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Understanding Carbon Credits: The Basics and Beyond

A carbon credit is essentially permission to release a specified amount of carbon dioxide (CO2) or other greenhouse gas (GHG) emissions. Carbon credits were developed as part of a worldwide effort for reducing greenhouse gas emissions in the environment. Carbon credits are legally recognized certificates that may be sold and given permission to emit one ton of carbon dioxide or its equivalent

Burning fossil fuels contributes considerably to industrial greenhouse gas emissions, notably in the power, cement, steel, textile, and fertilizer industries. Coal, coal-generated power, natural gas, and oil are all examples of fossil fuels. The principal greenhouse gases emitted by these industries include carbon dioxide, nitrous oxide, hydrofluorocarbons (HFCs), methane, and others. These gases all increase the atmosphere's ability to retain infrared radiation, which has an influence on the climate. As the necessity of lowering emissions became more generally acknowledged, the concept of carbon credits arose.

that are able to reduce their greenhouse gas emissions below their quotas get credits. Carbon credits may be exchanged on the worldwide market at their present price. It aids in the development of a strategic mentality capable of persuading industrial and commercial enterprises to emit minimal levels of carbon into the atmosphere and to utilize carbon trading to sell extra credits. Thus, the Greenhouse Gas (GHG) control mechanism gives rise to carbon trading, which can successfully encourage carbon reduction schemes across various industries. As a result, the concept of emitting carbon below the emission quota undoubtedly benefits many companies willing to sell excess carbon credits to commercial and individual customers. Carbon credits may be exchanged, bought, and sold in national and international carbon marketplaces at the current market price.

What Are Carbon Credits?

Carbon credits are licenses that enable the owner to release a certain quantity of CO2 or other greenhouse gases. One credit allows for the release of one ton of carbon dioxide or it is equal to other greenhouse gases. It is half of a so-called cap-and-trade program. Meanwhile, the corporation may sell any unused credits to another company that needs them. Private enterprises are, therefore, motivated twice to minimize climate emissions. First, they have to pay for additional credits if their emissions exceed the quota. Second, they may generate money by lowering their emissions and selling any extra permits.

Proponents of the carbon credit system argue that it results in quantitative, verifiable emission reductions from certified climate action programs, which cut, eliminate, or prevent greenhouse gas (GHG).

How Do Carbon Credits Work?

The ultimate purpose of carbon credits is to minimize greenhouse gas emissions in the environment. As previously stated, a carbon credit represents the right to release greenhouse gasses equal to one ton of carbon dioxide. According to the Environmental Defense Fund, it is comparable to driving 2,400 miles in terms of CO2 emissions.

Companies or governments are given a certain amount of credits, which they may sell to help balance global emissions. "Since carbon dioxide is the principal greenhouse gas," the United Nations says, "people speak simply of trading in carbon."

What are carbon credits and carbon offsets?

The phrases are sometimes used interchangeably. However, carbon credits and offsets work on separate principles.

Carbon credits, also known as carbon allowances, function as permission slips for emissions. When a firm purchases a carbon credit, generally from the government, it has authorization to emit one ton of CO2 emissions. Carbon credits allow carbon income to flow vertically from firms to regulators, but companies that have surplus credits may sell them to other enterprises.

Offsets move horizontally, exchanging carbon income across enterprises. When a corporation removes one unit of carbon from the atmosphere as part of its usual business operations, it may create a carbon offset. Other corporations may then buy the carbon offset to lessen their own carbon impact.

It should be noted that the two names are occasionally used interchangeably, and carbon offsets are sometimes referred to as "offset credits". However, it is important to remember the difference between regulatory compliance credits and voluntary offsets.

Types of Carbon Market

Businesses can support initiatives that keep global climate goals within reach by purchasing carbon credits, which are transparent, quantifiable, and results-based. Examples include restoring and protecting irrecoverable natural carbon sinks such as forests or marine ecosystems, as well as scaling up emerging carbon removal technology. There are two kinds of carbon markets.

