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