What Is a Carbon Offset?
A carbon offset is one metric ton of carbon dioxide reduction or absorption that occurs as a result of a project activity. This project must be “additional,” meaning it must result from an activity that is above and beyond any mandatory regulations, industry standards or business as usual. Voluntary offsets can be used by individuals or businesses to take action to reduce their greenhouse gas emissions impact. The credits are called “offsets” because they literally offset an emission caused in one place with a reduction created in another place. The purchase of voluntary offsets improves a company’s sustainability rating and affects its CSR score. Additionally, offsets help companies prioritize and achieve social and environmental goals. Offsets are essential to meet net zero goals.
How Much Do Offsets Cost?
Offsets vary in price substantially, based on a number of factors. The most significant drivers of price include co-benefits, location and the quantity purchased. Offsets can cost as little as less than $1 or be even higher than $20. For a more detailed explanation you can visit this page “What is a carbon credit worth””
How Does Carbon Trading Work?
The concept behind carbon trading is simple.
Let’s say Company A is subject to a legally-imposed cap of 100 units but, without implementing new technology to directly reduce the carbon it emits, produces 120 units. Company A knows it will be fined or taxed for every unit of emissions it generates over their cap amount.
Company B has the same cap of 100 units but can quickly and cheaply implement solutions that drive down emissions to 80 units.
In this case, as long as there is a market mechanism by which credits can be recorded, traded, and used, Company A can agree to buy the 20 units’ worth of excess credits Company B does not need. As long as the price of the 20 units of credits is lower than the fine Company A would face if it couldn’t meet its targets, it makes sense for Company A to buy Company B’s excess credits.
Most credits are transacted on an “Over-the-Counter” basis (i.e., privately-negotiated transactions between two parties) though limited trading is available on some public markets.
How is a carbon credit generated?
To generate a carbon credit/offset, you must have an eligible project that reduces emissions to the atmosphere in at least one of three ways:
- Capturing emissions that would otherwise be released into the atmosphere
- Sequestering (storing) emissions from being released in the first place
- Using renewable or clean forms of energy rather than fossil fuels
Who Oversees And Regulates Offsets?
Projects go through a rigorous process of third-party validation and verification to ensure the offsets they create meet certain criteria for quality. Non-profit certification bodies, or “Standards,” govern the criteria that must be met in order for an offset to bear the Standard’s name. Several standards, including the American Carbon Registry, Climate Action Reserve, Canadian Standards Association and Verified Carbon Standard, are widely recognized throughout the North American and global carbon markets for their excellence and rigor.
A carbon offset credit is a transferable instrument certified by governments or independent certification bodies to represent an emission reduction of one metric tonne of CO2, or an equivalent amount of other GHGs. The purchaser of an offset credit can “retire” it to claim the underlying reduction towards their own GHG reduction goals.
There are two kinds: compliance credits and voluntary reductions.
The Institute of International Finance believes there is "huge upside potential" for voluntary carbon credits, predicting the market could be worth as much as $100B/year by 2050.
In the past two years alone, the number of voluntary offsets sold has doubled, due to increasing interest among organizations and individuals to reduce their carbon footprint.
Voluntary Carbon Market (VCM) represents only 0.2% of global greenhouse gas emissions, but demand for VCM credits could increase as corporations and governments work towards Net Zero initiatives in order to reduce their carbon footprint or emit less than what they take up with economic activity.
As demand for carbon credits increases, the costs of undertaking real emission reduction projects will need to rise as lower project costs are used up.
Today's average prices of $3.00-$5.00/tCO2e will need to increase to $20.00-$50.00/tCO2e by 2030 and potentially up to $100.00/tCO2e, if governments undertake lower cost projects first. Prices are expected to keep rising through 2050.
CARBON CREDITS IN THE spotlight
First Carbon Corp. provides an innovative solution to this challenge with its unique approach to the development of a standardized credit market for carbon credits.
Investors managing a collective $6.6 trillion are pressing the finance industry to boost funding for carbon-removal methods and standardize pollution credits as part of the effort to keep global warming within 1.5 degrees Celsius of pre-industrial levels.
The carbon offset market may need to grow by as much as 50 times if companies are going to meet 2050 net-zero greenhouse gas emissions goals.
Envrionmental, Social & Governance (ESG) investing to reach $1 trillion by 2030, says head of iShares Americas as carbon transition funds launch.