Voluntary Carbon Market

The voluntary markets allow private parties to purchase and sell carbon credits reflecting the avoidance, reduction, or removal of greenhouse gases from the environment. Project developers generate credits and sell them; end purchasers, usually businesses or other institutions looking to offset their emissions; and various intermediaries, such as brokers, traders, and retailers, who provide liquidity, distribution, and other services. Carbon markets are also supported and influenced by various standard-setting bodies and registries that establish minimum requirements for credit creation and issuance, as well as third parties who conduct related due diligence or auditing to support credit issuance or subsequent trading.

Compliance Carbon Market

Carbon management regimes that are mandated at the international, national, and regional levels create and govern compliance markets particularly compliance markets now use the cap-and-trade system, which is particularly prevalent in the European Union (EU).

The EU's emissions trading system (ETS), which went into force in 2005, requires member states to put a cap or limit on emissions in a variety of sectors, including waste management, manufacturing, electricity generation, and oil. This limit is set in line with national climate objectives and progressively lowered to reduce emissions.

Role of Carbon Market

Carbon markets may help to complement and accelerate the broader transition to a low-carbon economy. The following is the role of the carbon market:

  • The Carbon Market enables flexibility in cutting and removing emissions, lowering the overall cost of reducing net emissions.
  • Driving capital to current and scalable solutions, which may assist in accomplishing near-term reductions or removals more quickly. Carbon markets may encourage more rapid deployment of proven solutions, lowering net emissions faster by allowing carbon reduction and removal initiatives access to a larger pool of financing.
  • Creating economic value for decreasing or eliminating emissions may spur innovation, perhaps accelerating decarbonization. Carbon markets may promote investment by displaying future income possibilities, therefore speeding up the development and implementation of novel carbon reduction and removal technologies.
  • Developing a variety of possible environmental, social, and/or economic co-benefits. Investing in projects via the purchase of carbon credits allows businesses and investors to support other vital goals than carbon abatement, such as greater biodiversity, pollution reduction, job creation, community development, and enhanced resilience

Overview of Carbon Trading Scheme, 2023

The Ministry of Environment, Forests, and Climate Change presented the draft Green Credit Programme Implementation Rules, 2023, on June 26, and the Ministry of Power unveiled the Carbon Credit Trading Scheme, 2023, two days later, on June 28. The scheme's execution emphasizes the importance of tackling climate change and the crucial role of market-based methods in meeting emission reduction objectives.

To address the issue of greenhouse gas (GHG) emissions and mitigate climate change in the country, the Bureau of Energy Efficiency (BEE), an organization established by the Ministry of Power to raise awareness of and disseminate information on energy efficiency and conservation, as well as assist in the development of strategies and policies to that end, has launched the Carbon.

The Carbon Credit Trading Scheme assigns a value to each ton of carbon dioxide equivalent (CO2) decreased or avoided, which is known as a carbon credit. The architecture of the country's carbon market would enable the sale, buying, and trading of these credits.

Energy Conservation Bill, 2001

The Energy Conservation Bill is an amendment to the legislation that was approved in 2001. Parliament permitted the creation of a domestic carbon credit trading mechanism by including additional sections in the amendment. The provisions of the law would allow India's public and commercial sectors to generate carbon credits in order to reduce emissions.

Latest Regulations of Carbon Trading Scheme, 2023

The Government of India announced India's Carbon Credit Trading Scheme, 2023 (CCTS 2023), on June 28, 2023, under the Energy Conservation Act of 2001, to establish the country's first domestic carbon market. The announcement emphasizes the critical framework and responsibilities of various stakeholders in the creation and operation of the Indian Carbon Market (ICM). The market would be driven by objectives or reducing greenhouse gas (GHG) emission intensity in accordance with India's Nationally Determined Contributions (NDC) for selected enterprises bound under CCTS 2023. Below are the primary stakeholders under ICM:

  • The Bureau of Energy Efficiency (BEE) will serve as the ICM's administrator, responsible for developing the GHG emissions trajectories and objectives for the entities committed under the notice.
  • The Grid Controller of India Limited will be the authorized agency for the management of the ICM Registry, which will include registering obliged entities and keeping track of transactions between obligated companies, among other things.
  • The Central Electricity Regulatory Commission (CERC) will supervise the trade of carbon credit certificates. They will protect the interests of both buyers and sellers, determine the frequency of trade, and take steps to avoid fraud or distrust. The CERC will register power exchanges to trade carbon credit certificates, as well as decide on and notify trading regulations on a monthly basis.

