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Carbon credit
A carbon credit is a certificate representing the equivalent of one tonne of CO2 that has not been emitted into the atmosphere. Carbon credits are the reference currency on the market for reducing greenhouse gas emissions. Project developers who want to reduce greenhouse gas emissions can sell carbon credits to companies that want or need to offset the emissions generated by their activities. According to the EU Emissions Trading Scheme (EU ETS), which governs regulatory carbon offsetting in the EU, the price of a carbon credit is €73.13 per tonne of CO2 equivalent as at 19/08/2024.
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What is a carbon credit?
A carbon credit is a certificate or unit representing one tonne of carbon dioxide (CO₂) or the equivalent of another greenhouse gas (GHG) that has either been removed from the atmosphere or avoided being emitted. Carbon credits act as a currency in market mechanisms aimed at reducing greenhouse gas emissions. For example, a tree-planting project that sequesters 10,000 tonnes of CO2 can, under certain conditions, give rise to the allocation of 10,000 carbon credits.
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The industries concerned mainly
- Combustion industries, such as power generation, district heating, cogeneration and refineries;
- Metallurgical industries, particularly those producing iron and steel;
- Cement, glass and paper production industries;
- Industries producing nitric acid and ammonia.
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The Kyoto Protocol
- The Clean Development Mechanism (CDM) allows industrialised countries to finance emission reduction projects in developing countries and receive carbon credits (Emission Reduction Certificates, CERs) in return;
- Joint Implementation (JI) allows industrialised countries to carry out emission reduction projects in other industrialised countries and generate Emission Reduction Units (ERUs);
- International Emissions Trading allows countries to sell their surplus Assigned Emission Units (AAUs) if they emit less than their allowances, thus creating an emissions market.
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The role of carbon credits
The concept of carbon credits, developed under the Kyoto Protocol, has been extended to the voluntary carbon offsetting market. Under this scheme, companies, even if they are not legally obliged to reduce their emissions, voluntarily choose to offset their carbon footprint.This market allows companies to purchase carbon credits to offset the emissions from their activities that cannot be avoided or reduced. The purchase of carbon credits enables them to finance the implementation of projects with a positive impact on greenhouse gas emissions.
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The increase
- A strengthening of EU climate policies: The European Union has adopted more ambitious climate targets, in particular the reduction of greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. These tougher targets have led to a reduction in the number of allowances available, thereby increasing their price;
- A reduction in the supply of allowances: the Market Stability Mechanism (MSM) aims to withdraw allowances from the market when supply exceeds a certain threshold. This has helped to reduce the supply of available allowances, driving up prices;
- Increased demand: the transition to a green economy and efforts to achieve carbon neutrality have increased demand for carbon credits, especially from industries seeking to offset their emissions;
- Anticipation of future regulations: market participants anticipate stricter regulations and a further rise in the price of allowances. This anticipation creates additional speculative demand.
( voluntary carbon offsetting market+ calculate carbon footprint)
The price per tonne of CO2 equivalent
The quality of the project: carbon offset projects can be of different kinds, such as reforestation, renewable energy production, carbon capture and storage, etc. The quality and credibility of the project, as well as its real impact on reducing emissions, can influence its price;
( voluntary carbon offsetting market+ calculate carbon footprint)
Project certification: carbon credits from projects certified by recognised standards, such as the Clean Development Mechanism (CDM) or the Gold Standard, may have a higher value due to their compliance with specific sustainability and emissions reduction criteria;
Supply and demand: the dynamics of supply and demand play a crucial role in determining prices. If demand for carbon offsetting is high among companies, this can lead to higher prices;
Government policies and climate regulations can also influence prices by stimulating demand for carbon credits or by introducing tax incentives or mandatory offset programmes;
Market trends: economic fluctuations, extreme weather events, technological advances and other factors can also affect prices in the carbon offset market.
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