Carbon Credits Explained

Companies around the world are taking a closer look at their contributions to climate change, with an increasing number voluntarily reducing their “carbon footprints” by purchasing offsets elsewhere. In a practice known as offsetting, businesses pay to outsource emissions reductions when it is more cost-effective or technologically feasible than doing so in-house. 

The market for these voluntary offsets, fueled by corporate commitments to become “carbon neutral,” is growing rapidly. Global carbon markets almost doubled in size in 2009. And the prospects for continued growth in carbon markets are strong. 

The reason is simple: companies are increasingly entering the voluntary carbon market. For example Landrover, HSBC, Google and DuPont are the types of companies engaging in voluntary markets to offset their emissions. 

Despite the growing interest in voluntary carbon markets, companies and individuals are finding a difficult playing field. The voluntary carbon market is fragmented with complex carbon “supply chains” and a lack of consistent standards. Carbon offset providers source from projects that range from planting trees in India to capturing methane in U.S. landfills.

Assessing the benefits and drawbacks of each provider is challenging, especially as historical data is limited. Some offset projects are independently verified to agreed-upon standards, but others are not. These standards are numerous and overlapping, but not using them runs the risk of having a project come under scrutiny in the future. As with many emerging markets, transaction costs can be high.

Therefore, buyers of carbon credits are looking for premium grade voluntary credits that are verified to the highest standard.