Voluntary Carbon 101
Net Zero ESG

Voluntary Carbon 101

Understory Team
Understory Team

In today's world of corporate ESG initiatives and net zero goals, carbon credits (also called carbon offsets) often are a key piece to the puzzle. But what are carbon credits? How do they fit into the broader landscape of the voluntary carbon markets?

In this overview, we dig into the various components of this complex industry and have compiled the basic information that you need to know.

What is voluntary carbon credit?

The voluntary carbon market is a climate change mitigation technique available for companies that want to reduce carbon emissions or reach net-zero carbon emissions. This is done via the use of carbon credits which can be purchased and redeemed when a company produces unavoidable greenhouse gasses (GHGs).

It should be noted that carbon credits don’t eliminate existing GHGs. Carbon credits are used as mathematical offsets in carbon accounting. Other entities, like project developers, have methods to sequester GHGs and sell these as carbon credits to other organizations who have the financial resources to fund sequestration.

How is the voluntary carbon credit market different from a mandatory carbon market?

Mandatory carbon credit means that organizations must reduce carbon emissions to comply with government mandates and regulations. Voluntary carbon scheme is available for organizations that have the desire to offset their carbon emissions.

What are carbon credits:

  • Carbon credits are permits or ‘allowances’ that allow for the emission of greenhouse gas. It is generally used for carbon dioxide (CO2) offsets.
  • 1 carbon credit = 1 tonne atmospheric GHG / CO2 removed
  • These carbon credits can be purchased and used to compensate for 1 tonne GHG produced.
  • Once a credit is used, it is retired and can / should no longer be used.

What are the different types of carbon credits?

REDD and REDD+ Credit stands for Reducing Emissions from Deforestation and forest Degradation – an avoidance type credit. These credits support projects that reduce deforestation and use resources in a more sustainable way (shifting away from slash and burn farming philosophy, for example). Examples include:

  • Reducing emissions from deforestation/forest degradation
  • Conserving forest carbon stock (in soil, animals, and plants)
  • Sustainably managing forests

REC Credit stands for Renewable Energy Credits. It is measured in megawatt hours and is not the same as a carbon offset. It is a way to demonstrate the use of renewable energy sources that do not generate GHGs. There are a few nuances associated with RECs:

  • It demonstrates avoidance of carbon use through the use of renewable energy sources
  • These credits are certified by non-profit organizations (e.g., Green-e)
  • Companies can purchase these credits to be carbon neutral, or to ensure that their energy is 100% renewable, whichever is the main goal of the company.

A Bundled REC is sold with the energy that is produced

  • This is more common for newer projects and can use additionality claims (company added low cost renewable energy to the grid)

An Unbundled REC is where the credits produced do not need to be purchased with energy

  • There is no additionality claim because these credits are not attached to the power that is produced.

Other Types of Carbon Offsetting Projects: There are multiple organizations and projects that are developed to sequester carbon or avoid the creation of carbon in the first place. These can take many different forms and have varying degrees of environmental impact. A subset of projects are listed below:

Forestry and conservation - trees naturally sequester carbon

  • Tree planting
  • Avoided deforestation
  • Forest management

Renewable energy - these energy sources do not produce carbon

  • Hydroelectricity
  • Wind energy

Community projects

  • Clean cookstove projects - these projects replace cookstoves that burn wood or coal inefficiently to reduce carbon emissions
  • Water sanitation and hygiene projects - these projects avoid generating carbon emissions if the use of firewood is reduced

Waste to energy

  • Landfill methane - captures methane and converts it into electricity
  • Biogas - turns human or agricultural waste into energy

What are the differences across geographies?

The EU, UK and the State of California have industry wide mandatory carbon markets for the energy sector. California’s cap and trade system (mandatory carbon scheme) is based on a maximum amount of emissions that are allowed across the industry. The rest of the United States operates a voluntary carbon market for the energy sector.

If you are interested in digging deeper into this topic, check out the additional recommended readings below.

Additional Readings:

Carbon Market Platform, OECD

Countries on the Cusp of Carbon Markets, The World Bank

Carbon Market, Science Direct

Carbon Market Resources, Environmental Defense Fund

Carbon Markets are Going Global, The Economist

What is Carbon Pricing? S&P Global

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