How Does Carbon Credit Trading Work?

Carbon Credit

Carbon credit trading is a global, voluntary market that enables businesses and individuals to offset their emissions with those of other organizations. To make the trade, companies must disclose their total greenhouse-gas emissions from all operations, along with their targets and plans for reducing them over time. Those that don’t meet their targets can neutralize the difference by purchasing and “retiring” carbon credits from other organizations that have made measurable reductions in their emissions, and then removing those credits from the market (so that another organization can’t claim them as their own).

A carbon.credit is an instrument that represents a measurement of greenhouse-gas emissions reductions, and is traded in markets that follow a protocol such as the Kyoto Protocol. It can also be used to neutralize residual emissions that a company isn’t able to eliminate from its business operations, and is sold through a process called ERPA (Emissions Reduction Purchase Agreement).

The carbon credit concept has gained traction as governments around the world have implemented regulations to cut greenhouse-gas emission levels. Such regulations are known as cap and trade. The concept is straightforward: Governments set an overall emission level limit, which will be reduced over time through a reduction plan, then allocates permits to emitters (either free or at auction) in order to keep the total pollution below the limit. Companies that are able to reduce their emissions faster than others can then sell their allowances, and those who pollute more than they can buy allowances in the carbon market, which is overseen by a regulatory body.

How Does Carbon Credit Trading Work?

A thriving carbon credit market is a vital part of any successful climate-change strategy, but it needs to be more efficient and transparent than today’s, in order to help businesses–and the world at large–meet ambitious goals for reducing greenhouse-gas emissions. A key problem is that the voluntary market lacks a centralized, high-quality process for verifying carbon credits. Instead, each credit has a different set of attributes, and buyers value those attributes differently. This heterogeneity makes matching a buyer with the right supplier a lengthy and inefficient over-the-counter process.

Verra, a Washington-based nonprofit group founded by environmental and business leaders to improve the quality assurance of carbon credits, is working to change this. Its approach uses a combination of accounting methodologies specific to each project type, independent auditing and a registry system. In its short life, the organization has verified nearly 700 million carbon credits from projects worldwide.

This helps “give both the buyer confidence that they are buying something that is legitimate, and give the sellers themselves a valuable asset,” says its president. Such a process could help streamline the supply chain, reduce costs for both suppliers and buyers, and enable a more robust exchange of carbon credits. It will take a long time, however, to build sufficient volume of these voluntary carbon markets to have the impact needed to accelerate climate action. And without such reforms, it’s unlikely that the world will be able to meet its greenhouse-gas emission reduction goals.

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