Regulatory Developments

The Energy Conservation Amendment Bill 2022 proposes to provide India with a legislative framework for carbon projects.

PIB Press Release Regarding Proposed Amendments:

  • Additional incentives, such as carbon credits against the deployment of sustainable technology, will encourage private sector engagement in climate action.
  • Propose expanding the reach to bigger residential structures

The Bureau of Energy Efficiency (BEE) has also developed a framework for India's national carbon market.

Indian Carbon Credit Market

The government aims to develop the Indian Carbon Market (ICM), a national framework with the objective of decarbonizing the Indian economy by placing a price on greenhouse gas (GHG) emissions via the trade of carbon credit certificates.

The Carbon Credit Trading Scheme is being developed by the Ministry of Environment, Forests, and Climate Change in collaboration with the Bureau of Energy Efficiency, Ministry of Power. Because India already has a market mechanism for energy savings, the new Carbon Credit Trading Scheme will bolster efforts to transition to a more sustainable form of energy by broadening the emphasis to encompass all possible energy sectors in India.

Benchmarks and objectives for GHG emissions intensity will be created for these sectors, and they will be in line with India's emissions trajectory under the Paris Agreement. Carbon credits will be traded depending on how these sectoral trends function. Furthermore, it is anticipated that a voluntary system would be established simultaneously to stimulate GHG reductions from non-obligated industries.

To operationalize the scheme, the ICM will define the requisite validation, registration, verification, and issuance procedures, as well as techniques for estimating carbon emission reductions and removals from different registered projects. Guidelines for the emissions scheme's Monitoring, Reporting, and Verification (MRV) will also be prepared after consultation. It is proposed that a comprehensive institutional and governance framework with clearly defined responsibilities for each stakeholder participating in ICM implementation be built. All entities will develop new talents in the field.

Certificate for Carbon Credit Trading Scheme

Carbon credit certificates are awarded by organizations covered by the legislation that reduce their emissions.

The steps for Obtaining a Carbon Credit Trading Certificate are:

Plan your project- You must consider how your project will influence the environment. Then, compare it to the standards set by the agency that verifies the number of credits.

Approval of Project - Your project has now been prepared for the certification organization's first examination after all estimations and evaluations. If everything goes as planned, you'll receive the go-ahead. Validation by a third party entails an unbiased review of your project. An on-site inspection may be required to certify that your project meets their certification criteria.

Final Review and Approval -After successful validation, your project will be processed for certification and issued certified carbon credits. Following that, you may use the credits to offset your own emissions or sell them via a carbon register.

Monitoring the Project -It doesn't end there after your carbon credits are certified. The monitoring approach you developed during project planning must be put into effect. As a consequence, you must give monitoring project reports to the agency responsible for carbon credit certification. It is critical to guarantee that the credits you offer decrease or eliminate emissions.

Challenges in Carbon Credit Trading

Both buyers and sellers of carbon credits may face challenges while engaging in carbon markets. Carbon credits may be complex, costly, and hazardous for purchasers to acquire and administer. They may encounter obstacles like price fluctuations, unclear laws, quality control issues, double dipping, or greenwashing, as stated below:

Double-counting of GHG emission reductions

This occurs when various parties or systems report the same decrease in emissions. This might jeopardize carbon markets' legitimacy and environmental integrity.

Regulatory uncertainty

Shifting rules and policies in many nations have an influence on the market, causing uncertainty for investors and firms.

