Carbon credits were supposed to offer incentives to reduce carbon dioxide emissions and encourage trade-offs between conversationalists and their rich polluters.
It was an arrangement based on upholding moral and ethical good conduct. Sadly, theories are not always practical. And good intentions may be crippled by harsh realities on the ground.
This article investigates the challenges of creating an artificial market to address complex environmental challenges fuelling global warming.
What are carbon credits?
Carbon credits permit the owner to emit carbon dioxide or other greenhouse gases (GHGs). One credit allows the emission of one ton of carbon dioxide or the equivalent of different greenhouse gases. Carbon credits are also known as carbon allowances.
The ultimate goal of the carbon credit system is to reduce the emission of GHGs into the atmosphere.
How Do Carbon Credits Work?
The United Nations allows countries a certain number of credits, and each nation is responsible for issuing, monitoring, and reporting its carbon credit status annually. Governments allow companies to emit a set amount of GHGs before needing to purchase credits.
If emissions exceed limits, they are required to buy credits. If a company purchases too many credits, it can sell the excess on a carbon exchange or marketplace. This system is commonly called a cap-and-trade program.
The Cap and Trade System
The cap-and-trade system is sometimes described as a market system. It creates an exchange value for emissions. Proponents argue that a cap-and-trade program incentivizes companies to invest in cleaner technologies to avoid buying permits that will increase costs each year.
Opponents argue that these systems only work to create an excess of circulating carbon credits because caps are set a few years in advance, and companies cut emissions quicker than expected—and then use the credits as money-making instruments.
Who Can Sell Carbon Credits?
Carbon credits can only be sold or purchased by businesses and governments. Carbon offsets, however, are carbon credits available on the voluntary carbon market.
The voluntary carbon market enables entities participating in an emissions reduction project to sell credits that are not regulatory in nature. Anyone can purchase these credits.
A diverse range of enterprises and individuals can sell these carbon offsets depending on their ability to participate in a carbon registry or sequestration program.
For example, landowners may be able to sell carbon credits if they enrol their land into a project, whether it’s reforestation, afforestation, or other carbon removal initiatives, and use the funds to pay for their operations.
Why Companies Buy Carbon Credits
Companies buy carbon credits to emit more GHGs legally. They also purchase carbon offsets, which allow them to have a “net-zero carbon emission” rate.
Given the urgency of the climate crisis, there’s growing public and institutional pressure for companies to make these net-zero commitments. These are pledges that companies make to cut or offset the amount of carbon they emit throughout their operations.
Some companies can reduce their emissions through changes in business practices, but a wholesale elimination of emissions isn’t feasible for many firms. Carbon offsets fund emission-reduction activities such as tree planting or nature conservation in lieu of completely eliminating their own emissions.
Worldwide Carbon Credit Initiatives
The United Nations’ Intergovernmental Panel on Climate Change (IPCC) developed a carbon credit proposal to reduce worldwide carbon emissions in a 1997 agreement known as the Kyoto Protocol. The agreement set binding emission reduction targets for the countries that signed it. Another agreement, the Marrakesh Accords, spells out the rules for how the system would work.
The Kyoto Protocol divided countries into industrialized and developing economies. Industrialized countries were collectively called Annex 1. They operated in their own emissions trading market.
If a country emitted less than its target amount of hydrocarbons, it could sell its surplus credits to countries that didn’t achieve their Kyoto-level goals through an Emissions Reduction Purchase Agreement (ERPA).
The separate Clean Development Mechanism for developing countries issued Certified Emission Reduction (CER) carbon credits. A developing nation could receive these credits for supporting sustainable development initiatives. The trading of CERs took place in a separate market.
The first commitment period of the Kyoto Protocol ended in 2012, and the U.S. quit in 2001. The Paris Agreement, also known as the Paris Climate Accord, is an agreement among the leaders of more than 180 countries to reduce greenhouse gas emissions and limit the global temperature increase to less than 2° Celsius or 35.6° Fahrenheit above preindustrial levels by the year 2100.
The Paris Climate Agreement
The Kyoto Protocol was revised in 2012 in an agreement known as the Doha Amendment that was ratified as of October 2020, with 147 member nations having “deposited their instrument of acceptance.”
More than 190 nations signed the 2015 Paris Agreement, which set emission standards and allowed for emissions trading.
The U.S. dropped out of the agreement in 2017 under President Donald Trump but subsequently rejoined it in January 2021 under President Biden.
The Glasgow COP26 Climate Change Summit
Negotiators at the November 2021 summit ratified a deal that saw almost 200 countries implement Article 6 of the 2015 Paris Agreement. It permits nations to work toward their climate targets by purchasing offset credits that represent emission reductions by other
countries. The agreement hopes to encourage governments to invest in initiatives and technology that protect forests and build renewable energy technology infrastructure to combat climate change.
Brazil’s chief negotiator at the summit, Leonardo Cleaver de Athayde, stated that the forest-rich South American country planned to be a major trader of carbon credits. “It should spur investment and the development of carbon projects that could deliver significant emissions reductions,” he told Reuters.
Several other provisions in the accord aimed at reducing overall global emissions include a zero tax on bilateral trades of offsets between countries and cancelling 2% of total credits.
