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What are carbon Credits?
What are carbon Credits?
Authors: Valentina Sechi & Jasper van Belle
A Carbon credit is a unit of measurement that represents the removal of one ton of carbon dioxide equivalent (tCO2eq) from the atmosphere[1]. Buying such credits enables a buyer to offset[2] their greenhouse gas (GHG) emissions[3], while enabling a seller to finance the changes needed to reduce GHG emissions.
The voluntary carbon market functions outside but in parallel with the compliance (i.e. mandatory) market. It operates not because of government obligations but because of Corporate Social Responsibility (CSR) and/or as a response to market pressure and public opinion. Therefore, in the voluntary market, the trading of Carbon Credits is not related to an allowance to emit but more to a voluntary action to support and promote a project which reduces global emissions. The voluntary trading schemes ultimately depend on parties (private or public) that want to reduce their carbon footprint, even though they are not required to. Such parties may want to reduce their net carbon emission by paying others to take carbon out of the air. The amount of carbon emissions saved is again measured as Carbon Credits.
Criteria for carbon credits
Criteria for carbon credits
Generally, the following criteria need to be considered in the voluntary emission reductions programs/projects:
Additionality
Additionality
This means that a project would not have gone ahead in a ‘business as usual’ scenario and that any emissions reductions are ‘additional’. GHG emissions reduction from a project activity are quantified relative to baseline emissions for the project duration. Baseline GHG emissions are derived from the baseline scenario. The baseline scenario is a continuation of the current peatland condition category and hence a continuation of current GHG emissions (‘business as usual’).
Measurability
Measurability
Ensures that emission reductions achieved by a project can be quantified in a transparent and verifiable way. Baseline data based on pilot sites are required to measure the effects of carbon reduction and sequestration and thus deduce emission factors related to measurable indicators during the project. This evaluation should be conservativeness that meaning that emissions are underestimated in the baseline and overestimated in the project scenario. This helps to ensure that a project can provide near certainty that it will achieve its GHG emissions reductions targets.
Verifiability
Verifiability
Requires that an independent third party must be able to verify the quantification of emissions reduction on the basis of previously defined criteria. Verification provides assurance to buyers of Carbon Credits.
Reliability
Reliability
Complete and reliable documentation is necessary not only to avoid double selling but also to create confidence in the market. For this reason, the trading of carbon credits must be documented indisputably in central registries. This register must provide an open and transparent record of all aspects of approved projects.
Sustainability
Sustainability
Projects should not contribute to the deterioration of socioeconomic or environmental conditions. Moreover it has to avoid Leakage. The project must not lead to higher emissions being caused outside the project boundary. Projects must be designed to prevent this from happening.
Permanence
Permanence
When emissions reduction projects come to an end there is a risk that any carbon saved or captured will be emitted due to a possible lack of future funding. To avoid or reduce this risk, reversals must be prevented with long-term contracts or legal measures and effectively made permanent. The VCS standard now limits ‘permanence’ to 100 years. The duration refers to the timespan of a peatland rewetting project. Commonly this is 50 years.
Co-Benefits
Co-Benefits
Carbon projects can also contribute to improved socioeconomic and environmental conditions. Co-benefits refers to gains other than emissions reduction derived from rewetting peatlands. These can include, improved water quality, flood prevention, groundwater enrichment, evaporative cooling and increased more typical biodiversity.
Voluntary Offset Standards
Voluntary Offset Standards
To propose carbon credits on the voluntary market, it is necessary to prove the environmental quality of the projects. Therefore, the criteria described above are based on a framework, set in agreement of project partners to make voluntary offset standards. The amount of the carbon credit is based on the quality of the critèrias and the verification framework. Below you can find some examples of standards.
THE VERIFIED CARBON STANDARD (VCS) [4]
This is the most important standard for land use projects, created in 2007 it includes guidelines for the development of projects in agriculture, forestry since 2008. 2 modules apply specifically to wetlands : wetlands restoration (BL-PEAT), maintaining against degradation (M-PEAT) but the scope concerns domed peatland in the tropical climate zone. Find out more
THE GOLD STANDARD
This standard was developed in 2003 by a group of NGOs. It is the first independent and the most rigorous certification standard for creating high-quality carbon offset projects is regarded as an independent set of criteria to evaluate carbon projects internationally.
