Compliance Carbon Credits: How They Work and Why They Matter
Compliance carbon credits are certifications that represent the reduction or removal of greenhouse gas emissions from the atmosphere by certain sectors or countries. The carbon credits are issued by regulated markets that set mandatory emission reduction targets for their participants. In this article, we will explain what compliance carbon credits are, how they work, and what are the benefits of using them.
What are compliance carbon credits?
A compliance carbon credit is a unit that corresponds to one metric ton of carbon dioxide equivalent (tCO2e) that has been prevented, reduced, or removed from the atmosphere by a regulated entity. The regulated entity can be a company, an industry, a region, or a country that is subject to a legal or policy requirement to limit its greenhouse gas (GHG) emissions. Compliance carbon credits are also known as allowances, permits, or quotas.
Compliance carbon credits are different from voluntary carbon credits, which are issued by projects that reduce or remove emissions voluntarily, without any legal obligation. Voluntary carbon credits are used by individuals, organizations, or companies that want to offset their own emissions or support climate action. Voluntary carbon credits are also known as offsets, reductions, or verifications.
How do compliance carbon credits work?
Compliance carbon credits work on the principle of “cap and trade”. This means that there is a limited amount of emissions that can be released into the atmosphere, and this amount is divided into tradable units (carbon credits). Those who emit more than their allocated amount must buy carbon credits from those who emit less or from projects that generate carbon credits. This creates a market incentive for emission reduction and a price signal for carbon. The price of carbon credits depends on the supply and demand of the market, as well as the quality and type of the regulated entity or project that generates them.
Compliance carbon credits can be traded in two types of markets: national and international. National markets are established by individual countries or regions that set their own emission reduction targets and rules. For example, the European Union Emissions Trading System (EU ETS) is the largest national market in the world, covering more than 11,000 power plants and industrial facilities in 31 countries. International markets are established by global agreements that set common emission reduction targets and rules for multiple countries. For example, the Kyoto Protocol is an international agreement that created three mechanisms for trading carbon credits: the Clean Development Mechanism (CDM), the Joint Implementation (JI), and the International Emissions Trading (IET).
What are the benefits of using compliance carbon credits?
Using the carbon credits can have multiple benefits, both environmental and financial. Here are some of the main reasons why compliance carbon credits are important:
Environmental impact: By using the carbon credits, regulated entities are contributing to the global effort to limit the temperature rise to 1.5°C above pre-industrial levels, as agreed in the Paris Agreement. The carbon credits help to reduce greenhouse gas emissions and mitigate the effects of climate change, such as extreme weather, sea level rise, biodiversity loss, and human health risks.
Financial returns: The carbon credits can offer financial returns, as the demand for them is expected to increase in the future, driven by the tightening of emission reduction targets and the expansion of regulated markets. According to a report by the World Bank, the value of the global carbon market reached $272 billion in 2020, a 20% increase from 2019. Some experts predict that the carbon market could reach $1 trillion by 2030, as more countries and sectors join the carbon pricing schemes.
Innovation and development: The carbon credits can stimulate innovation and development, as regulated entities seek to adopt cleaner and more efficient technologies and practices to reduce their emissions and costs. Compliance carbon credits can also support the development of low-carbon projects, especially in developing countries, that can provide social and economic benefits, such as job creation, poverty alleviation, energy access, and infrastructure improvement.
Conclusion
Compliance carbon credits are certifications that represent the reduction or removal of greenhouse gas emissions from the atmosphere by certain sectors or countries. The carbon credits are issued by regulated markets that set mandatory emission reduction targets for their participants. The carbon credits work on the principle of “cap and trade”, which creates a market incentive for emission reduction and a price signal for carbon. Compliance carbon credits can have multiple benefits, both environmental and financial, such as contributing to the fight against climate change, offering financial returns, and stimulating innovation and development.
If you are interested in learning more about the carbon credits, you can explore the different options and platforms available, such as EU ETS, Kyoto Protocol, or World Bank Carbon Pricing Dashboard. You can also learn more about the compliance carbon market and the compliance carbon credit standards from sources such as gn0e, Deloitte, Verra, or Dentons. Remember to always do your own research and due diligence before making any decision.
