What are carbon credits and how do they work?

A carbon credit is a permit that allows the company that holds it to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of a mass equal to one ton of carbon dioxide. – Investopedia

If that still sounds like a jargon, let’s try a simpler way – carbon credit is the generic term used for any certificate representing one ton of carbon dioxide (CO2) or any other greenhouse gas (GHG) removed from the atmosphere.  

Companies purchase carbon credits, also known as carbon currency, to offset the GHG emissions that are generated as part of their regular operations. In most cases, carbon credits are created through sustainable agricultural or forestry practices, though it can be generated in any project that actively reduces GHG emissions. Carbon credits can either be exchanged in a carbon market voluntarily or as part of a regulatory framework.

The carbon credit market is hot and growing. The voluntary market is on track to reach a record of USD 6.7 billion at the end of 2021, according to September 2021 report from Ecosystem Marketplace. The report also noted that year 2021 logged a new market value record of over USD 1 billion in voluntary carbon credit transactions.

“The carbon credit market is ready for a revolution. GHG reduction is now a pivotal global objective, and the carbon market has to be raised to the standards of modern financial institutions,” says Pavel Bordioug, Vice President, Tech Strategy, CarbonTerra, a farmer centric carbon credit aggregator focused on providing farmers with simple, effective, science based agronomic carbon farming solutions.

The whole idea of carbon credit basically amounts to make the offenders pay for sustainable practices elsewhere. The bigger your carbon footprint, the more you pay for purchasing carbon credits to offset your negative impact. The money goes to sustainable practices like eco-friendly agriculture or growing forests.

How Carbon Credit Works

Although it sounds very complicated, the concept of carbon credit is fairly simple.

Why carbon credits?

Our planet is on the brink today. Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment Report, which was released on August 9, 2021, highlights that human influence has warmed the climate at a rate that is unprecedented in at least the last 2,000 years.

UN Secretary-General António Guterres had called the report as nothing less than “a code red for humanity. “The alarm bells are deafening, and the evidence is irrefutable,”

The report said in 2019, atmospheric CO2 concentrations were higher than at any time in at least 2 million years, and concentrations of methane and nitrous oxide were higher than at any time in the last 800,000 years.

As Year 2021 joined 2020 in top seven warmest years on record, experts agree we are at imminent risk of hitting 1.5 degrees in the near term. The only way to prevent exceeding this threshold, is by urgently stepping up our efforts in reducing global emissions.

Because carbon credit broadly refers to reduction in GHG emissions, it essentially amounts to increase in carbon storage, through land restoration, forest conservation, tree planting or even adoption of sustainable ways of farming, such as organic farming or less nitrogen in the soil etc., to compensate for emissions that occur elsewhere. A known emitter – whether an individual or an organization – looking to offset their carbon emission can purchase carbon credit to show towards their own GHG reduction goals. From Bill Gates to Jeff Bezos, Google to General Motors, major corporations have all been investing in carbon offset market to make up for their emissions.   

The concept of carbon credits seem to be getting more popular, especially as organizations and governments commit to massively reducing their emissions. Global spending on carbon offsets could increase from roughly $300 million in 2018 to as much as $100 billion by 2030, according to the Institute for International Finance’s Taskforce on Scaling Voluntary Carbon Markets.

“Carbon currency and crediting provide valuable instruments to sustain an economy that values carbon storage and sequestration in soils and biomass. Regenerative and smart agriculture offer avenues to create carbon neutral industries with farmland serving as carbon sinks,” Dr Sabine Grunwald, Professor, Pedometrics, Landscape Analysis & GIS Laboratory, and Soil and Water Sciences Department, IFAS, University of Florida.

“Carbon economies that are data and science driven and apply Artificial Intelligence (AI) modeling technology will provide the foundation for sustainable and resilient futures that serve both the people and the land,” she adds.  

How does carbon credit work?

