Carbon Credits: Pay-to-Pollute Permit or Path to Net Zero?

You’ve probably heard of them, but what exactly are carbon credits?

Under the Paris Agreement, countries commit to reducing emissions through Nationally Determined Contributions (NDCs). To fulfill their commitments, countries often impose regulations on companies to govern their emission levels, by issuing them emission permits (or allowances). This forms the compliance carbon market, where less-polluting companies with unused allowances can sell their permits to higher-polluting companies that require higher allowances. To meet their emission targets, companies will often first attempt to cut emissions by altering the production methods, but will inevitably be left with “last-mile” emissions that are necessary to sustain the company’s baseline operations.

On the other hand, carbon credits are part of the voluntary carbon market (VCM). Put simply, one carbon credit is equivalent to one metric ton of greenhouse gasses removed from the atmosphere (often abbreviated as MtCO2e, or one metric ton of carbon dioxide equivalent). Carbon credits are generated by carbon offset projects, which take many forms. An example would be reforestation projects. These projects are overseen by international carbon registries such as Gold Standard and Verra’s Verified Carbon Standard, to verify their validity and ensure that the projects are of high quality. Additionality is a key criterion for a high-quality project - that is, the carbon reductions from the project must go above and beyond a “business-as-usual” emissions scenario.

Upon issuance, project developers can sell their produced carbon credits to companies. By purchasing one carbon credit (recall: 1 MtCO2e), companies can claim to have reduced their emissions by one metric ton. In theory, this should lead to the same environmental outcome as companies reducing their own emissions by 1 MtCO2e, since the reduction effect on the global atmosphere is the same. Hence, by purchasing carbon credits and retiring them (aka “redeeming”), companies can offset their last-mile emissions and claim to be net-zero.

In theory, carbon credits have many benefits. For one, they help to channel capital from emitting companies to carbon project developers, increasing the efficiency of financing costly sustainability projects. Article 6 of the Paris Agreement also enables carbon credits to flow between countries, bolstering international cooperation against climate change. So why does criticism arise?

Earlier in October, a group of Democratic senators including Bernie Sanders and Elizabeth Warren had asked the Commodity Futures Trading Commission to address the schemes that are used by companies to offset their carbon emissions. They argued that carbon credits allow companies “to make bold claims about emission reductions and pledges to reach ‘net zero,’ when in fact they are taking little action to address the climate impacts of their industry.” In reality, despite the best efforts of certification registries, many carbon offsets are derived from questionable projects, and both pricing and verification lack transparency.

At the end of the day, carbon credits and the VCM will benefit from tighter international cooperation on managing standards and accounting practices. Governments need to complement the efforts of independent carbon registries to enact guardrails on the standards of projects and qualities of carbon credits. At the same time, companies must continue reducing their own emissions rather than merely purchasing credits. Only by doing so, can our world truly head towards a net-zero future.

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Xianli Fu is a freshman studying Economics at the University of Pennsylvania.