Find out more
MOORFUTURES® (Germany)
In Germany, the MoorFutures scheme was introduced in 2010 as the first carbon credit scheme for peatland rewetting in the world. The credits were sold in the German federal states of Brandenburg and Mecklenburg-Western Pomerania and Schleswig-Holstein. Certificates were issued for measures that result in reduced GHG emissions or in increased carbon sequestration through agriculture or forestry, but not for the mere presence of carbon stocks. Find out more
VALUTA VOOR VEEN (Netherlands)
In the Netherlands, the Valuta voor Veen (VvV), a local scheme for carbon credits for peatland rewetting was put in place by the Frisian Environmental Federation. It is one of the projects within the “Green Deal Nationale Koolstofhandel” (Green Deal National Carbon Market[5]). 3 types of certification:
maintain agricultural peat meadows at a higher groundwater level, including extensive grassland farming (nature-inclusive agriculture
paludiculture with wet crops at a much higher water level
nature development at a much higher water level
VvV wants to compensate the additional costs for the farmer with the issue of certificates. Certificates[6] - after being validated by national authorities can be purchased from the National Carbon Market. Find out more
LOW CARBON LABEL (France)
In France, the Low Carbon Label provides a financial incentive to projects or activities that reduce direct GHG emissions, as well as indirect emissions and carbon storage. The purpose of the low-carbon label is to certify voluntary reduction projects that go above and beyond standard practice. The certification is granted by an independent third party. To promote the financing of the certified projects, the low-carbon label certified emissions standard specifically provides for the participation of financial partners who will be able to claim that they contributed to the additional GHG reductions resulting from such projects. To be recognized, carbon Credit allowed by agricultural and forestry projects has to respond to environmental intégrity criteria defined in the standard. Standard and methodologies are both approved by the ministère de la transition écologique et solidaire in French (MTES). Several methodologies exist for forestry, cattle, lands but for the moment no method has been written for peatlands. Find out more
PEATLAND CODE (United Kingdom)
In United Kingdom, the Peatland Code is a voluntary standard for peatland projects wishing to market the climate benefit of peatland restoration. It sets out a series of best practice requirements including a standard method of quantification which when validated by an independent body will give assurance to buyers that their purchase will return verifiable climate benefit over the project duration. Same as the Woodland Carbon Code, the peatland code is full ISO14065 audit status, and having its credits listed on the Market Registry.
Find out more
Interpretation of reference criteria for Carbon Credits in pioneer schemes applied to peatlands and frameworks along with the international C-credit scheme standards (Sechi et al. 2021: 18)
Advantages for Businesses
Advantages for Businesses
For a business, financing low carbon projects is a way to respond to their corporate social responsibility.
Moreover, private actors are increasingly expressing the willingness to contribute to climate national objectives as in the Netherlands or with the Peatland Code in the United Kingdom. More and more companies are happy to contribute to collective effort against climate change and want to make sure their contribution is actually seen in the national inventory.
But financing low-carbon projects does not exempt activities compatible with the carbon neutrality objective …
Labels that look at a company’s climate strategy are also important to avoid green washing.
How to build a voluntary carbon credit market?
How to build a voluntary carbon credit market?
The price
The voluntary carbon credit price can be set freely. To determine the price of 1 T CO2eq, the following points must be taken into account:
Action cost (restaure peatland, higher water level, …)
Costs related to the implementation of mitigation and sequestration actions (initial investments, operating costs, need for training, etc.)
Transaction costs (administrative costs, follow-up costs, audit)
The consent to receive from project leaders (must at least cover the risk-taking of the project leader)
The presence of co-benefits
The price must then be negotiated with the funders
Carbon prices are very heterogeneous among projects, but are on average higher than on international voluntary markets. The weighted average price for European domestic credits in our case studies, which are mainly from land-use projects, is 13 €/tCO2e[7]. Prices range from 6 €/tCO2e to 110 €/tCO2e and many projects are still in the pipeline waiting to be validated.
Co-benefits for higher prices and valuation of the “beyond” carbon benefits
One of the conditions of success of project-based mechanisms is ensuring fairly high prices for projects, in order to provide a sufficient incentive for project developers. The price of carbon units depends on the cost of the project, but other factors actually influence it. In France, 73% of buyers considered environmental co-benefits as essential or very important, although it was not always correlated to a much higher willingness to pay. Finally, they also observed that ex-ante crediting usually implied lower prices.
Blue Credits
Blue Credits
“Blue credit” is a term used in the context of the Carbon Connects project proposal to define tradable certificates that translates water purification, water storage, and water retention services into Blue credits. The creation of a credit system for these services, and thus its recognition at the institutional level, should make these additional ecological values visible and thus stimulate the implementation of sustainable peatland management.
As in the case of a Carbon credit, it is important to define the Blue credit as a financial unit which can be traded. There are two main ways of trading Blue credits:
Incorporating them in the Carbon credit system as a co-benefit;
Creating a separate Blue credit market
Example Blue credit approaches
Example Blue credit approaches
The Green Water Credits Mechanism developed for Kenya, aims to let farmers and hydropower producers downstream pay farmers upstream for ground water, fresh water and soil conservation actions
The Dutch Catalogus groenblauwe diensten (Catalog of greenblue services) approved by the European Commission, provides a legal framework aiming on improving habitat conditions and water storage in ditches. It gives a list of activities that can be implemented by land owners that are relevant in the provision of green or blue services. Payment for greenblue services is based on the cost of construction and maintenance plus the loss of agricultural productivity.