Amid the global clarion call for reducing GHG emissions, realists also understand it’s not possible and practical to switch off all machines of the world. Some of the practical ways to approach this crisis are:

  • Reducing emissions by cutting down on fossil fuel, particularly coal, and switching to clean, renewable resources such as solar or wind energy. For instance, Canada has an action plan to phase out coal-fired electricity by 2030. This includes investments of more than $185 million to support coal workers and their communities through the transition to cleaner energy.
  • Identifying GHG emission that would otherwise be emitted into the atmosphere. For instance, capturing methane leaks at landfills or industrial sites. Here too, Canada has shown a leading initiative as Canadian satellite company GHGSat’s multi-layered methane detection and monitoring services can pinpoint source emissions down to the individual facility level.
  • Carbon capture and storage (CCS) by conserving forests to lower emission of greenhouse gas into the atmosphere. Canada’s forestry sector is a CCS leader As a major forest nation, Canada is working to understand how today’s changing climate will affect the global carbon balance, the health of the country’s ecosystems and the flow of goods and services provided to Canadian society.
  • Lastly, adopting carbon capture and storage (CCS) via sustainable agriculture practices. Adoption of CCS technologies in agricultural sector, also known as carbon farming includes zero-till agriculture, cultivating specific crops, using organic fertilizer or regenerative cattle farming, which increases the ability of the soil to sequester CO2 and ensures it stays trapped within the ground.

Any organization – whether public or private – can invest in any of these initiatives to generate carbon credits and work towards reducing global emissions. In addition to conservation and forestry organizations, individual farmers and landowners practicing sustainable practices can sell carbon credits, which are managed by organizations – both private and public.

“Carbon farming is the way forward to soak up excess CO2 and reverse climate change for the betterment of the generation,” says Jon Bradbury, Chief Financial Officer, CarbonTerra.

“Greenhouse gases have been raising at alarming rate that many of the countries have tried to implement protocols for reducing GHG emissions. Farmers, who already feed the world are in a unique position to offset this emission by farming best practices,” underlines Dr. Sivasathivel Kandasamy, Lead Data Scientist, Carbon Terra.

“The key concept is that offset credits are used to convey a net climate benefit from one entity to another. Because GHGs mix globally in the atmosphere, it does not matter where exactly they are reduced,” according to Carbon Offset Guide, an initiative by the Carbon Offset Research and Education (CORE) initiative of the Stockholm Environment Institute (SEI) and Greenhouse Gas Management Institute (GHGMI). 

It adds, from a climate change perspective, the effects are the same if an organization:

  1. ceases an emission-causing activity; or
  2. enables an equivalent emission-reducing activity somewhere else in the world.

Carbon credits naturally make it easier, practical and more cost-effective for organizations to pursue the second option, even while contributing to green practices and working towards mitigating climate change.

The role of CarbonTerra carbon credit market

CarbonTerra believes in maximizing the value earned through Agricultural Land Management practices that generate Pedigreed Carbon CreditsTM. Headquartered in Saskatoon, Saskatchewan, Canada’s breadbasket, CarbonTerra’s uses cutting-edge technologies that integrate agronomy, science, and artificial intelligence to build a farmer-focused platform that earns farmers more money for their Carbon FarmingTM practices both currently and historically.

For an average farmer, adopting these practices are challenging in terms of costs and adoption, even as more and more farmers are increasingly understanding the concept, the benefits – for their businesses as well as from a holistic environment perspective – and becoming receptive to these technologies.

CarbonTerra works with farmers as partners, helping them to manage and navigate the complexity of sustainability in farming. A farmer has to simply visit the CarbonTerra website. There they get to select only the practices and protocols they want to adopt. CarbonTerra applies AI-driven quantification techniques to calculate how many credits their land is eligible to generate. They have the option to claim these credits, and even sell these on the CarbonTerra’s marketplace.

For calculating both future and historic carbon credits, CarbonTerra’s AtlasX platform uses blockchain technology to run the complex analysis. This ensures the transactions and transparent and immutable.

CarbonTerra uses research backed assessments to validate that carbon has been stored after taking into account all changes. These assessments are then validated by a third part assessor. Once the assessment has been validated it is publicly posted to a registry and tokens are created on the blockchain which correspond to the assessment. The blockchain itself actually stores the information from the assessment so that anyone in the world is able to confirm the validity of a credit. These tokens can then be sold to those looking to offset their carbon footprint and they can claim them by burning the tokens on the chain. This claiming process is also recorded and permanently stored. This creates a fully traceable, transparent and reliable system for managing the trading of carbon credits.

As Bradbury underlines, “In the same way Atlas was condemned to carry the weight of the World on his shoulder for leading a battle for control of the Heavens, the Atlas token symbolizes the struggle we all face to take back control of our climate by giving us a mechanism through which we can all achieve carbon neutrality.”