Green-washing

This is the technique of creating or misrepresenting an environmental commitment without actually lowering emissions or changing corporate policies via the use of carbon credits or offsets. As a consequence, public trust may suffer, and resources may be diverted away from more effective climate action.

Climate project authenticity and high standards

Determining the degree of additionality, measurability, verifiability, permanence, and avoidance of emissions shifting is a difficulty in guaranteeing climate initiatives' credibility and authenticity.

Price Volatility

Carbon credit rates may fluctuate, making it harder for companies to plan long-term sustainability projects.

Benefits of the Carbon Credit Trading Scheme

Thus, India, as a developing country, may benefit from carbon credit and trade in the following ways:

Profitability

To begin, money from carbon credits obtained via carbon trading may be economically utilized to fund renewable energy projects.

Energy Saving

Second, energy-saving activities may be implemented via the right use of carbon credits.

Creating Jobs

Third, carbon credits may help to create jobs by establishing firms that manufacture sustainable energy products.

Carbon Credit vs Carbon Offsets

Let us understand the differences between Carbon credit and carbon offsets:

Carbon Credit

  • A carbon credit is a transferable financial instrument that firms may buy or sell, and governments (or independent certifying organizations) acknowledge it as indicating a decrease in emissions.
  • Tradeable 'permits' to release CO2.
  • Governments and regulatory agencies construct them to regulate emissions by industry or sector (mandated cap and trade).
  • If a company's emissions fall below the permitted amount, it may sell any leftover credits to another company.
  • Carbon Credits provide a financial incentive for enterprises to minimize their emissions.
Carbon Offsets
  • A carbon offset is a decrease or removal of carbon dioxide (CO) or other greenhouse gas (GHG) emissions to compensate for emissions from other sources.
  • These initiatives mitigate or remove greenhouse gases from the environment.
  • These initiatives include planting trees, investing in renewable energy, increasing energy efficiency, and so forth.
  • Carbon offsets are more widely accessible and voluntary in nature.
  • When you purchase a carbon offset, you essentially pay someone else to decrease emissions.


Global Carbon Credit Initiatives

In 1997, the United Nations' Inter-governmental Panel on Climate Change (IPCC) created a carbon credit plan to decrease global carbon emission reduction target as part of the Kyoto Protocol accord. The agreement established binding emission reduction objectives for the nations who signed it. Another accord, known as the Marrakesh Accords, established the parameters for how the system would operate.

The Kyoto Protocol separated nations into industrialized and developing economies. Industrialized nations, commonly known as Annex 1, ran their own emissions trading market. If a nation emits less than its target quantity of hydrocarbons, it may sell its excess credits to countries that did not meet their Kyoto-level targets via an Emissions Reduction Purchase Agreement (ERPA).

The separate Clean Development Mechanism for poor nations granted carbon credits known as Certified Emission Reductions (CERs). These credits might be given to a developing country in exchange for helping to fund sustainable development efforts. CERs were traded on a separate market.

The first commitment period of the Kyoto Protocol concluded in 2012. The United States had already pulled out in 2001.

The Paris Climate Agreement

The Kyoto Protocol was updated in 2012 via an accord known as the Doha Amendment, which was approved in October 2020, with 147 member states having "deposited their instrument of acceptance."

More than 190 countries signed on to the Paris Agreement in 2015, which also establishes pollution limits and allows for carbon trading. The United States withdrew from the pact in 2017 under then-President Donald Trump but rejoined in January 2021 under President Biden.

The Glasgow COP26 Climate Change Summit

Negotiators at the November 2021 conference reached an agreement that saw over 200 countries adopt Article 6 of the 2015 Paris Agreement, which allows states to work toward their climate goals by purchasing offset credits representing emission reductions by other countries. The pact is intended to encourage nations to invest in projects and technologies that conserve forests and construct renewable energy infrastructure to mitigate climate change.

For example, Brazil's main negotiator at the conference, Leonardo Cleaver de Athayde, said that the forest-rich South American nation intended to become a significant dealer of carbon credits. In an interview with Reuters, he stated, "It should spur investment and the development of projects that could provide significant emissions reductions."

