What are carbon credits?

What are carbon credits: a short guide to complement your ESG education with need-to-know knowledge.

Carbon credits are a key element in global efforts to mitigate climate change by incentivising reductions in carbon dioxide emissions. 

You’ll likely hear the term tossed around regarding your company’s emissions, and it’s a hot topic within the news cycle and national/international politics.

A carbon credit is a certified representation of a quantified greenhouse gas emission reduction. It’s typically measured in tonnes of CO2 equivalent. 

These credits can be generated through various projects, such as renewable energy, forest conservation, or improved agricultural practices, which prevent or reduce emissions compared to a baseline scenario, often a benchmark year at some point in the past.

The concept of carbon credits arose from the need to address the global challenge of climate change in an economically sensible way. Essentially, they put a price on carbon emissions. For many companies, this means they’re a financial incentive to reduce those emissions and invest in cleaner alternatives and innovative technologies. 

The ultimate goal of carbon credits is to assist businesses in lowering their carbon footprint. How well they do this is constantly a matter of debate.

Carbon credits are created by entities that have successfully reduced greenhouse gas outputs in a quantifiable way. 

From there, they can be traded on various platforms and acquired by companies that have not gone as far to reduce their emissions. The credits essentially “fill the gap” between reality and the companies’ stated goals. Once purchased, the buying company can then claim that it has “offset” its emissions through carbon credits. 

This method is so popular because many companies find it cost-effective and easy to integrate into their strategy.

The primary advantage of carbon credits is that they offer a flexible, market-based mechanism to encourage emissions reductions. They enable entities unable to reduce their emissions internally to meet their environmental targets by buying credits, thereby supporting sustainability projects elsewhere.

Critics argue that carbon credits can allow companies to purchase a “license to pollute” rather than making direct reductions in their own emissions. 

Concerns also include verifying the real impact of attached projects and their potential to displace communities or lead to unintended environmental consequences that the credits themselves won’t show.

Boards should understand both the above advantages and criticisms of carbon credits in sufficient detail. Ultimately, it’s all about judging the complete impact that credits may have on your business strategy. 

They may allow your company to present itself with greener credentials but also bring reputational risk through accusations of green-washing or community harm. It depends on your stakeholders, their values, and shifting sentiments in the consumer and investing markets. 

It also depends on the laws in your country, as carbon credits are a regulated market. 

Ensure you’re on top of all this if you decide that credits are right for your business.

Carbon credits are an integral part of the global strategy to combat climate change. For companies, they represent both an opportunity and a challenge in navigating the evolving regulatory landscape and shifting stakeholder expectations around sustainability. 

Understanding carbon credits is essential for board members tasked with guiding their companies towards a sustainable future.