by Permian Global

December 3, 2021

No one can be left in any doubt in 2021 that collaborative working towards mitigating the worst impacts of the climate crisis is now urgent.

This urgency has increased over recent years, culminating in the Intergovernmental Panel on Climate Change (IPCC) report. Published in August 2021, this report shows that climate change is rapid, affecting everywhere and intensifying fast. An increasing number of countries, corporations, NGOs and individuals are publicly pledging to reduce greenhouse gas emissions (GHG).

Carbon credits are one strand of many different elements that will work together to solve the climate crisis. Here’s how they work.

Carbon credits form one part of the fight back against climate change

Year-on-year climate scientists are able to pinpoint the damage being inflicted on the environment accurately and identify methods to reduce this damage.

In 2021 alone, there has been a rapid succession of climate induced extreme weather events that have led to disasters worldwide. From flooding in Germany to life-threatening heat plumes in the US, it’s clear that the consequences of inaction are happening right now.

In addition to the urgent need for a fast and complete shift towards clean energy and industrial decarbonisation, restoring and protecting precious natural landscapes is also vital. This is particularly important for massive natural carbon storage regions, such as the Indonesian rainforest that the Katingan Mentaya Project (KMP) protects.

One way in which businesses can offset their GHG emissions is through the carbon economy. Buying carbon credits allows businesses to offset the unavoidable emissions they are responsible for by purchasing carbon credits that have been generated through activities that are helping to reduce emissions.

The role of carbon emissions in global warming 

Organic life of every kind contains carbon, and for billions of years, the natural environment has balanced itself through the storage and removal of carbon. Therefore, the protection of these natural processes is vital for the world to have any chance of staying below the 2 degrees C of global warming as set out in the Paris Climate Agreement.

These types of protective initiatives are called Nature-Based Solutions (NBS) or Natural Climate Solutions (NCS) and offer a tangible, real-world way that companies can become directly involved in contributing to lowering global emissions.

To limit global warming to below the threshold, we collectively need to slash current emissions by 50% by 2030. The next step is reaching net zero by 2050. Some business activities cannot be made carbon-free, certainly not in the immediate future. And this is where carbon credits come in.

By paying to replace carbon used or to reduce emissions, companies can offset their carbon footprint. In the most ambitious and forward thinking of cases, it’s even possible for businesses to become carbon neutral.

How do carbon credits work?

The underlying idea behind the carbon market is very simple. If a business cannot feasibly stop its emissions of CO2, then it can pay another to emit less so that the total is still reduced.

There are three main types of carbon credits:

  1. Reducing emissions through a switch to green energy, industrial efficiencies and smarter technology.
  2. Removing emissions completely by planting or restoring forests or another form of carbon capture and storage.
  3. Avoiding emissions by supporting local communities financially to protect rather than destroy carbon sinks, such as peat forests like the Katingan Mentaya Project.

Companies focused on their own emission targets find that buying carbon credits to offset their emissions is enough. Other businesses are going much further. For example, Microsoft has committed to using credits to offset all historical emissions from the whole time the company has been going – that’s 45 years’ worth.

Other businesses have cut most of their emissions and use carbon credits to offset the final amount they can’t avoid. Credits are usually traded in a unit worth one tonne of CO2. It’s estimated that two billion tonnes of CO2 will need to be offset to reach the 2030 target.

Building transparency and widespread acceptance of the carbon market 

One of the biggest problems that have faced the burgeoning carbon credit market is the historical lack of standardisation. This has led to some groups criticising the problem as susceptible to abuse and manipulation.

And while this has taken its toll on the industry, the wider world is slowly becoming more accepting of the carbon credit market and its potential to make huge inroads into the carbon crisis.

A report published in November 2020 shows a possible blueprint for the creation of a large-scale carbon credit global trading market that is fully transparent. Led by Mark Carney, UN Special Envoy for Climate Action and Finance, the consultation document was devised based on independent verification that reducing CO2 through carbon credits is valid.

It is, of course, important that carbon credits are used in conjunction with businesses directly reducing their emissions too. Climate change is not a one solution problem, and all stakeholders must work together using every tool in their collective arsenal.

The report points out that carbon credits must be based on initiatives that have been monitored and independently validated throughout their lifespan. It also proposes the use of blockchain technology in the process to benefit from the unalterable recording system that it offers. 

Examples of carbon credits working right now

The Katingan Mentaya Project provides a real-world example of just how well carbon credits can work. The project has formed partnerships with the 34 villages surrounding the 150,000 ha of intact peat forest, to help protect it from deforestation and degradation and to fund local community development initiatives. This is made possible through the selling of carbon credits.

Currently, this is the biggest forest-based project that falls into the avoided emissions category of carbon credit initiatives. So far, we’ve prevented the release of more than 37 million tonnes of CO2 and preserved more than 200,000 hectares of vital peat swamp forest.

Other working examples include the EU Emissions Trading Scheme (EU ETS), which the most energy-intensive industries have used on the continent since 2005.