A carbon credit is generated by projects that help reduce, remove or avoid greenhouse gases. They are certificates representing the quantities of greenhouse gases that have been kept out of the air or removed from it. 1 carbon credit = 1 metric ton CO2 emission or equivalent greenhouse gas emission avoided.
A brief history
Carbon Trading started in 1997 when some 180 countries signed the Kyoto Protocol. The Protocol called for countries to reduce their greenhouse gas emissions between 2008 – 2012 to 5% below 1990 levels, an easy target (in hindsight) that was unfortunately never met (George W Bush pulled out of the agreement in 2001 shortly after taking office and then the rest of the countries followed. Sounds familiar? The good news is that the Kyoto Protocol laid the framework for creating, certifying and trading carbon credits which are still used today.
Click here if you want to know more about the Kyoto protocol and the Paris agreement.
What are carbon credits and how much are they worth?
As mentioned earlier, carbon credits are essentially just certificates representing the quantities of greenhouse gases that have been kept out of the air or removed from it. 1 carbon credit = 1 metric ton CO2 emission or equivalent greenhouse gas emission avoided.
There are two types of carbon credits:
Certified emissions reduction (CER): Emission units, or credits, created through a regulatory framework (equivalent to a strong investment grade bond; think AAA rated bonds)
Voluntary emissions reduction (VER): A carbon offset that is exchanged in the over-the-counter or voluntary market for credits (equivalent to a lower grade bond; think BBB rated bond)
Companies buy and sell those credits in a voluntary carbon market as a way to offset their emissions — when a credit is claimed, it can no longer be sold. Project developers or companies when undertaking projects which are good for the environment can get certified and receive carbon credits and sell them to companies looking to offset their emissions. The quality of the certificate (the body approving the certificate) determines the prices of carbon credits. In current carbon markets, the price of one carbon credit can vary from a few cents per metric ton of CO2 emissions to $15/mtCO2e or even $20/mtCO2e. Tesla, for example, sold $2.4 bn worth of credits to Stellantis between 2019 and 2021.
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