What Is a Carbon Credit and How Does It Work?

Organizations and individuals interested in offsetting emissions have often purchased carbon credits through government-backed carbon offset programs. Although these initiatives sound good in theory, environmentalists say they actually do little to help the planet.

If you’ve wondered what a carbon credit is and how these programs are set up, this guide will break it down for you step by step.

What Is a Carbon Credit?

In broad terms, carbon offsets are when organizations or individuals reduce greenhouse gas emissions through sustainable projects and green investments to compensate for emissions elsewhere.

Organizations can purchase voluntary emission reductions (VERs), which are a type of carbon offset purchased via the over-the-counter market. One VER is equal to about 1 ton of CO2 emissions. Once corporations obtain equal credits to match their carbon footprint, they’re considered “carbon neutral.”

Currently, carbon credits cost corporations between $1.40 and $81 per metric ton of CO2 (29/11/2022). However, as more businesses look to boost their sustainability, credits will likely reach $20 to $50 per metric ton by 2030.

Those that genuinely care about the environment will find advantages in purchasing carbon credits. For instance, since CO2 traps heat and raises atmospheric temperatures, reducing emissions outputs can dramatically slow down global warming. It also could provide a way to reach corporate emissions standards outlined by the Paris Agreement.

How Do Carbon Offset Programs Work?

Organizations might participate in carbon offset programs voluntarily or to meet environmental regulatory compliance. Sometimes, companies will hire a broker to offset carbon somewhere else in the world.

Once the individual or corporation evaluates its current carbon footprint, the broker issues a charge based on the emission levels and invests part of the money in CO2-reducing projects.

Companies can offset their emissions by spearheading reforestation initiatives or investing in clean, renewable energy projects. Decarbonizing the electric grid with renewables reduces CO2 emissions that cause adverse ecological effects, such as extreme weather patterns and ocean acidification.

Once an organization purchases a carbon credit, they receive a certificate that they’ve offset emissions and are compliant with federal environmental regulations.

Criticisms of Carbon Offsetting

Critics of carbon offset programs – including industry professionals and environmentalists – say that carbon credits do little to prevent industry-generated global warming. From the scientists’ standpoint, carbon offsets promote a business-as-usual model that hides dirty practices behind “climate-neutral” labels with few ecological advantages.

Others say that credits are often misleading and counted twice, allowing two entities to claim CO2 offsets in the same place from the same credit.

Amid several loopholes that set environmental progress back, the United Nations recently called on corporations to offset their own emissions rather than buy into faulty carbon offset schemes.

Efforts are underway to improve the carbon offset program by lowering permissible emissions levels and raising the bar for organizations to offset themselves.

For example, the Science Based Targets Initiative now demands that companies offset 90% of their own emissions by 2050. While they can still purchase carbon credits to reach net zero, the credits won’t apply to their individual compliance requirements.

The Voluntary Carbon Markets Integrity (VCMI) Initiative is also creating a new model aimed at greenwashing. The group hopes to generate a standard code that improves transparency in how corporations evaluate their emissions and reach their carbon offset targets.

Carbon Offsetting Done Right Benefits the Environment

A solid carbon offset program can reduce CO2 in the atmosphere and slow global warming. Of course, closing loopholes and adhering to new emissions standards is critical if companies want to offset their emissions effectively.