A carbon credit is a tradable instrument that represents one tonne of CO2 or another greenhouse gas (GHG) reduction. It is used to offset emissions elsewhere, allowing companies or individuals to reach their climate goals without reducing emissions in their own operations. Ambitious corporations, like software giant Microsoft, have even pledged to be carbon neutral or negative, nullifying all their previous historical emissions through carbon credits.
But the industry has some controversies around it. Some critics have pointed to research that finds that projects often overstate how much carbon they remove from the atmosphere, essentially giving companies a pass to pollute more. This can be because landowners are not managing their forests any differently than they would have, or because the project is only removing carbon from the air and not storing it in the ground.
In other cases, carbon.credit are sold for projects that protect forests that were never in danger of being deforested. In order for a carbon credit to be real, it needs to actually generate or incentivize an additional climate benefit – and these forests did not. This can be especially harmful for communities, since it creates the impression that the market is actually addressing GHG emissions and the climate crisis when it is not.
Several high-level coalitions are working to define consensus-based standards that ensure the integrity of the carbon credit market – in other words, that the credits really do help reduce emissions and have positive impacts on people, nature, and society. For example, the Voluntary Carbon Market Integrity Initiative is designing a set of guidelines for credits themselves and the ICVCM is developing a standard for how to evaluate underlying carbon projects – for the supply side of the carbon market.
The cost of carbon credits depends on a number of factors, including the type of underlying project, how standardized it is (e.g., exchange-traded), the geographic region and vintage of the project, and the time frame for the credits to be delivered. They also can depend on how much it costs to certify the project, and whether or not it generates additional co-benefits for the local community.
The cost of carbon credits is expected to skyrocket in the coming years as companies seek to meet their climate targets and avoid fines under regulatory programs such as cap-and-trade. But the price of carbon credits can also reflect political and public sentiment toward the industry, and controversies around projects may undermine its reputation. As such, the industry needs to make sure it is doing its best to maintain credibility and bolster public confidence in carbon finance as it becomes increasingly essential to our collective future.