Several additional elements in the pact include a zero tax on bilateral offset sales between nations and the cancellation of 2% of total credits, both of which seek to reduce global emissions. In addition, 5% of offset income will be invested in an adaptation fund for underdeveloped nations to combat climate change. Negotiators also agreed to carry over offsets from 2013, enabling 320 million credits to join the new market.

Why should the atmosphere's concentrations of greenhouse gases and carbon be lowered?

According to research conducted by scientists from the Inter-governmental Panel on Climate Change (IPCC) of the United Nations, the earth is warming as greenhouse gas concentrations in the atmosphere rise. Global weather patterns fluctuate dramatically as a result of this. The most prevalent greenhouse gas today is carbon dioxide, which is created when fossil fuels like coal, oil, and gas are burned. We might be able to stop more climate damage if we reduce the amount of carbon dioxide we release.

How to produce carbon credits?

Many different sorts of enterprises may generate and sell carbon credits by lowering, absorbing, and storing emissions using various procedures. Some of the most common kinds of carbon offset initiatives are:

  • Renewable Energy Projects,
  • Improving energy efficiency,
  • Methane and carbon capture and sequestration,
  • Land usage and reforestation.

Renewable energy projects have existed long before carbon credit markets became popular. Many nations throughout the globe are endowed with a natural abundance of renewable energy resources. Brazil and Canada, for example, have numerous lakes and rivers, whereas Denmark and Germany have several windy areas. Renewable energy was already an appealing and low-cost source of power production in many nations, and it now has the additional bonus of producing carbon offsets.

Energy efficiency improvements support renewable energy projects by lowering the energy needs of existing buildings and infrastructure. Even small adjustments, such as changing your home lighting from incandescent to LED bulbs, may help the environment by lowering electricity use. On a broader scale, this might include upgrading buildings, refining industrial processes to increase efficiency, or giving more efficient appliances to those in need.

Carbon and methane capture is the process of removing CO2 and methane (which is nearly 20 times more detrimental to the environment than CO2) from the atmosphere.

Methane is easier to deal with since it can be burnt off to produce CO2. While this may seem counterintuitive at first, since methane is nearly 20 times more destructive to the environment than CO2, converting one molecule of methane to one molecule of CO2 by burning nevertheless decreases net emissions by more than 95%.

Carbon is often captured directly at the source, such as in chemical industries or power plants. While the injection of collected carbon underground has been employed for decades for different objectives such as better oil recovery, the notion of storing this carbon footprint indefinitely, treating it similarly to nuclear waste, is a more recent development.

Land use and reforestation efforts rely on Mother Nature's carbon sinks, trees and soil to absorb carbon from the atmosphere. This involves preserving and repairing ancient forests, establishing new forests, and managing soils.

Plants use photosynthesis to transform atmospheric CO2 into organic matter, which finally ends up on Earth as dead plant matter. Once absorbed, CO2-enriched soil helps to restore the soil's natural properties, increasing agricultural output while decreasing pollution.

How companies can offset carbon emissions?

There are several options for businesses to offset or reduce carbon emissions. Although not an exhaustive list, here are some common behaviours that often qualify as offset projects:

  • Investing in renewable energy involves financing wind, hydro, geothermal, and solar power-generating projects or transitioning to these sources wherever practical.
  • Improving global energy efficiency, such as giving more efficient cookstoves to those living in rural or underprivileged areas.
  • Capturing carbon from the atmosphere and converting it into biofuel, making it a carbon-neutral fuel source.
  • After harvest, biomass is returned to the land as mulch rather than being removed or burned. This approach lowers evaporation from the soil's surface, helping to save water. The biomass also feeds soil bacteria and earthworms, enabling nutrients to cycle and improving soil structure.
  • Promoting forest regeneration via tree planting and reforestation efforts.

Switching to low-carbon biofuels like maize, as well as biomass-derived ethanol and biodiesel.

