Climate projects and carbon credits: climate action, today

Passport. Sunscreen. Carbon credits? 

Carbon offsetting is fast becoming a holiday essential, with airline passengers choosing to buy carbon credits alongside their tickets to offset their emissions. Deloitte estimates consumer purchases of carbon offsets could reach close to USD 100 billion in developed countries by 2030.¹ And for good reason; carbon credits are one of the most effective means of delivering immediate climate action. 

But offsetting air travel emissions is just one example of how carbon credits can help individuals and companies mitigate their emissions and contribute towards a more sustainable future. 

How do climate projects generate carbon credits? 

Carbon credits arise from projects delivering climate benefits through the reduction or removal of greenhouse gas emissions. These projects can deliver climate benefits in a variety of ways. Nature-based solutions might focus on protecting rainforests or restoring damaged mangroves. Other projects might be technology-based, for example distributing clean cookstoves or implementing engineered carbon removal methods. Regardless of type, they all promise to avoid or remove emissions. 

Preventing deforestation or investing in renewable energy sources are examples of projects that aim to avoid carbon emissions, while tree planting or direct air capture are examples of projects that remove and store carbon that is already in the air.

Many of these projects need outside funding to achieve climate benefits, so developers around the world are increasingly turning to carbon markets to help project activities see the light of day.

The accreditation and issuance of carbon credits is a collaborative endeavour involving many stakeholders. It starts with developers devising and establishing projects, potentially recruiting investors to fund any initial costs. 

Accredited projects must be designed according to strict methodologies created by standards bodies such as Gold Standard and Verra. Developers first submit their projects, including assumptions around estimated emissions reductions, to a Verification/Validation Body (VVB), a type of specialist carbon auditor. If the VVB is happy the project abides by the chosen methodology, the developer or project proponent then uses this seal of approval to register the project with the standards body for credit issuance.

Each issued carbon credit represents a promise that one tonne of carbon dioxide has been avoided or removed as a result of project activities (or one tonne of CO₂ equivalent if the project is abating other greenhouse gases, such as methane or nitrous oxide).

Additional input from third-party monitoring, reporting, and verification providers facilitates this accreditation process, and these providers continue to play an important auditing and monitoring role throughout the project’s life cycle.

Carbon rating agencies provide a vital pre-purchase touchpoint for buyers and investors by offering an independent risk-based opinion on the likelihood a given credit will deliver on its carbon claims. High ratings give assurance that investments are channelled into high-quality projects with tangible climate impacts. 

Another way buyers may wish to de-risk their investments is by turning to specialist carbon insurers. These companies can help buyers protect themselves against reversals (carbon unexpectedly released back into the air) or issuance risk (carbon credit deliveries not meeting their forecast).

Buyers such as corporates and governments will then purchase carbon credits, either straight from the developer or via intermediaries (e.g. carbon brokers, exchanges and marketplaces).

Finally, buyers can make a reduction claim, whether to offset their emissions or simply to contribute towards climate action. This means the credits get taken off the standards body’s registry, also known as ‘retirement’. At this point, the retired credits can no longer be resold to another buyer. Accurate retirement records are essential because they prevent the double-counting or double-claiming of carbon benefits linked to the same credit.

The variety and scope of stakeholders involved in creating carbon credits concentrate climate knowledge from around the world into a single market, creating a one-stop shop for climate expertise and environmental action. 

Global and local impact, today and tomorrow

Companies in some countries and sectors are mandated or regulated to buy credits through compliance markets. Some companies purchase credits voluntarily as part of a broader strategy that contributes to environmental and social impacts. 

As such, credit buyers have the freedom to shop the market for projects that fulfil not only their net-zero ambitions but also their ‘beyond carbon’ goals, be it improving the quality of life for local stakeholders or supporting natural ecosystems and biodiversity. 

The diversity and scale of the project types means buyers can build diverse portfolios of carbon credits focused on the specific countries, sectors, and activities that best align with their values and environmental ambitions. 

Whether through the retirement of post-issuance credits that are already delivering climate action - the ‘spot’ market - or through investment in pre-issuance credits set to shape the future of climate mitigation - the ‘forward’ market - buyers are spoiled for choice.

Investing in climate projects through carbon credits also presents a unique opportunity to redistribute capital from historic global emitters to the Global South, home to much of the planet’s natural capital. Developing countries urgently need funding to protect themselves against future warming. Populations in these regions experience the most severe impacts of climate change; the World Bank predicts that without concrete climate action, over 216 million people could be internally displaced by climate change by 2050.² Funding climate action via carbon credits offers a powerful solution.

The future of climate action looks bright

The Science Based Targets initiative, often seen as the leading authority in defining effective corporate climate action, recently showed signs of support for the potential role of high-quality carbon credits in helping companies address their ‘Scope 3’ emissions (caused by upstream activities such as business travel, and downstream activities such as transportation of sold products to customers). The move, though controversial to some, represents a view that corporate investment in high-quality carbon credits has an important role to play in the climate transition. This chimes with a recent survey of over 180 global businesses, in which over 70% of respondents agreed the voluntary carbon market (where these types of credits are bought and sold) allowed them to take climate action beyond what they could achieve without buying carbon credits. 60% said high-quality credits incentivise decarbonisation.³

Companies can make more confident decisions around their carbon investments than ever before thanks to a flurry of innovations, including the emergence of carbon ratings and insurance providers, advances in digital monitoring and Earth observation technology, and multiple market-led initiatives pushing for higher credit quality and more transparency.

John Kerry, the USA’s Special Presidential Envoy for Climate, believes the voluntary carbon market has the potential to be ‘the largest marketplace the world will have ever known’. With credit retirements on the rise with a record-breaking start to 2024 and a renewed focus on quality and transparency, delivering a quick win for climate action has never been more accessible. 

In the next article in our carbon credit explainer series, we explore what carbon credit-funded climate action looks like using real case studies. Read more here.

References

1. Deloitte, July 2023: Deloitte Center for Financial Services (DCFS) analysis of data from the Federal Reserve Bank of Cleveland, Organization for Economic Cooperation and Development, and the US Bureau of Labor Statistics (BLS)

2. World Bank, September 2021: Groundswell Part 2: Acting on Internal Climate Migration. Of the 216 mil­lion predicted displaced people, 86 million would occur in Sub-Sahar­an Africa, 48 million in East Asia and the Pacific, 40 million in South East Asia, 19 million in North Africa, 17 million in Latin America and 5 million in Eastern Europe and Central Asia.

3. We Mean Business Coalition, Intercontinental Exchange, Bain, March 2024: Accelerating corporate climate finance through carbon markets: overcoming the challenges