The Timeline of Carbon Credits
To Begin, What are Carbon Credits?
Carbon credits are a standardized environmental economic instrument representing a reduction of one metric ton of carbon dioxide emissions. These credits can be traded, sold, or retained to offset emissions from a company’s operations or activities (Metcalf Weisbach, 2009). As the backbone of a carbon market, these credits meet the demand and supply needs of carbon innovators and polluters.
The industry categorizes carbon credits based on how they are issued. For instance, credits earned through initiatives such as renewable energy adoption, afforestation efforts, carbon capture technology (CCT) advancements, or other preventive measures have distinctive classifications. These credits introduce a new economic dynamic and foster an environment where carbon innovators and businesses can thrive. They provide an organized platform for trade, with the broader goal of making sustainability economically attractive (Stavins, 2008).
Furthermore, businesses can utilize this structured system to measure and show their genuine environmental efforts precisely, diminishing the potential or intent for greenwashing. Additionally, this system empowers and mandates certain regulatory bodies and industries responsible for ensuring these certificates' proper renewal, protection, and oversight (Convery, 2009).
Timeline of a carbon credit
The timeline of a carbon certification—from birth to retirement, can be classified into four stages, namely: generation, verification and rating, registration, and retirement.
Generation of Carbon credits
The Ecosystem Marketplace estimates the Voluntary Carbon Market (VCM) to be a $2 Billion industry in 2021. It classifies about 170 projects as carbon credit generation activities ranging in eight broad categories, including Renewal energy, household and community, chemical and industrial, energy efficiency, waste disposal, agriculture, transport, and forestry. Carbon credit generation can also be divided into two categories: natural intervention (such as forestry and agriculture) and technological intervention (such as Carbon Capture Technology (CCT) or renewables). These activities must be ‘born’ from human intervention to participate in the market; for example, oceans absorbing CO2e cannot be a credit generator; however, if a technology aids in the faster or better absorption of CO2e, it [the firm involved] will be able to participate in the market. The activities will have to follow a Product Design Document (PDD) designed by verification companies to participate. It is evident that the quantification of these certificates is easier when they are generated through technological intervention.
It is also important to note that to certify a carbon credit, the avoidance or omission of CO2e has already been established, or the process follows PDD to account for the generation of CC in the future. This requires constant monitoring by verification companies for transparency and a quality-insured carbon credit for the market.
Verification and Rating
The role of auditors and third-party companies in verifying these certificates is critical. They are in charge of certificate documentation and verification, as well as the creation of the Product Design Document (PDD), the guideline carbon credit generating companies use for standardized generation. Because certificates can be issued in a variety of ways, the PDD designed by verification firms is critical in a carbon market. These firms also conduct site visits to the generating firm for added assurance; however, for the market to appeal and expand to the larger economy, technological solutions are required with the assurance that generating firms do not report false certificates.
The following step is to rate the quality of the verified certificates. Firms such as BeZero rate these certificates from A (highest) to D (lowest).
Registration
Because the certificates have been verified and rated, they are eligible for registration in the marketplace. Verra and Gold Standard are the leading firms that register these certificates. Once registered, these credits are referred to as Verified Carbon Credits (VCC) by Veera. Registries categorize carbon credit offsets using a variety of quality control metrics, regardless of their names. They are verified through the validation and verification procedures described in the preceding step.
Retirement
The Verified Carbon Credits are now on the market, and both end users and traders can participate in the carbon exchange. CME Group, Xpansiv CBL, ICE, Carbon Trade Exchange (CTE), and other carbon trading markets exist. To encourage new traders into the market, ‘vintage carbon’ participation has not been restricted; such restrictions would add complexities for companies in intertemporal carbon exchange and strict movement in business-as-usual.
