What are carbon credits and why are they important?

• A carbon credit (or “offset”) is a certificate representing one metric ton of carbon dioxide equivalent that is either prevented from being emitted into the atmosphere or removed from the atmosphere as the result of a carbon-reduction project. 
• Carbon credits can be used by buyers to compensate emissions by financially enabling projects that avoid emissions or remove carbon dioxide.
• Hence, carbon credits are an important market-oriented mechanism to reduce greenhouse gas emissions and tackle climate change.

How do carbon markets work?

• Supply is created by project developers that develop an emissions avoidance/ reduction or removal project
• Projects are certified by independent third-party auditors that validate against a methodology as defined by standard/ certification body (e.g. Verra, Gold Standard)
• Buyers purchase and retire the credits so their impact can be claimed towards a climate target
• Intermediaries bring supply and demand together and maintain records of the creation and sale of credits on central registries
• Carbon pricing compares with other commodity pricing, ie. subject to market forces.  
• Two type of markets:
  • Compliance markets are based on government regulations and allow firms to reduce emissions for compliance purposes 
  • Voluntary markets are non-regulated with participation based on self-imposed emission goals (have grown to 95 MtCo2e in 2020)

How can carbon credits be generated in agriculture?

• Global farm decarbonization can reduce annual carbon emissions by up to 1 gigaton
• Two ways to generate credits:
  • Additional emissions avoidance/ reduction, e.g. variable rate fertilization, controlled-release and stabilized fertilizers and improved fertilization timing 
  • Nature based sequestration e.g. trees in cropland, regenerative agriculture (low/ no till to maintain integrity of top soil structure) or cover crops
• Besides additional revenues from carbon credits conservation practices increase yield and soil health