The issuance and trading of carbon credits is an important mechanism in carbon markets that aims to reduce greenhouse gas emissions and incentivize emissions reduction measures.
Here’s an overview of how it works. First of all, there is the issue of emissions. CO2 certificates are generated by projects that reduce, avoid or eliminate greenhouse gas emissions. These projects may include, but are not limited to, renewable energy facilities, reforestation initiatives, energy efficiency improvements, and methane capture from landfills or agricultural activities. When a project is developed and implemented, it goes through a rigorous process to quantify and verify the emissions reduction achieved. After verification by an accredited third party testing agency, CO2 certificates are issued based on the amount of emissions reduced or avoided by the project.
The second step is verification. Verification is a crucial step in the carbon credit awarding process to ensure the credibility and integrity of emissions reduction claims. Independent auditors assess project documentation, methodologies and data to confirm that emissions reductions have been accurately measured, reported and verified according to established standards and protocols as provided by organizations such as VERRA, the Gold Standard or the Clean Development Mechanism (CDM ) were developed under the Kyoto Protocol.
After verification, the CO2 certificates are registered in a central register, usually maintained by a regulatory authority or a standards organization. Each carbon credit is assigned a unique serial number that is tracked in the registry to avoid double counting and ensure transparency and traceability in the carbon market.
Once issued and registered, carbon credits can be bought and sold on carbon markets. Markets for carbon allowances can take various forms, including compliance markets, where companies are required to offset their emissions to meet legal caps (e.g. the European Union Emissions Trading Scheme), and voluntary markets, where organizations and individuals voluntarily purchase CO2 certificates to reduce their carbon footprint or demonstrate their environmental responsibility. Carbon credits are traded on specialized platforms or through brokers, where buyers and sellers negotiate prices based on supply and demand dynamics, project quality and market trends.
When a buyer purchases carbon credits, they can write them off to offset their own emissions or demonstrate carbon neutrality. Derecognition ensures that the emission reductions associated with the CO2 certificates are recorded permanently and cannot be claimed by multiple parties.
Overall, issuing and trading carbon credits provides a mechanism to incentivize emissions reduction measures, mobilize investment in climate-friendly projects and facilitate the transition to a low-carbon economy. However, it is important to ensure that carbon credits are issued, verified and traded transparently and in accordance with robust standards and protocols to maintain the integrity and effectiveness of carbon markets in combating climate change.
