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August 19, 2019

What Are Carbon Credits?

Do they have what it takes to decelerate global warming?

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.

The Origins of Carbon Credits

Carbon credits were created as an answer to the need for controlling emissions –  seeing as global carbon-dioxide emissions in 2016 were about 36 billion metric tonnes. They were also intended to reduce the emission of greenhouse and harmful gases from industrial activity in sectors such as power, steel, textile, fertilizer, etc. all of which are using fossil fuels (coal, oil, and natural gas) so much so that they’ve earned the title of those most responsible for greenhouse gas emissions.

Who Issues Carbon Credits?

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

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 and therefore setting a limit on the emissions of CO2 for each.

Any government or other regulating body willing to limit 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 organizations 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 positive image feedback, while Company B buys carbon credits from Company A and 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 cheaper to pay a fine than to buy carbon credits due to their high price.

How Much Is a Carbon Credit?

All 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 approach to pricing them. Carbon credit prices 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 of this), 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, such as the Clean Development Mechanism.

Currently, the price for CO2 European Emission Allowances is €20.75 – this is the first time in a decade it has breached the threshold of €20. Projections suggest that the 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 Carbon Credits Go?

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

As normally happens, there are those who see the acceleration of the carbon market after years of slow growth as positive and those who openly criticize it, saying that carbon trading is a false solution to climate change.

Carbon offsetting plans are also gaining a relevant position in the political agenda of some countries – but not without some opposition. One of the critiques addressed to the carbon credits system is the lack of transparency. In other words, where do the carbon credits go? Does it take 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 recent years, many initiatives were launched to make the carbon credits system more transparent and many companies were born from selling carbon credits to both individuals and businesses, such as Cool Effect (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. However, it is difficult to foresee the effect that the adoption of this system will have on the reduction in global emissions.

At Submer, we like to look on the bright side and we do believe that, in theory, carbon offsetting can make a difference in addressing the problem of global emissions. However, we do not naively see it as the only solution, and it’s clear that the carbon credit system needs supported by a more proactive attitude by both governments and private companies.

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. 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. Scientists agree that we must act now to promote more sustainable development if we want to find a solution to the rising global temperatures (compared to pre-industrial levels), as well as global greenhouse gas emissions, that are mostly responsible for climate change and consequently worldwide natural disasters. We must invest in energy efficiency and promote the use of renewables etc.

At Submer, we not only set out to provide higher densities and cheaper costs, but also to do our part to lessen the datacenters’ impact on climate change – to leave the world in a better state than how we found it!

It’s never too late to put renewable energy in place, implement your own efficiency programs…or to speak to us about how to take your datacenter into the next eco-friendly generation!