Carbon Credit / Offset Primer

Carbon credits and offsets have been in the news a lot lately and have been a speaking point for many of the presidential candidates.  In the not too distant future, your bank may encounter a customer seeking to partially finance a project through carbon offsets.  Furthermore, as markets develop, carbon credits may become a more prevalent investment.  Following is a very brief, very basic primer on carbon credits and carbon offsets.

Carbon Credits: carbon credits are tradeable permits to emit greenhouse gases. Carbon credits are generally issued as part of a government mandated cap-and-trade system.

Cap-and-Trade: a regulatory scheme under which a government sets a cap on harmful emissions. Companies that are subject to the scheme must meet the cap. If a company emits less than cap, it will receive carbon credits that can then be traded for a profit. If a company exceeds the cap, it must purchase carbon credits to meet the cap.

Carbon Offsets: carbon offsets are financial instruments representing a reduction in greenhouse gas emissions. Carbon offsets generally arise in the voluntary carbon market. Note: the terms “carbon credit” and “carbon offset” are often used interchangeably. However the terms are used, the distinction between credits/offsets in a mandatory cap-and-trade market and credits/offsets in the voluntary market should be noted.

Voluntary Carbon Offset Market: the voluntary carbon offset market generally consists of bilateral, over-the-counter transactions between a party who has instituted a project or practice that has proven to capture, sequester, or otherwise reduce greenhouse gas emissions. Organizations are emerging that verify and register voluntary carbon offsets.

     The United States has not instituted a cap-and-trade system. The U.S. has not ratified the Kyoto Protocol and has not developed a domestic system. The Kyoto Protocol caps the emissions of ratifying, non-developing countries. Countries exceeding the cap can purchase credits from countries who emitted less than the cap, or can purchase credits from projects that capture, sequester, or otherwise reduce greenhouse gas emissions, similar to the voluntary carbon offset market. Regional initiatives to cap major emitters are emerging in the U.S., but a unified system has yet to be established. There are currently bills before Congress seeking to establish a cap-and-trade system.

     Lacking a cap-and-trade system, the voluntary market has developed in the U.S. In the voluntary market companies, governments, and individual buy carbon offsets to mitigate their own greenhouse gas emissions arising from energy use, waste, transportation, and other sources. A the rationale for the purchase, purchasers cite care for the environment, customer goodwill, positive press, gaining valuable early experience in an emerging market, and the inevitable institution of higher emissions regulations, be it a cap-and-trade system or a straight emissions tax. Offsets can be generated from projects such as wind energy, the capture or sequestration of agricultural gas, renewable energy, and forestry. Generally, to obtain voluntary offsets for a project, strict protocol of the body verifying and registering the project must be followed. One key requirement in the voluntary market is additionality. Although there are different definitions of additionality, the gist is that the project must reduce emissions over and above “business as usual” and would not have gone forward without carbon offset funding. Although difficult to grasp and prove, this concept is intended to ensure that purchasers are buying a true reduction in emissions and are not merely padding the pockets of a project, and emission reduction, that would have occurred anyway.

Comments

[Chris D.]

I found this site where you can find carbon offset providers http://www.carbonoffsetreview.com/

[CDM Consultant]

well versed Description.I visited you site,very attractive.Carbon offsetting is not the end solution, that much is obvious. But, it's putting money toward good causes that will eventually be part of this solution. It's easy to be cynical about it, but in the meantime it's making an impact.