How Carbon Credits Work For Business
When experts warned of climate change being the next pandemic, most people assumed that it’d be a problem for future generations. Unfortunately, the climate change crisis has arrived sooner than expected, and the world is currently living in this nightmare.
One of the causes of climate change is global warming, which refers to the gradual increase in temperatures on the earth’s surface. It’s caused by the rise in the concentration of greenhouse gases, including carbon dioxide, nitrous oxide, methane, and water vapor. When these greenhouse gases are emitted to the atmosphere in high amounts, they trap the heat that’s supposed to be released for the earth to cool down. Greenhouse gases can absorb and hold on to heat. Therefore, when a significant amount of heat is trapped on earth, it becomes warmer.
Global warming results in crises like the recent wildfires in Australia, heat waves, such as the one happening in China today, and other natural calamities.
After experts warned of climate change being a crisis waiting to happen and after a lot of climate action activism, eventually, individuals and organizations finally paid attention. Therefore, organizations, businesses, and governments have started taking steps to mitigate its effects, one of which being carbon credits.
This article will discuss carbon credits and how these specifically work for businesses. Keep reading to learn more.
What Are Carbon Credits?
Carbon credits, also called carbon offsets, are an incentive mechanism devised to encourage businesses and companies to reduce their greenhouse gas emissions. Therefore, such credits permit businesses to emit carbon or any other greenhouse gas up to a given limit. Each carbon credit permits the emission of one ton of carbon dioxide or an equal amount of any other greenhouse gas. However, the credits permitted reduce every time they’re used. If your company exhausts its carbon credits, you must purchase extra credits.
There are two types of carbon credits. These are:
- Certified Emissions Reductions
This is where the carbon credits are created through a regulatory framework. When the credits are exhausted, the business or company has to purchase new ones and not exchange any service for credits or finance any projects.
- Voluntary Emissions Reductions
This is where the carbon credits are created through projects that aim to combat climate change. Therefore, if your business wants carbon credits in a voluntary market, it has to finance a project that promotes climate change. For example, your company can sponsor a reforestation project in exchange for carbon credits.
The main difference between voluntary and certified emissions reductions is that, for the former, there’s a third party involved in the form of a regulatory body that gives out carbon credits.
Now that you have a deeper understanding of carbon credits and their two major classifications, here’s how they work for businesses:
- Through The Cap-And-Trade Program
In the cap-and-trade program, the government sets a cap or limit on how much carbon or an equivalent amount of greenhouse gas your business can emit without incurring any charge. One credit permits the emission of one ton of carbon or an equal amount of greenhouse gas.
Unfortunately, your business may not immediately be able to cut off carbon emissions at the set standards. Therefore, for your business to emit more carbon than the set amount, purchasing more carbon credits is required.
However, should your business operate and emit carbon below the set standards, you’re allowed to sell the remaining credits you may have to companies that are emitting more than the set standard. This is where the term trade in the cap-and-trade program comes in. By selling credits, your business makes money.
- Through Carbon Financing
Other than buying carbon credits from a regulatory body, your business can get carbon credits by investing in sustainable projects that are meant to reduce carbon and greenhouse gas emissions. For example, suppose there’s a sustainable project looking to establish a green energy plant. In that case, your business may choose to contribute funds to the project in exchange for a permit to emit a certain amount of carbon.
Money collected from carbon financing is mostly used to fund sustainable projects in developing countries. In most cases, you’ll find that such projects in those countries stall due to insufficient funds. Therefore, carbon financing comes in handy. The financing is usually done annually, where your business is expected to submit a given amount of money to the sustainable project.
- By Implementing and Investing In Climate Action Projects
Carbon credits are often created through climate action projects, such as:
- Agricultural projects
- Forestry renewable energy projects
- Projects that promote energy efficiency
Whatever the case, the project has to, in one way or another, promote climate action or reduce greenhouse gas emission. Therefore, in a voluntary market, you can purchase carbon credits created in the above ways in two ways:
- Implementing the projects yourself—for example, planting trees
- Investing in the projects
Investing in the climate action project can take various forms. For example, if, in a voluntary market, there’s a farmer who plants trees and has already mature ones, your business can directly pay them to purchase carbon credits. In this case, you’ll be paying them since the trees help absorb the carbon your business emits.
As the issue of climate change continues to worsen globally, individuals, governments, businesses, and organizations are constantly coming up with methods to reverse and end climate change. One of the ways such goals can become attainable is through the introduction of the carbon credits program, wherein a particular organization is only allowed to emit up to one ton of carbon or an equivalent amount of greenhouse gases per credit. When the credit permit is exhausted, your business has to purchase extra ones.
For businesses, this program works in three ways—the cap-and-trade program, carbon financing, and implementing and investing in climate action programs. This article has discussed these three things comprehensively, making it a good place to start if you want to know how carbon credits can work for your business.