A Beginner’s Guide To Navigating Carbon Markets

Businesses often offset their residual and unavoidable emissions by investing in projects that reduce or remove CO2 from the atmosphere.

Getting to grips with carbon markets and offsetting projects and how to best approach them can be overwhelming at first. In this blog post, Pledge aims to make carbon markets more approachable by exploring their history and the important role they play in allowing businesses to offset their residual emissions.

Understanding the origins of carbon markets

In 1997, the Kyoto Protocol was founded by a group of developed countries that pledged to reduce and limit their greenhouse gas (GHG) emissions as an early means of combating irreversible climate change. The Clean Development Mechanism (CDM) is an example of a compliance carbon market, where countries who failed to meet mandatory emission reduction targets could purchase emissions from projects in developing countries that reduce or remove emissions.

What is the difference between the compliance and voluntary carbon market?

Compliance markets are used by companies that are legally mandated to adhere to government emission trading schemes to drive emission reductions. The EU Emission Trading System is one of the largest schemes in the world, and it is based on emission allowances which are traded on exchanges. It is important to note that these allowances do not represent any emission reduction or removal.

The voluntary carbon market (VCM) brings together projects that reduce or remove emissions with companies that want to support these projects as a way to mitigate their carbon footprint. It is important to note that companies choose to purchase carbon offsets from the VCM willingly. 

The importance of the voluntary carbon market

Companies tend to purchase offsets from the voluntary carbon market to address their residual emissions or to achieve other sustainability objectives such as carbon neutrality. But it’s important to remember that offsetting should be used as a tool to address those emissions that cannot be reduced. 

VCMs are an important way of providing funding to climate and sustainability projects. There are a range of positive outcomes for local communities, typically in emerging economies, including improved employment and biodiversity protection. 

What makes an environmental project viable for offsetting business emissions?

The VCM is not overseen by a single overarching body;  there are a number of globally recognised standards including Verra and Gold Standard. Investing in projects under the watchful eye of standards like Verra, The Gold Standard and others are ultimately more likely to be successful in reducing/removing emissions.

When it comes to reviewing the efficiency of offsetting projects, it’s important to understand key areas of diligence, such as leakage and permanence. If a project doesn’t meet criteria surrounding these characteristics, it cannot be verified, or registered as a source of offsets.

Leakage refers to whether a project would simply shift emissions elsewhere, while permanence explores how long carbon remains out of the atmosphere as a result of the project.

Where do we go from here?

When used properly, carbon offsets are an essential tool if you’re a business looking to address emissions as part of a net-zero target under the Science Based Targets. Offsetting can also be used on the path to net-zero to address emissions whilst decarbonisation efforts are underway, as outlined in the ‘High Ambition Path to Net-Zero’.

The VCM helps fund offsetting projects that are having a positive impact on carbon levels in the atmosphere, yet there is still room for the market to evolve into something more transparent and effective. Conversations surrounding offsetting should no longer revolve around whether offsets are a viable weapon in the war against climate change, but rather how we can improve accountability, effectiveness and permanence.

With VCM projects varying considerably in quality and impact, working alongside offsetting experts can help to create confidence that any investments are made to pre-vetted high-quality offsetting projects.

Source: Pledge

PLEASE NOTE: All information contained in this article was correct at time of publication and obtained directly from Pledge. Please ensure information is cross-checked against current legislations before taking any action.