Additionally, 5% of revenues generated from offsets are placed in an adaptation fund for developing countries to help fight climate change. Negotiators also agreed to carry over credits registered since 2013, allowing 320 million credits to enter the new market.
Who Gets Carbon Credit Money?
Carbon credits, the emission credits issued to companies by governments, can be sold to other companies on the carbon credit market. The money goes to the company that sold the credit. Money spent on carbon offsets goes to the project or entity sponsoring the carbon offset. Offsets are voluntary credits representing one ton of emissions the project’s operations countered.
Is Carbon Credit Good or Bad?
The regulatory carbon credit program is a good initiative designed to incentivize businesses to reduce their emissions. Voluntary carbon offset programs are also a good idea, but they are not used to reduce emissions—they are used to offset emissions, which is good but not ideal.
How Much Is a Carbon Credit Worth?
The value of a carbon credit can vary significantly based on time and geography. It can also swing due to changes in regulations, policy, and demand for offsets. According to Bloomberg NEF, a commodities research service, carbon prices in California are expected to average USD 42 per metric ton in 2024 and USD 76 per ton in Europe.
The Bottom Line.
Carbon credits were devised to reduce greenhouse gas emissions by creating a market where companies can trade emissions permits. Under the system, companies receive several carbon credits that decline over time. They can sell any excess to other companies.
Carbon credits create a monetary incentive for companies to reduce their carbon emissions. Those that can’t easily reduce emissions can still operate but at a higher financial cost. Proponents of the carbon credit system say that it leads to measurable, verifiable emission reductions.
Controversies Stoked by Carbon Credits
In this opaque global market, some projects earn carbon credits by increasing the use of renewable energies. Others recycle waste or plant trees or improve agricultural practices.
However, the most popular and profitable approach in the Brazilian Amazon is known as “avoided deforestation” ventures. These projects win credits by essentially maintaining the status quo — by preserving forests seen to be at risk.
I will peek at two carbon credits projects to indicate that it is challenging to police this inchoate market that promises a lot but may struggle to meet its hype. These are millions of cookstoves sent to Mozambique and the Brazilian Amazon.
The cookstoves in Mozambique were designed to reduce the amount of wood, smoke, and cooking time, significantly taming deforestation and smoke pollution. However, there were red flags everywhere.
Millions of cookstoves were shipped to Mozambique with little follow-up. The names of beneficiaries were recorded, but later, they were noted to have been exaggerated.
The simple and cheap technology applied to manufacture the cookstoves did not consider the need to escape open space where the vagaries of nature could interfere with the cooking.
When cooking was moved inside the thatched houses, the gases generated by the cookstoves created even more problems for inhalers.
Without a concerted follow-up, the assessment of whether the effort was worth it remains inconclusive, and those multi-conglomerates that were supposed to buy carbon credits raised by the cookstoves have developed cold feet.
The intricate problem has triggered powerful incentives to balloon potential benefits in order to rake out higher rates for profit. Insincerity and corporate greed are all we are left with while the poor of Mozambique have been taken for a ride.
Brazilian Amazon forests were deemed to be the highest natural capture of the GHGs and, therefore, merited receiving carbon credits to encourage them to conserve the massive forests that can justify major pollutants to chill out their stewed moral conscience.
However, nobody thought those forests were a major source of gaseous pollution.
Right now, the Amazon forests are on fire caused by arsonists, but who pays for the pollution from the enraging plumes? The role of conservationists to polluters can shift in a matter of seconds. In the case of the Brazilian Amazon, forests have flipped roles from a conversationalist to a mega polluter.
How can the Brazilian Amazon forests compensate the world for smoke pollution, and how can future carbon credits be deducted to compensate us for inhaling or enduring the enlargement of the ozone layer hole caused by the fires?
The unforeseeable consequences of widening ozone layer depletion are very grave, as recently witnessed by the vagaries of nature, leading to population displacement, property destruction, and hot weather, just to name a few.
The polluter pays concept meets its conspicuous dilemmas. On the other hand, imposing penalties against wildfires will erode the incentives to conserve the forests.
That scenario will defeat the very reason carbon credits were created in the first place. The future of the carbon credits market is mired in controversy, but what surprises me most is how gullible the leaders in developing countries have been in leasing their indigenous forests for a forlorn hope that big cash is on the horizon.
Of more concern, the Amazon forests have churned out “carbon mercenaries” who reap profits from public lands they have no right to own and renege on sharing the profits with the targeted communities.
Of more damning, most developing countries, including Tanzania, are yet to craft laws regulating the trade in carbon credits but have shown the willingness to lease their prime public lands.
Government authorization has been used to equip foreigners with legal status to transact with major polluters, while the distribution of benefits remains unknown.
Developing countries’ governments cannot be trusted in this venture because past records indicate that when they receive such funds, they spend them on themselves with little regard for the people most affected by the exercise.
They buy fancy SUVs for themselves, hike their salaries and perks, spend on overseas medical tourism, and inaugurate costly infrastructural projects that have no link to poverty alleviation.
Well, I have bad news for the carbon credits industry: not all that glitters is ‘DIAMONDS FOREVER AND EVER, AMORE!’
