FAQ Carbon Markets

What are carbon markets?

The objective of carbon markets is to reduce greenhouse gas (GHG, or “carbon”) emissions cost-effectively by setting limits on emissions and enabling the trading of emission units, which are financial instruments representing emission reductions. Trading enables entities that can reduce emissions at lower cost to be paid to do so by higher-cost emitters, thus lowering the economic cost of reducing emissions.

What’s the difference between carbon credits and renewable energy?

Renewable energy sources generate little to no carbon as they produce energy from natural resources that don’t run out or use fossil fuels, like solar or wind energy.

Carbon credits are a mechanism for funding projects that avoid emissions being released in the first place, or removing greenhouse gases from the atmosphere. One type of carbon credit project is renewable energy installations, so long as they avoid emissions from a fossil-fuel power plant that would otherwise be providing energy to the same grid to which the renewables are connected.

There are many other types of carbon credit project (also known as methodologies), many of which do not involve renewable energy.

What is a carbon credit?

A carbon credit unit represents the removal of one tonne of carbon dioxide equivalent (tCO2-e) from the atmosphere, or the avoidance of one tCO2-e of emissions. The term "carbon dioxide equivalent" refers to the summation of multiple greenhouse gasses based on each gasses global warming potential (GWP). The Global Warming Potential (GWP) was developed to allow comparisons of the global warming impacts of different gases. Specifically, it is a measure of how much energy the emissions of 1 tonne of a gas will absorb over a given period of time, relative to the emissions of 1 tonne of carbon dioxide (CO2). For instance, methane has a GWP about 28 times that of CO2.

What happens with the revenues generated by the sale of carbon credits?

Project developers cover their investment and operational costs by selling carbon credits. A portion of the revenues generated remains with the developers as profit. Entrepreneurs are thus incentivized to set up emission reduction projects that are not business-as-usual, and therefore enable climate action. The majority of emission reduction projects are located in developing countries or in economies in transition.

Aren't carbon credits just for greenwashing?

To be certified, emission reduction projects must demonstrate that they are not business-as-usual. This is referred to as environmental integrity or additionality. This means that, without the additional revenues generated from selling carbon credits, these projects would not have been implemented. Supporting a certified emission reduction project ensures real benefits and maximum impact.

Only additional projects are recognized and can issue carbon credits. This mechanism, which is rooted in the Kyoto Protocol, has firmly established itself and has proven its worth over the past 20 years as a central component of voluntary, non-state regulated climate protection.

How do carbon credits help in the fight against climate change?

Carbon credits are a valuable tool to compensate for hard-to-abate emissions, i.e. emissions which may be difficult to eliminate completely with current technology. Purchasing and retiring verified carbon credits lead to measurable and accountable emissions reductions or removals.

One of the most powerful economic levers we have in the fight against climate change is pricing carbon. In an indirect way, the voluntary carbon market helps price-in the negative externalities of emitting greenhouse gases into the atmosphere. As more actors decide to do this, the price of carbon will increase steadily, and eventually reach a point where economic and social costs are accurately accounted for by the price of credits. This is the fundamental role of the infrastructure which KlimaDAO is building.

Which are the relevant political foundations for international climate protection?

As early as 2005, binding targets for greenhouse gas emissions, which are the main drivers of global warming, were set for the first time in industrialized countries as part of the Kyoto Protocol. This was then replaced in 2015 by the Paris Agreement, which obliges industrialized, developing and emerging countries alike to fight against global warming. The Agreement includes an obligation to limit average global warming to well below 2°C by the end of the century compared to the pre-industrial period.

What are examples of carbon credit projects?

1. Nature-based carbon sequestration. Biological sequestration absorbs CO2 emissions through the growth of vegetation and the continued storage of some of the carbon in plant tissues and organic materials derived from plant tissues (e.g. stored in the soil). An example project is the restoration of degraded mangrove landscapes in Myanmar. Other examples include biochar (long term carbon storage from biological sources), and afforestation initiatives (e.g. tree planting on degraded landscapes).

2. Renewable energy. Renewable Energy projects include hydro, wind, and photovoltaic solar power, solar hot water and biomass power and heat production. Many renewable energy projects have high up-front capital costs, although they may offer high rates of return, and their operating costs are often minimal once built. Carbon credits help support these projects by providing an additional revenue stream to cover their high up-front capital costs. This wind energy power project in India is an example and helps reduce 182,016 tons of carbon dioxide equivalent a year by replacing polluting fossil fuel power plants.

3. Methane capture. Methane’s global warming potential is about 28 times greater than that of CO2, and thus preventing methane emissions can have significant environmental benefits. Methane is emitted by landfills, during wastewater treatment, in natural gas and petroleum systems, from agricultural activities (livestock and rice cultivation), and during coal mining. Methane is basically ‘natural gas’ and can therefore be captured and used as a source of energy. Such projects include those that capture and purify methane in wastewater treatment plants or landfills and use it for electricity production or the production of another form of energy. The West Star North Dairy project in California, USA is an example project that captures methane from a dairy farm and uses it for energy.