What Is A Carbon Credit Or Carbon Offset?

24 May 2012

Carbon Offset CertificateWhat is a Carbon Offset or Carbon Credit? 

By Noel McArdle

A Carbon Credit and a Carbon Offset are essentially the same thing.

A Carbon Credit is the term used to describe a reduction or offset of one tonne of Greenhouse Gas emissions purchased by a business to lower or eliminate their carbon footprint.  One carbon credit is equal to one tonne of carbon dioxide (CO2).

Carbon credits are a mechanism whereby a market price is placed on human-caused environmental damage to the atmosphere.

Background

Modern industry depends upon electricity and transport.

  • Most of our electricity is produced through the burning of fossil fuels (coal, oil and natural gas)
  • Most transport systems (road, air & rail) involve the burning of fossil fuels (oil or gas)

The burning of fossil fuels is a major cause of Greenhouse Gas (GHG) emissions.  When we burn coal we are releasing the CO2 which was stored in the coal by the previous forests.  When we burn oil, we are releasing the CO2which had previously been absorbed by the algae in the ancient shallow seas and which now form our current oilfields.  These GHGs, which consist mainly of carbon dioxide (CO2); methane; nitrous oxide; and hydroflurocarbons, trap that infrared energy that would normally bounce back from the ground into the atmosphere.  The trapping of heat which cannot escape back into space, increases average global temperatures.

Sometimes the tonnage of carbon dioxide emissions is expresses as (CO2-e) – the “little e” meaning equivalent.   Some of the Greenhouse Gases are more damaging that carbon dioxide.  For instance, methane is 23 times more damaging.  When methane emissions are measured they are converted to their equivalent of carbon dioxide and represented as (CO2-e).  One tonne of methane would be expressed as 23 CO2-e.

 

What are the Different Types of Carbon Offsets / Carbon Credits?

Carbon Credits & Carbon Offsets, are produced in a variety of ways (see ‘What is the Carbon Market’ below) – but it may be helpful to summarise carbon offsets as comprising two main types:

o   Offsets produced as a result of reducing the level of Greenhouse Gases emitted into the atmosphere

o   Offsets produced by projects which absorb GHG emissions already present in the atmosphere.

In turn, these can be divided into further subset of categories:

  1.  Mechanical Offsets Preventing the Discharge of Emissions into the Atmosphere:  Undertakings which reduce atmospheric emissions involve technological applications.  Such projects are typified by alternative power or renewable energy activities (such as wind farms or solar panels) which replace the energy which would otherwise have been produced from fossil fuels like coal or oil.  Other examples include installing a filter on top of a steel furnace chimney, capturing methane emissions generated by landfill sites or perhaps the extraction of methane from mines which would otherwise vent into the atmosphere and using it to generate power for the mine.
     
  2. Biological Absorption / Sequestration of Emission Offsets from the Atmosphere: Projects, which absorb Greenhouse Gas emissions from the atmosphere, do so by creating a Carbon Sink.  These are mainly biological and the planting of forests are typical of such carbon sinks.  Within this category in the future may also be included technical storage innovations such as the capture & storage of carbon dioxide deep underground in old oil and coal strata.

When Governments introduce Emission Trading Schemes, they impose reporting obligations upon those companies captured within the Scheme.   Where such companies have a net carbon emission level, that is, a higher levels of carbon emissions than they can offset, then the Government can issue theses organisations with a Carbon Offset Certificate for the net value of their emissions.  This is purely an administratively generated certificate.   As a paper permit, it will neither have absorbed carbon dioxide from the atmosphere nor have reduced emissions.  In many ways, this may be regarded as a 3rd category of Carbon Credit.  This is the least satisfactory of the credit types precisely because no actual carbon is either absorbed from the atmosphere nor avoided being vented into the atmosphere.  However, it does have a seminal role in kick starting the other two methods by setting an initial market price for carbon.

What is the Carbon Market?

There are two types of carbon markets operating in the world:

(i)            Mandatory

(ii)           Voluntary

Mandatory markets occur whenever individual nations introduce their own carbon emission reduction schemes under legislation.  They also arise from the Kyoto Protocol and are binding upon those countries who sign the Protocol.  The Kyoto Protocol, is an agreement between 180 countries which imposes legally binding targets upon its participants to manage and reduce their emissions as a percentage of their 1990 levels.  This Treaty was followed by the Marrakesh Accords.

In 2007 Australia ratified the Kyoto Protocol and accepted a target to reduce emissions by 60 per cent of its 2000 levels by 2050.

Kyoto designed two main types of carbon credits for its participating parties:

  • Certified Emission Reduction Units – commonly known as CERs.  These were developed under Kyoto’s Clean Development Mechanism (CDM)
  • Emission Reduction Units – commonly known as ERUs.  These were developed under the Kyoto Joint Implementation (JI) vehicle.

Nations which fail to meet their emission reduction targets can purchase CERs or ERUs to cover their shortfall obligations under the Kyoto treaty.  Where individual nations have also introduced their own legislation to reduce carbon emissions, individual companies may also purchase CERs or ERUs to meet their obligations under such national legislation.  Australia will be implementing such legislation commencing July 2012.

Voluntary markets occur when companies or individuals make a decision to offset their Greenhouse Gas emissions, even though there is no legal requirement upon them to do so.

Organisations may do this for a number of reasons.  Some companies wish to meet their environmental responsibilities.  Others may see that it gives them a marketing edge by appealing to the ‘green’ buyer segment.  Many businesses are simply strategically pre-empting legislative impacts which they expect later on.  Increasingly, companies in those nations which impose legislative reporting requirements on their larger emitters, such as: miners; power generators; or steel smelters, are finding that other businesses, which supply these mandated larger companies, are under increasing pressure to ensure that their product or services are carbon neutral.  If they are not carbon neutral, their clients will have to account for and report on the carbon externality of their non-carbon neutral supplier.  They may either do this or choose to switch suppliers to a carbon neutral supplier if a suitable one is available.

Fungibility

A Carbon Offset Certificate (click on the image above to enlarge Eco’s sample certificate) shows that a business has paid to have a specific quantity of Greenhouse Gases removed from the environment, or has avoided the emission of Greenhouse Gases through the introduction of technology, or has purchased from the Government the right to emit a certain quantity of carbon dioxide.  If a business has generated its own carbon offsets, for example through the installation of solar panels, it can use these carbon credits to offset its own carbon emissions and trade any surplus in the marketplace.  If a business has not managed to offset its own carbon emissions, it may purchase carbon offsets from the market.  One might buy offsets from people who grow trees for carbon offsets or purchase offsets from wind farms.  By functioning as a saleable commodity in the carbon market, carbon credits form the fungible base of any Emissions Trading Scheme.

To give an example of how this works in practice:carbon offset

One Carbon Credit equals one tonne of CO2e.  The Australian price for a carbon offset is around $20 per tonne.

Suppose a medium sized law firm emits 500 tonnes of carbon dioxide each year.  This would require the purchase of 500 carbon offsets in order to offset their annual carbon footprint emissions.  This would cost the business approximately $10,000 at $20 per tonne.

 

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