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August 19, 2019

What are Carbon Credits?

Why We Should Care

What does it mean carbon credits

What are Carbon Credits

A “carbon credit” is a tradable certificate. More specifically, it is a permit that gives the holder the right to emit, over a certain period, carbon dioxide or other greenhouse gases (e.g. methane, nitrous oxide or hydrofluorocarbons).

The carbon credit limits the emission to one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent (tCO2e) corresponding to one tonne of carbon dioxide. In other words, 1 carbon credit corresponds to 1 metric tonne of carbon dioxide prevented from entering the atmosphere.

Origins of Carbon Credits

Carbon Credits were created as an answer to the need for controlling emissions (global carbon-dioxide emissions in 2016 were about 36 billion metric tonnes), and as an attempt to reduce the emission of greenhouse and harmful gases coming from industrial activity (industries as power, steel, textile, fertilizer, etc. using all fossil fuels – such as coal, oil and natural gas – that are the major responsible for greenhouse gas emissions).

The Carbon Credits system was officially formalised in the Kyoto Protocol, while the mechanisms that regulate the Carbon Credits market were established in the Marrakesh Accords.

Who Issues Carbon Credits

The Kyoto Protocol establishes the quotas of greenhouse gases (denominated in individual units) that each developed country can emit. These so-called Assigned Amount Units (AAUs) correspond to an allowance to emit one metric tonne of CO2 or equivalent greenhouse gas. Each country then divides its quotas assigning them to local businesses and organizations, setting in this way a limit on the emissions of CO2 for each of them.

Any government or other regulating body willing to limit the carbon dioxide emissions can issue Carbon Credits. Carbon trading follows the principle of an emissions trading (or cap and trade) approach, i.e. a market-based approach in which economic incentives are given to encourage reductions in the emissions of pollutants. One of the positive aspects of this approach is that organisations can decide to use the emissions trading schemes in a flexible way, finding the best option to meet policy targets.

Who Buys Carbon Credits

Carbon Credits are bought, on a voluntary basis, by any country or company interested in lowering its carbon footprint.

The Kyoto Protocol divides countries into two groups according to the level of their economy: industrialised and developing economies. The first group operates in an emissions trading market, assigning to each country a certain emissions standard to meet. If, for example, a country emits less than its target amount of CO2, then it can sell the surplus credits to other countries that do not meet their emissions level goals established by the Kyoto Protocol. This buying and selling of Carbon Credits is regulated by a legal contract called ERPA (Emission Reduction Purchase Agreement). There is also another mechanism, called Clean Development Mechanism and specifically addressed to developing countries, that issues Carbon Credits for supporting sustainable development initiatives (those Carbon Credits are called Certified Emission Reduction, or CER).

How Do Carbon Credits Work

To better understand how Carbon Credits work, let’s consider this example:

Company A emits less than its target amount of CO2; this means that Company A has a surplus of Carbon Credits. Company B, on the other hand, emits more than its target amount of hydrocarbon, so either Company B pays a fine or tries to buy Carbon Credits from another company. At this point, Company A and Company B get to an agreement and trade Carbon Credits: Company A sells its surplus to Company B, getting money and a positive image feedback, while Company B buying Carbon Credits from Company A avoids paying a fine.

Buyers and sellers can also use an exchange platform to trade, which is like a stock exchange for carbon credits. In some cases though, it can happen that it is more economic to pay a fine than to buy Carbon Credits due to their high price.

How Much is a Carbon Credit

Carbon Credits do not have the same value. This is mainly because the Carbon Credits market, like any other voluntary market, doesn’t have a central authority that dictates the rules or the approach to pricing them. Carbon Credits price can be determined by the market dynamics (primarily driven by supply and demand), the costs of a specific project (the Fairtrade Carbon Credit pricing model offers an excellent example in that sense) or the sponsor supporting the carbon project (i.e. a business initiative that receives funding because of the cut the emission of greenhouse gases). In general, voluntary units tend to have less value than the unit sold through a regulated system (as the Clean Development Mechanism, for example).

Currently, the price for CO2 European Emission Allowances is €20.75 (first time in a decade to breach the threshold of €20) and projections suggest that EU carbon price could reach an average of €35-€40 per tonne in the 2019-2023 period, reflecting a faster switch from less efficient and more polluting coal plants to cleaner gas-fired facilities and a reduction of greenhouse gas emissions.

Where do the Carbon Credits Go

Carbon Credits are stirring up a lot of interest. Among the private sector, there is a growing awareness of the true value and the real importance of natural capital (a stable climate, a prosperous ecosystem, use or renewable energies, etc.) and companies are increasingly adopting tools or technologies to lessen the impact on the environment and be more eco-friendly.

As it always happens, there are those who see positively the acceleration of the carbon market after years of slow growth, and those who openly criticise them, saying that carbon trading is a false solution to the climate change.

Carbon offsettings plans are getting a relevant position also in the political agenda of some countries, not without contrasts. One of the critiques addressed to the Carbon Credits system is the lack of transparency. In other words, where do the Carbon Credits go? Is just a whole scam that takes advantage of the will of those companies ready to pay (sometimes great sums of money) to offset their emissions of hydrocarbons or does the system really work?

Over the last years, many initiatives were launched to make the Carbon Credits system more transparent and many companies were born offering Carbon Credits for sale to both individuals and businesses: Cool Effect (that informs you about the projects funded with your Carbon Credits), Native Energy, Terra Pass, Stand for Trees, Carbon Funds, etc.

The Submer Take

The carbon offsetting mechanism per se is actually not that complicated. It is difficult to foresee however the effect that the adoption of this system will have on the reduction in global emissions.

We at Submer have a positive attitude, so, yeah, we believe that in theory carbon offsetting can make a difference in starting to face the problem of global emissions. Of course, we do not naively see this as the only answer to reduce emissions and tackle global warming.

The Carbon Credit system needs to be supported in a more proactive attitude, by governments and private companies as well.

The Intergovernmental Panel On Climate Change (IPPC) recently issued a special report on the probable impact of a global increase in temperature of 1.5°C. Scientists agree that we must act now, promoting more sustainable development, if we want to find a solution to the rising global temperatures (compared to pre-industrial levels) and the global greenhouse gas emissions, that are mostly responsible for climate change (and consequently natural disasters etc. all around the world).

Researchers say that if we want to keep temperature increases below 1.5°C, global CO2 emissions need to decline by 45% from today’s levels by the year 2030. We need to invest in energy efficiency and promote the use of renewables etc.

Here at Submer, we not only set out to bring our customers higher densities, amazing efficiencies in energy and building costs. We also want to do our part to lessen the impact of the datacenter industry on climate change, hoping to leave the world in a better state than in which we found it.

We believe that it’s not too late to do something for our planet, insist on renewable energy, implement your own efficiency programs and speak to us (contact@submer.com) about delivering the next generation highly efficient eco-friendly datacenter.