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A comprehensive visual guide to carbon markets
Carbon markets allow the trading of carbon credits, also known as carbon offsets.
One carbon credit is equivalent to one tonne of greenhouse gas (GHG) emissions. To go further, carbon markets help companies offset their emissions and meet their climate goals. But how exactly do carbon markets work?
In this infographic by Carbon diffusion company, we take a look at the fundamentals of carbon markets and why they have significant growth potential.
What are carbon markets?
For many companies, such as Microsoft, Delta, Shell, and Gucci, carbon markets play an important role in offsetting their impact on the environment and meeting climate goals.
Companies buy a carbon credit, which finances a GHG reduction project such as reforestation. This allows the company to offset its GHG emissions. There are two main types of carbon markets, depending on whether emission reductions are mandatory or voluntary:
Mandatory systems regulated by government organizations to cap emissions for specific industries.
Voluntary carbon markets:
Where carbon credits can be purchased by those who wish to voluntarily offset their emissions.
As demand for emission reductions intensifies, the volume of the voluntary carbon market has increased quintuple in less than five years.
Drivers of carbon market demand
What are the factors behind this surge in volume?
- Paris Agreement: Companies looking to align with these goals.
- Technological gaps: Businesses are constrained by technologies available on a large scale and the costs of which are not prohibitive.
- Time intervals: Businesses cannot afford to eliminate all emissions today.
- Shareholder pressure: Companies are under pressure from shareholders to reduce their emissions.
For these reasons, carbon markets are a useful tool for decarbonising the global economy.
Voluntary Markets 101
To begin with, there are four key participants in voluntary carbon markets:
- Project developers: Teams that design and implement carbon offset projects that generate carbon credits.
- Standardization bodies: Organizations that certify and set criteria for carbon offsets, for example Verra and the Gold Standard.
- Brokers: Intermediaries facilitating carbon credit transactions between buyers and project leaders.
- End buyers: Entities such as individuals or companies seeking to offset their carbon emissions by purchasing carbon credits.
Secondly, carbon offset projects fall into one of two main categories.
Avoidance / reduction projects prevent or reduce the release of carbon into the atmosphere. These can include avoided deforestation or projects that conserve biomass.
Kidnapping / forcible confinement projects, on the other hand, remove carbon from the atmosphere, where projects can focus on reforestation or direct air capture.
In addition, carbon offset projects can offer co-benefits, which provide benefits that go beyond reducing carbon emissions.
What are co-benefits?
When a carbon project offers co-benefits, it means that it provides characteristics in addition to carbon credits, such as environmental or economic characteristics, which can align with the United Nations Sustainable Development Goals (SDGs). .
Here are some examples of co-benefits that a project can offer:
- Biodiversity: Protect local wildlife that would otherwise be threatened by deforestation.
- Social: Promote gender equality by supporting women in leadership positions and local business development.
- Economic: Create employment opportunities in local communities.
- Educative: Provide educational awareness of carbon mitigation in local areas, such as primary and secondary schools.
Often, companies are looking to buy carbon credits that have the greatest lasting impact. Co-benefits can provide additional value that simultaneously address broader climate challenges.
Why market values are increasing
In 2021, market values in voluntary carbon markets are expected to exceed $ 1 billion.
|Year||Volume of carbon offsets traded (MtCO₂e)||Voluntary transaction value in the market|
|2017||46||$ 146 million|
|2018||98||$ 296 million|
|2019||104||$ 320 million|
|2020||188||$ 473 million|
|2021 *||239||$ 748 million|
* As of August 31, 2021
Source: Ecosystem market (September 2021)
Today, the oil majors, banks and airlines are active players in the market. As corporate climate targets multiply, future demand for carbon credits is expected to surge 15 times by 2030 according to the Scaling Up Voluntary Carbon Markets Working Group.
What constitutes high quality carbon offsetting?
Here are five key criteria for examining the quality of a carbon offset:
- Additionality: Projects cannot exist without income derived from carbon credits.
- Verification: Monitored, reported and verified by a credible third party.
- Permanence: The reduction or elimination of carbon will not be reversed.
- Measurability: Calculated according to scientific data using recognized methodology.
- Avoid leaks: An increase in emissions should not occur elsewhere, nor explain any increase that occurs.
In fact, the road to net zero requires an annual reduction of 23 gigatonnes (GT) in CO₂ emissions from current levels. High quality offsets can help achieve this goal.
Fight against climate change
As the urgency to tackle global emissions accelerates, the demand for carbon credits is poised to increase dramatically, providing much-needed capital for innovative projects.
Not only do carbon credits finance nature-based projects, they also finance technological advancements and new innovations in carbon removal and reduction. For companies looking to achieve their climate ambitions, carbon markets will continue to play a more concrete role.