1. What is a carbon credit?A carbon credit is a certificate representing one metric ton of carbon dioxide or similar greenhouse gases (GHGs) that was either prevented from being emitted into the atmosphere or removed from the atmosphere through carbon-reduction projects. Carbon credits are either required by governmental regulations or bought by companies and individuals voluntarily. The voluntary carbon market (VCM) was developed to help businesses and individuals to achieve ambitious commitments to reduce global greenhouse gas emissions by offsetting their residual emissions. Carbon offset registries, such as Verra and Gold Standard, develop standardized protocols for project registration, monitor available credits, and ensure that credits aren’t allocated to multiple entities. To register a project with a registry, developers must demonstrate that the credits are real, permanent, additional, measurable, independently verified, and unique. Once an entity claims credit to offset its footprint, the credit is retired from the registry and can no longer be sold.
2. Unprecedented pressure on corporates to make net-zero commitmentsNearly 200 countries have endorsed the Paris Agreement, a legally binding international treaty on climate change. It commits to limiting the global average temperature increase to below 2-degrees Celsius above pre-industrial levels at a minimum—and ideally, keeping to the science-based 1.5-degree increase scenario. The latter would reduce the odds of triggering climate change’s most consequential and irreversible effects. Reaching that target, however, would require cutting GHG emissions by 50% of current levels by 2030 and 100% of current levels by 2050. Over the last two years, many companies have risen to the occasion: according to the Net Zero Tracker, one-third of the world’s largest publicly traded companies had net zero targets in 2022, up from one-fifth in 2020. Stakeholders are increasingly pressuring companies to measure and report their progress in line with science-based targets.
Commitments by companies and cities account for 25% of global CO2 emissions and over 50% of GDP.
In order to reach these pledges, companies will first have to reduce both their direct and indirect carbon footprints. Given current technological constraints, reducing emissions beyond a certain point will be prohibitively expensive for many companies. To achieve their decarbonization targets, these companies will have to offset their footprint using carbon offsets. Some companies, such as Microsoft, have gone even further and committed to retroactively removing all their carbon emissions since it was founded in 1975.