Highlights :
- COP29 summit led to the decision to set up a global carbon market countries will trade carbon credits
- Carbon dioxide removal is the ultimate objective of carbon credits, carbon offsets, and RECs
While carbon credits, carbon offsets, and RECs all serve as tools to address environmental impact, they operate differently within the sustainability landscape. Understanding the distinctions between carbon offsets, carbon credits, and renewable energy certificates (RECs) is essential for grasping how organizations strive to mitigate their environmental impact. Knowledge of these distinctions also helps organizations and individuals make informed decisions in their efforts to combat climate change.
Let’s delve into each and clarify common confusions, supplemented with straightforward examples.
Carbon Credits
A carbon credit is a tradeable permit that allows the holder to emit one metric tonne of carbon dioxide or an equivalent amount of another greenhouse gas. These credits are integral to cap-and-trade systems, where a governing body sets a cap on total emissions and distributes allowances accordingly. Companies that reduce their emissions below their allotted amount can sell surplus credits to others struggling to meet their targets.
During the recent COP29 summit in Baku, a decision was taken to set up a global carbon market. The new market will allow nations to trade carbon credits whose prices are determined based on emission caps imposed by countries.
Example: Imagine a factory that has innovated its processes to emit less CO₂ than permitted. It can sell its excess carbon credits to another factory that is exceeding its emission limits, thereby incentivizing overall emission reductions. It should be highlighted that the market so far has been plagued by accusations of fraud, misreporting and corrupt evaluations. So a huge challenge to overcome still.
Carbon Offsets
Carbon offsets represent a reduction or removal of emissions achieved by one entity to compensate for emissions produced elsewhere. Unlike carbon credits, which are part of regulated markets, offsets are often used voluntarily by organizations aiming to neutralize their carbon footprint. These offsets fund projects like reforestation, renewable energy installations, or methane capture initiatives.
Carbon offsets are produced by independent companies that pull CO2 emissions from the atmosphere. The offsets are then sold to companies that emit (or have emitted) CO2. In a sense, offset-producing companies are directly funded by those companies that emit GHGs.
Example: A corporation might invest in a reforestation project that absorbs CO2, offsetting the emissions generated by its business operations. This means that for every tonne of CO2 the company emits, an equivalent amount is sequestered by the project.
Renewable Energy Certificates (RECs)
Renewable Energy Certificates (RECs), also known as renewable energy credits, are tradable environmental commodities that represent the environmental attributes associated with the generation of renewable energy. RECs are bought and sold on various renewable energy markets and can be purchased by businesses, governments, and individuals. They certify that one megawatt-hour (MWh) of electricity was generated from a renewable energy source and fed into the grid.
If an organisation is not generating or using renewable power, they can make the contribution by purchasing RECs claiming the operational use of renewable energy, even if their direct electricity supply comes from non-renewable sources. The purpose of RECs is to incentivize and promote the production of renewable energy by providing a financial incentive to renewable energy generators.
Example: A business operating in an area where the local grid is powered by fossil fuels can buy RECs from a wind farm elsewhere. This purchase supports renewable energy generation and enables the business to claim that its electricity consumption is renewable.
Common Confusions and Clarifications
Interchangeability: People often confuse C-credits and C-offsets. While both involve compensating for emissions, carbon credits are typically part of regulatory compliance markets, whereas carbon offsets are usually voluntary and involve funding specific projects that reduce or remove emissions.
Double Counting: A significant concern is the potential for double counting, where the same environmental benefit is claimed by multiple parties. For instance, if both the producer and purchaser of a REC claim the renewable energy benefit, it leads to an overestimation of renewable energy usage. Ensuring clear ownership and proper retirement of certificates is crucial to maintain integrity.
Additionality: This concept questions whether a carbon offset project results in emission reductions that wouldn’t have occurred otherwise. For an offset to be credible, it must fund activities that are truly additional and not projects that would have happened in the normal course of business. Concerns about over-crediting and lack of additionality have been raised in various carbon credit markets.
Environmental Integrity: The effectiveness of carbon offsets and credits depends on rigorous monitoring and verification. Issues such as overestimation of benefits or lack of permanence – trees planted for offsets being cut down – can undermine their environmental integrity. High-quality carbon credits are essential to ensure genuine emission reductions.
