Carbon capture technologies: Although still expensive, technologies which directly capture carbon from the air are considered among the most important credit production tools of the future.
These projects are audited by international certification systems. Among the best known, there are Verra and Gold Standard. A certified project can produce carbon credits that are valid in the international markets.
The emissions produced as a result of the activities of a company or an institution can exceed the specified goals. For example, an airline company cannot reduce its carbon emissions to zero due to its flights. At this point, carbon credits come into play. The company offsets the emissions it could not reduce by buying carbon credits.
Let’s say that one flight produces one ton of carbon dioxide per person. The airline can offset this amount through carbon credits by applying a small extra charge on the ticket bought by the passenger. This credit comes from a wind power plant or forest protection project at some other place. Thus, the company can become “carbon neutral” on paper.
The logic of this system is that reduction of emissions in any place in the world would create the same impact for global climate. In other words, one ton carbon dioxide released in Türkiye can be offset with a solar power plant established in Brazil. The theoretical simplicity of the issue, however, leads to serious controversies in practice.
Click here to check out our blog post titled ‘What Is Carbon Footprint and How To Measure It?’
The most significant advantage of carbon credit is the ability to rapidly offset emissions. For a company, setting all its emissions to zero can take years in technological terms. Thanks to carbon credits, a transitional tool is used in this process.
The second advantage is the funds provided for developing countries. Many renewable energy projects, especially in Africa and Asia, are realized thanks to carbon credit revenues. And this has the potential of creating a more equal distribution on a global scale.
Thirdly, carbon credits facilitate the companies’ efforts to reach sustainability goals. Especially investors and consumers attach importance to “carbon neutral” commitments. And this strengthens the reputation of companies in the markets.
Carbon credits are heavily criticized as well. The biggest criticism is that the companies use this system as a method of “absolution” instead of real emission reduction. In other words, they continue to pollute the planet, and they pay money to avoid responsibility. This is referred to as “greenwashing.”
Click here to check out our blog post titled ‘What is Greenwashing, and How to Spot It?’
Another issue is transparency. Each carbon credit may not reflect an actually measured reduction. Some projects may have exaggerated or unconfirmed impacts. The lack of inspection stands out, particularly in voluntary markets. Furthermore, carbon credit projects can have adverse impacts on the local communities. For example, the land used for deforestation projects may be threatening for the livelihoods of people living in that region. Therefore, ethical dimension of carbon credits is also a controversial issue.
Türkiye ratified Paris Agreement in 2021 and set a net zero emission goal for 2053. The importance of carbon markets is increasing to reach this goal. Voluntary carbon markets are already active in Türkiye. Wind and solar power plant projects produce carbon credit through international certification providers. Türkiye does not yet have a compliance market such as the one in the EU. However, the European Union’s Carbon Border Adjustment Mechanism will have a direct impact on Turkish exporters. Companies exporting to the EU will have to report and compensate for their carbon emissions. And this increases the interest in carbon credit market in Türkiye.
Carbon credits are expected to play a bigger role in the global economy in future. Article 6 of Paris Agreement specifies the frame of international carbon markets. And this will increase international credit trading.
Digitalization is also steering this process. Blockchain-based carbon credit is a prominent method to solve the transparency issue. Traceability of credits, prevention of fraud and increase in confidence in the markets can be made possible in this way.
Furthermore, new kinds of credits will get into the market as direct carbon capture technologies develop. This will enable diversification of the system. However, the fundamental issue does not change: Carbon credits cannot replace actual reduction of emissions, it can only be a complementary tool.
Carbon credit system is a significant but controversial tool in the fight against climate crisis. When applied correctly, it can help offset global emissions and promote green initiatives in developing countries. However, in case of wrong applications, it poses the risk of becoming merely a “sustainability label” for the companies.
The main goal is to enable productivity increase by transforming activities and all value chains, and to reduce emissions by gradually parting with fossil fuels. Carbon credits offer a temporary and complementary solution in this journey. In other words, carbon credits will be important in the world of the future, but beyond that, we will need to revolutionize our production and consumption habits.