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Understanding the Carbon Market: 4 things you should know

The effects of climate change are becoming increasingly evident with extreme weather events such as rising sea levels, floods, droughts, and wildfires. At COP26, Nations reached new agreements for market mechanisms with aim to mitigate these extreme events in the long term, essentially supporting the transfer of emission reductions between countries while also incentivizing the private sector to invest in climate-friendly solutions. To better understand how our everyday actions may be contributing to this global crisis, we need to debunk the issues that stem from carbon emissions.

Truth be told, no-one is perfect, and every industry emits greenhouse gases (GHG) and carbon dioxide (CO₂) somewhere within their supply chain or direct business actions. The goal is for corporations to continually develop innovative and efficient measures to reduce their carbon footprint. Best practices around carbon emissions are encouraged through environmental protection agencies with the implementation of annual carbon discharge thresholds. These limitations remind corporations to be accountable and aware of their own emission levels.

The carbon market is a global marketplace for trading GHG which includes various schemes that allow companies to buy and sell their carbon credits to achieve compliance with national or regional emission-reduction goals under the Kyoto Protocol. The idea is that if corporations exceed their annual threshold, they can purchase carbon offsets from project developers who create GHG reducing or preventing projects to balance things out, such as energy transformation or regenerative agriculture. And so to fully understand the global marketplace, we need to unpack these 4 concepts.

1. What are Carbon Credits?

Carbon credits are an essential mechanism for mitigating climate change through a system of tradeable allowances. These credits, like money, are an international financial abstraction that entitles its possessor to emit a certain amount of GHGs or CO₂. Each credit represents the right to emit one ton of CO₂ or other GHGs into the atmosphere without worrying about adverse economic or environmental impacts. This is achieved by using the money generated from carbon credits to fund clean energy and ecologically enhancing projects.

2. Carbon Offsetting and High-Quality Offsets

Carbon offsetting is a method of neutralizing one’s emissions by investing in GHG-reducing projects. The benefits of these projects are measured by the amount of CO₂ equivalent that they avoid or absorb. Then, the company or fund that is engaging in the carbon offsetting project will then receive one carbon credit for every ton of CO₂ negated. The quality of these offsets is determined by the following key factors:

Additionality - Projects that are considered “additional” are emission-reducing activities that wouldn’t have been funded because they are most likely not economically viable without the use of offset money.

Verification - Verified carbon credits by a third-party organization such as Verra ensures that the carbon reporting is monitored and accurate.

Permanence - A carbon offset project is only effective if it remains in effect for long-term duration without being reversed.

Measurability - At the end of the day, a high-qualify carbon offset project must be able to quantitatively measure its carbon reduction to the environment.

Leakage Avoidance - Leakage occurs when emissions are not truly reduced and so it's crucial that these emissions aren’t moved somewhere else.

3. How much are they and who can buy them?

Offset providers sell carbon credits to individuals and businesses, but the cost per ton varies depending on the type of project that is being funded. For example, a rainforest preservation project might cost $8.00 per ton while a seagrass restoration project might cost more than $100.00 per ton. The price of the carbon credit is determined by offset quality.

A typical carbon off-setter at scale would be corporations that exceed their annual carbon emission threshold such as airlines, cement producers, car manufacturers, and oil companies to name a few. Individuals can also purchase carbon credits through a variety of websites to offset their own lifestyle choices, though this can lead to a simple click of a button, rather than a lifestyle shift- people often still choose to fly.

4. What are the benefits of Carbon Offsets?

Carbon offsets can be a useful tool in reducing our carbon footprint by providing an opportunity for people and organizations to take action against climate change. Additional benefits of carbon offsets are as follows:

• Slow down global warming

• Assurance of livelihood for many communities worldwide

• Save countless species from extinction

• Incentivize R&D for corporations to speed up technological progress

• Critical for sustainable development

• Puts pressure on industries to more do eco-friendly business

• Eco-friendliness and profit maximization goals are better aligned

• Companies can improve their public image

As the urgency to tackle global emissions accelerates, demand for carbon credits is poised to increase substantially, bringing much-needed capital to innovative projects. Not only do carbon credits fund nature-based projects, but they also finance technological advancements and innovations in carbon removal and reduction. Carbon markets will continue to play a more substantial role for companies looking to reach their climate ambitions, and this is why this lies at the heart of our mission at Laconic.

Jordan Clayton

Operations Analyst, Laconic Infrastructure Partners

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