The MoorFutures® system has tried to integrate ecosystem services in a Carbon Credit standard. Next to the GEST approach to quantify GHG emission reductions, MoorFutures® (version 2.0) employs five additional methodologies (still under development).
Towards an integrated Eco-credit system in Europe
Towards an integrated Eco-credit system in Europe
High quality standard verification systems are usually quite expensive to achieve for small private entities. The example of MoorFutures® showed that quality can be guaranteed and costs lowered if the accreditation is carried out to a regional standard. In the case of MoorFutures® transaction costs are greatly reduced compared with VCS and Kyoto Protocol projects, because validation and certification are carried out ‘in-house’ by the University of Greifswald. This approach is not uncommon on the voluntary market, but does require that emissions reduction is estimated conservatively and with the greatest possible transparency.
Additionally to this, national frameworks have now been developed in the Netherlands (Green Deal National Carbon Market) and the United Kingdom (Peatland Code). The latter uses a similar proxy measurement expert assessment to Moorfutures®. The former uses an uniquely Dutch model, which relies on water levels coupled with expert opinions to measure greenhouse gas emissions. When calculating the total CO2eq for Carbon Credits, both scenarios (reduction and sequestration) can be included in the calculation either as an unique absolute value or as a separate one, accounting for both carbon uptake and carbon stock. Other ecosystem services can potentially add value to Carbon Credits by including Blue Credits (credits relating to water).
In the context of wet agriculture (paludiculture) an easy and cheap accreditation system based on proxies to assess GHG emission reduction such as the GEST system used by MoorFutures® seems to be the most suitable as it reduces costs by minimising the need for expensive equipment on multiple sites. Moreover, the quality and reliability of the Eco Credits issued need to be guaranteed. Following the example of MoorFutures®, an option would be to set-up accreditation systems at regional or national level, which could be scaled up throughout Europe with public authorities or governments at various levels acting as quality guarantors of each accreditation system.
The European Commission anticipates that emissions by the land use, land-use change, and forestry (LULUCF) sector will be fully integrated into the 2030 EU GHG target as reported under the UNFCCC inventory. The EC is looking to develop a certification system for carbon removal to encourage landowners to store more CO2 on their land. While the EC is aware of the possibilites for the LULUCF GHG inventory sector to become the first sector to achieve net zero emissions, common guidelines on how to measure and account for Carbon Credits and Blue Credits (Eco Credits) are urgently needed.
Eco-credit use case
Eco-credit use case
The Use Case in the figure below outlines the recommended attributes of an Eco Credit system for peatlands. In the first instance, a framework at national or regional level is desirable. This can provide a legislative, administrative and policy context for Eco Credit schemes. A database of peatland types, map based data and associated emissions is necessary to allow the implementation of standardized GHG emissions assessment models (like GEST). Details of a project site need to be established and monitored to ensure that the sale price of Eco Credits can fund the financial requirements of the project i.e. securing restoration funding and landowner reward payments. GHG emissions are evaluated for the duration of the project on a conservative basis and converted into individual Carbon Credits representing 1tCO2eq each and sold via the Voluntary Carbon Market as regular Carbon Credit certificates, with the option of adding a Blue Credit portion to create a higher value for each Eco Credit certificate.
Use case describing the necessary components of peatland restoration projects involving the sale of Eco Credits (Sechi et al. 2021: 31)
Further Reading
Further Reading
CConnects and Care Peat White Paper on Carbon and Blue Credits: download here
The basis of a carbon credits certification for restoration & low carbon farming on peatlands in Northwest Europe (CConnects): download here
Financing mechanisms in Europe for restoring peatlands - An overview of the different financing opportunities existing for peatland restoration (CConnects) : download here
References & Footnotes
References & Footnotes
[1] https://www.goldstandard.org/resources/faqs
[2] Carbon offset: A reduction in emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere. Offsets are measured in tonnes of carbon dioxide-equivalent (CO2eq).
[3] Greenhouse gasses are all gases that contribute to the greenhouse effect of the earth or global warming. Well known GHG gasses emitted by human activities are CO2, CH4 and N2O.
[4] www.v-c-s.org
[5] https://nationaleco2markt.nl/wp-content/uploads/2018/10/GDNK-Groen-Veenweide-001.pdf
[6] https://nationaleco2markt.nl/
[7] https://www.i4ce.org/wp-core/wp-content/uploads/2020/02/0218-i4ce3153-DomecticCarbonStandards.pdf
Sechi, V., Geurts, J., van Belle, J., Röhrig, N., Liu, W., Tilak, A., Smits, T., Nailon, P., Cartmell-Done, K., de Boever, M., Fritz, C., Ó Brolcháin, N., Morley, T., Field, C., Kennedy, J., Johnson, S., Caphorn, S., Halevy, C., Ryan, J., Eakin, M., Fernandez, F., Bain, C., Domegan, C., McGuinness, S. and M. McCorry 2021: Peatland Carbon Credit and Blue Credit White paper.
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