Voluntary vs Compulsory: The biggest difference between credits and offsets

Participation in a cap-and-trade regime is often not voluntary. Your organization must either comply with regulator-imposed carbon credit restrictions, or there are none. As more nations implement cap-and-trade schemes, businesses are increasingly required to engage in carbon credit programs.

Carbon credits are designed to impose additional costs on companies. In exchange, the most effective cap-and-trade schemes give a defined framework for decreasing carbon emissions. Of course, not all programs are made equal, but carbon credits, when done correctly, have a significant influence on overall carbon emissions.

Carbon offsets, on the other hand, are traded on a voluntary basis. There is no rule requiring businesses to acquire carbon offsets. Doing so goes above and beyond, especially for enterprises operating in areas where cap-and-trade regimes do not yet exist. For that reason, offsets provide a few benefits that credits do not.

How Corpbiz can assist you with Carbon Credit?

Corpbiz is a platform that measures, monitors, reduces, offsets, reports, and certifies, allowing you to buy carbon credits or participate in trading systems without depending on a third party. We'll show you how easy it is to plan your reduction strategy, use our simulator to set lower goals each year, and fund initiatives that offset the leftover emissions.

Frequently Asked Questions

To address the issue of greenhouse gas (GHG) emissions and mitigate the climate crisis in the country, the Bureau of Energy Efficiency (BEE), an organization established by the Ministry of Power to raise awareness of and disseminate information on energy efficiency and conservation, as well as assist in the development of strategies and policies to that end, has launched the Carbon Credit Trading Scheme.

Companies can support initiatives that keep global climate goals within reach, such as protecting and restoring irreversible natural carbon sinks such as marine or forest ecosystems, as well as scaling up emerging carbon removal technology by purchasing carbon credits that are transparent, quantifiable, and results-driven.

A carbon market allows investors and companies to exchange carbon credits and offsets simultaneously. This alleviates the environmental situation and creates new commercial prospects.

The Carbon Credit Trading Scheme is regulated by the Bureau of Energy Efficiency, the Ministry of Power, and the Ministries of the Environment, Forestry, and Climate Change.

Carbon offsets are a measuring unit used to "compensate" a company for investing in green projects or efforts (natural or mechanical) that reduce emissions. Carbon credits are a measuring unit used to "cap" emissions (permitted emissions).

This implies that every carbon credit registered and retired on our infrastructure has an open and public audit trail that can be accessed by all parties. As more registries integrate blockchain, this level of openness may become a requirement for all credible net zero claims.

The Central Government, or any agency authorized by it, may issue carbon credit certificates to registered entities that meet the conditions of the carbon credit trading program.

Under the scheme, businesses get a fixed quantity of carbon credits that decrease over time. They may sell the extra to another enterprise. Carbon credits provide monetary incentives for businesses to minimize their carbon emissions.

Carbon credits were developed as a tool to minimize greenhouse gas emissions by establishing a market in which corporations may exchange emission permits. Under the scheme, businesses get a fixed quantity of carbon credits that decrease over time.

The Commodity Futures Trading Commission (CFTC) is responsible for investigating any fraud or malpractice in the Carbon Credit Trading Scheme and enforcing anti-fraud and anti-manipulation rules. Carbon credits and other environmental commodities connected to futures contracts are within the CFC's authority.

The Carbon Credit Trading Scheme encourages firms to decrease emissions by providing a value, known as a carbon credit, for each ton of carbon dioxide equivalent (tCO2e) cut or avoided. The architecture of the nation's carbon market would enable the purchase, sale, and trading of these credits.

This is projected to increase as faith in the market returns and corporations seek a wide range of solutions to help them avoid, decrease, and offset emissions. The price of carbon is expected to climb, with those purchasing carbon credits now guaranteed the highest long-term rates.

Policy risks unique to the carbon financing market include allowance allocation regulations, compliance standards, and approval criteria for emission reduction projects and reductions. These exogenous risks have the potential to have immediate and direct consequences for the carbon finance markets.

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