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A carbon credit is a kind of permit that represents 1 ton of carbon dioxide removed from the atmosphere. They can be purchased by an individual or, more commonly, a company to make up for carbon dioxide emissions that come from industrial production, delivery vehicles or travel.
Carbon credits are most often created through agricultural or forestry practices, although a credit can be made by nearly any project that reduces, avoids, destroys or captures emissions. Individuals or companies looking to offset their own greenhouse gas emissions can buy those credits through a middleman or those directly capturing the carbon. In the case of a farmer that plants trees, the landowner gets money; the corporation pays to offset their emissions; and the middleman, if there is one, can earn a profit along the way.
But this only goes for what is called the “voluntary market.” There is also something called the involuntary or “compliance market.”
What is the “compliance market” for carbon credits?
In the compliance market, or involuntary market, governments set a cap on how many tons of emissions certain sectors — oil, transportation, energy or waste management — can release.
If an oil company, for example, goes over the prescribed emissions limit, it must buy or use saved credits to stay under the emissions cap. If a company stays under that cap, it can save or sell those credits. This is known as a cap-and-trade market. The cap is the amount of greenhouse gases a government will allow to be released into the atmosphere and emitters must trade to stay within that limit.
Article 6 of the 2015 Paris Agreement tasks national leaders with figuring this out on a global scale. So far, about 64 carbon compliance markets are now in operation around the world, the World Bank reported in May. The largest carbon compliance markets are in the European Union, China, Australia and Canada.
While politicians and business executives have discussed putting a price on carbon, the U.S. does not have a federal, wide-ranging cap-and-trade market for greenhouse gases.
Regulators, businesses and environmentalists have debated globalizing a cap-and-trade market for carbon. But it is challenging to agree on a common time frame, common price, common measurement and transparency, said Alok Sharma, president of this year’s United Nations Climate Change Conference, also called COP26.
How big is the carbon credit market?
The voluntary market is on track to reach a record of $6.7 billion at the end of 2021, according to a September report from Ecosystem Marketplace. Currently, traders in the European compliance market project carbon prices to increase 88 percent to about $67 per metric ton by 2030, according to a survey released in June by the International Emissions Trading Association.
The voluntary market’s rapid acceleration over the course of the year is largely driven by recent corporate net-zero goals and interest in meeting international climate goals set out in the Paris Agreement to limit global warming to 1.5 degrees Celsius over preindustrial levels.
What is the pushback?
Critics of the voluntary market, where a company buys carbon credits from a business outside of a regulated exchange, point out that this does not lower the overall amount of greenhouse gases released by buyers. They are simply offset, which gives corporations a way to claim they are eco-friendly without reducing their overall emissions. Critics call this “greenwashing.”
Carbon credits can also be bought from projects that would have happened anyway. For instance, one investment company says they pay farmers to convert their fields into forests and sell those credits to corporations, according to Bloomberg. But several farmers claim they already planted trees through a government conservation program.