Carbon Credits
Carbon credits are tradable permits or certificates that represent the removal of one ton of carbon dioxide (CO2) or an equivalent amount of another greenhouse gas (GHG) from the atmosphere. They are used as a mechanism to reduce GHG emissions by providing a financial incentive for emission reduction projects. There are several types of carbon credits based on their origin and the standards they follow:
Voluntary Emission Reduction (VER) Credits
These are generated by projects that voluntarily offset emissions. They are usually not used for compliance with mandatory regulation but rather by companies or individuals wishing to offset their own carbon footprints. The VER market is often referred to as the “voluntary market.”
Certified Emission Reductions (CERs)
These credits are issued by the Clean Development Mechanism (CDM) for emission-reducing projects in developing countries. CDM is one of the Kyoto Protocol’s flexible mechanisms and is intended to help industrialized countries meet their emission reduction commitments.
Emission Reduction Units (ERUs)
Created by Joint Implementation (JI) projects, another flexible mechanism of the Kyoto Protocol, these credits represent emission reductions in industrialized countries. JI projects might involve, for instance, the upgrade of power plants or industrial processes to be more energy-efficient.
Removal Units (RMUs)
These are issued for activities that remove carbon from the atmosphere, such as afforestation and reforestation.
Assigned Amount Units (AAUs)
Every Annex I country under the Kyoto Protocol is issued AAUs, which represent the GHG emission allowance (or “cap”) that the country has. Countries that have emissions below their “cap” can sell the excess AAUs to countries that exceed their emissions quota.
Offset Credits
Generated by projects that reduce or avoid emissions outside of a cap-and-trade system, these credits can be used to meet compliance obligations within such a system. For instance, a company might fund a reforestation project to generate offset credits.
REDD Credits
Representing emissions reductions from projects that prevent deforestation and forest degradation in developing countries. REDD stands for “Reducing Emissions from Deforestation and Forest Degradation.”
T-credits
These are generated by technology-specific projects, such as those that promote renewable energy or energy efficiency.
In-Setting Credits
These are generated within a specific setting or sector, such as aviation or shipping.
Verification Standards
Different standards and verification bodies ensure the integrity of these credits, such as the Verified Carbon Standard (VCS), Gold Standard, and others. When selecting or investing in carbon credits, it’s essential to ensure they are credible, verifiable, and make a genuine impact.
