One of the buzzwords in the past decade is carbon credits. Multiple companies are introducing their carbon offset initiatives to reduce GHG emissions. While it raises more awareness and encourages more companies to follow suit, there are still misconceptions about what a carbon credit is and how does it work.

What is Carbon Credits and How It Works

Many people use the terms carbon credits with carbon offset interchangeably. While both may refer to the same activity, reducing the GHG emission from the air, they are two different things.

A carbon credit is a government regulation that caps the maximum emission a company can emit. Or in layman’s terms, a company has a set number of credits that decline over time. And just like carbon offset, the basic calculation for one carbon credit is equal to one ton of CO2 reduction.

In November 2021, negotiators from 200 countries who attended the Glasgow COP26 signed the agreement that allow nations to buy credit offsets from other countries. In other words, a global carbon credit market is in the making. The regulated market may affect the pricing of carbon credits.

The price for one carbon credit differs based on location and whether it’s a voluntary or compliance market. Because people can buy directly from a carbon offset provider, the voluntary market has a much lower price yet is also as volatile.

Benefits of Implementing Carbon Credits

Among the many benefits of implementing carbon credits, climate-change efforts and economic benefits are the most prominent ones. Many companies see the emerging market as an efficient way to earn profit and still achieve their climate-change goals.

1. Climate-Change Mitigation

In 2019, only 500 companies were pledging to reduce GHG emissions. This number doubled within a year to more than 1000 companies in 2020. Implementing carbon credit pushes companies to work on their green initiatives. Most companies participating in the pledge already take the necessary internal steps. They start by promoting a sustainable lifestyle at the office and have more energy-efficient offices. These companies also sponsor carbon projects worldwide as part of their CSR programs.

2. Economic Benefits

Research by Taskforce on Scaling Voluntary Carbon Markets found that the demand for carbon credit can increase exponentially. They predict that the overall value of the carbon credit market can breach $50 billion in 2030. The economic benefits are not only for the companies and nations that actively trading. But it also affects the local communities, activists, and everyone who works on the carbon project. It also will inspire more entrepreneurs to start green climate tech initiatives.

The Challenge of Carbon Credit

It’s worth noting that trading carbon credit may diminish the green efforts. There is a chance people will choose to purchase a credit instead of living a sustainable lifestyle. In the long run, it will reduce the positive impact that carbon projects have working on.

A carbon credit is only one of many efforts that everyone can do to reduce the world’s temperature. At the end of the day, it requires global collaboration to get the maximum and immediate impact.