Carbon market or carbon credit markets is a specialized financial market. In this case, it trades carbon or greenhouse gases in carbon-equivalent form in commodity form in financial trading systems (trading). These markets can be regulatory or voluntary.
In this way, negotiations are carried out in the carbon market based on the concept of cap-and-trade (trading) and carbon inventories, which quantify the carbon necessary during the production of a good or service.
Thus, if a company manages to improve its processes to the point of reducing its carbon emissions in relation to what is expected for its production line, it will be generating carbon credits.
How is carbon credit calculated?
Carbon credit occurs when a company manages to produce with less carbon than the basis for its activity. To know if this happened, you must know the carbon consumption basis of that production or service. In other words, it is necessary to know the standard for the activity.
Thus, the inventory of carbon credits or specific public policy provides the basis for carbon emissions from a productive activity or service.
Upon knowing this basis, the company calculates, also in carbon inventories, whether its production consumes more or less than the standard. If you consume less, the company is generating carbon credits. If you consume more, you are creating a carbon deficit.
Therefore, if the company is generating credits, it can sell them. If it is in debt, it can acquire it from other companies to compensate. In either case, the negotiation takes place through the exchange of carbon credits, which are one ton of carbon or carbon equivalent (in the case of other greenhouse gases).
Trading is the exchange of certified credits (tradable carbon credits) on voluntary or regulatory carbon markets.
What are tradable carbon credits?
Companies receive their tradable carbon credits when they can prove that they have reduced their carbon or carbon-equivalent consumption. The instrument that formalizes this are the certificates called Certified Emissions Reduction (RCE).
In turn, companies that have failed to meet their climate targets can purchase CER to offset their emissions.
In this sense, participating countries must issue carbon credits through specific mechanisms. Also, international agreements determine the amount of credits that a country can issue.
How are credits traded on the carbon market?
The forms of trading carbon credits are organized into a voluntary carbon market and a regulatory carbon market. Some instruments created during the different climate agreements also contribute, such as:
- Emissions trading – Article 18 of the Kyoto Protocol;
- Joint implementation – Article 6 of the Kyoto Protocol;
- Clean Development Mechanisms – Article 12 of the Kyoto Protocol.
These rules depend on the type of carbon credit market in which the operation is being carried out.
Thus, the regulatory market (or compliance markets) involves legal obligations, dictated by public policies and international agreements. Furthermore, the regulatory market necessarily requires the participation of some companies.
In other words, regulatory markets are also more restrictive and rely on specific rules and methodologies, such as Clean Development Mechanisms (CDM), of which REDD projects are part.
On the other hand, in voluntary markets there is not necessarily a legal obligation for the company to participate. In this case, “the majority of carbon credits come from private entities that carry out carbon projects, or governments that develop programs certified by carbon standards that generate reduction or removal of emissions”.
Can recovering degraded areas generate carbon credits?
Soils in general are large global carbon stores. In fact, soils, especially forest soils, contain some of the most important carbon reserves in the biosphere, along with oceans and plant biomass.
In other words, soil’s ability to remove carbon from the atmosphere is enormous. This characteristic is particularly interesting in the case of economies with large agricultural and mining bases, such as Brazil and other countries in the global south.
In the case of these countries, the largest source of carbon and carbon equivalent emissions occurs due to changes in land use for the implementation of economic activities. In this regard, recent reports point to the large amount of degraded pastures in Brazil, which is also an opportunity to generate carbon credits for many businesses.
In fact, IPCC estimates indicate that according to the IPCC (Panel on Climate Change) estimated a carbon sequestration absorption potential of between 60-87 Pg C in afforestation and reforestation activities worldwide between 1995 and 2050. This represents representing 12 to 15% of fossil fuel emissions for that period.
Therefore, soil management and the recovery of degraded areas stand out as important tools to reduce the negative effects of climate change and strong candidates for projects to generate carbon credits.
How can recovery projects for degraded areas be included in the carbon market?
Currently, the instrument that allows the generation of carbon credits in projects to recover degraded areas is REDD (Reducing Emissions from Deforestation and Degradation), a structure recognized in article 5 of the Paris Agreement.
In this scenario, the type of project determines the generation of carbon credits. In Brazil, participation in REDD+ projects occurs through approval of notices available on the Ministry of the Environment website.
In other words, degraded areas have immense potential for absorbing atmospheric carbon and can be an excellent opportunity for investment in the carbon market through projects to recover degraded areas.
Carbon markets, in turn, provide an opportunity for companies to be rewarded for their positive actions and for companies that have difficulty meeting their climate goals to reduce their negative impact on the environment.
Leave a Reply