A brief introduction to CO₂ certificates: what is behind them and how do they contribute to climate protection?
As a result of the global COVID-19 pandemic, the sharpest annual decline in global carbon emissions was recorded in 2020. However, this decline was short-lived, as globalCO2 emissions quickly rose again the following year to a higher level than before the pandemic, with an increase of 6.3%.
Even today, we continue to emit additional carbon emissions every year. If we do not prevent more emissions from entering the atmosphere than the Earth can absorb, global temperatures will continue to rise. However, to achieve the 1.5°C scenario of the Paris Agreement,CO2 emissions must be drastically reduced to avoid the worst effects of climate change. Companies and organizations must use all means at their disposal to achieve these significant emission reductions. Furthermore, actively removingCO2 from the atmosphere with nature-based and technological solutions is becoming an essential part of net-zero strategies.
The IPCC emphasizes that Carbon Dioxide Removal (CDR) is needed to "achieve global and national targets of net-zeroCO2 and greenhouse gas emissions. CDR cannot replace immediate and deep emission reductions, but is part of all modeled scenarios that limit global warming to 2° or less by 2100."
Before we take a closer look atCO2 reduction and net-zero strategies in the next blog articles, we would first like to give a brief introduction tocarbon credits.
We answer the following questions:
In emissions trading, a distinction is made between the voluntaryCO2 market and state-regulated emissions trading. In this article, we focus on the voluntaryCO2 market and leave out regulatedCO2 markets(e.g. the European Emissions Trading System, EU ETS).
In a nutshell,CO2 certificates are measurable and verifiable emission reductions from certified climate protection projects. These projects can be divided into two different types of credits on the voluntaryCO2 market: Avoidance Credits andRemoval Credits.
Avoidance credits originate from projects that aim to avoid or reduce the generation of emissions. These are, for example, projects that prevent deforestation, as this avoids the release of greenhouse gases that would have been caused by deforestation.
In contrast, removal credits are generated in connection with projects that reduce existingCO2 emissions in the atmosphere. These projects use different approaches to reduce emissions. Nature-based solutions, such as reforestation, involve the introduction of trees into previously non-forested areas, thereby sequesteringCO2 from the atmosphere. Technology-based solutions, such as the generation of renewable energy, help to reduce emissions by replacing fossil energy sources.
Both Avoidance and Removal Credits correspond to one tonne of carbon dioxide or the equivalent amount of another greenhouse gas that has been reduced, sequestered or avoided. Once the certificate is retired from the registry of the respective standard of the project, it is no longer tradable.
Several actors are involved in the creation ofcarbon credits, all of whom play a key role in ensuring the credibility and effectiveness of the projects. First, project developers identify initiatives that can lead to verifiable emission reductions or removals. These developers can be private companies, non-profit organizations or even government agencies. They develop projects in the areas of renewable energy, reforestation or improving energy efficiency. It must be demonstrated that these projects meet strict quality criteria. This requires a specific methodology that is tailored to the type of project involved. Project developers, such as Pina Earth, are responsible for theCO2 calculation, the project documentation and the validation process.
The project is then implemented by the project sponsor. As soon as a project is implemented, independent third-party auditors or verifiers come into play. They assess the project's compliance with certain standards and methodologies and verify the emission reductions. These auditors ensure the accuracy and transparency of the data and calculations associated with the project. Their expertise and impartiality are crucial to the integrity of theCO2 certificates.
At Pina Earth, this process begins with the first contact with the forest owner. In close cooperation, the project area is defined, the forest inventory data is reviewed and the necessary forest conversion measures are determined. Once the project contract is signed between Pina Earth and the forest owner, Pina Earth simulates the potentialcarbon sink. Once the project plan is finalized, independent auditors are brought in. All our projects are audited by TÜV Nord. Previous projects have been audited under the guidelines of ISO 14064-2. In the future, Pina Earth will also develop projects under the Forest Climate Standard, a quality standard for climate certificates from German forests founded by the Ecosystem Value Association.
Althoughcarbon credits are recognized by many as an effective lever against climate change, they are not without vulnerabilities. A significant challenge is to establish and maintain robust monitoring, reporting and verification (MRV) systems. MRV is crucial to accurately quantify emission reductions or removals and ensure the credibility ofcarbon credits. Developing standardized and reliable MRV methodologies that can be applied to different projects and sectors can be a challenging task. It requires careful consideration of various factors such as baseline emissions, project boundaries and leakage to accurately measure the net impact of a project.
In addition, some stakeholders fear that the use ofcarbon credits could hinder, delay or even replace companies' efforts to reduce emissions in their operations and supply chains. The lack of clear and transparent guidance on the voluntary use ofcarbon credits to support credible claims prevents investors and consumers from using their capital to support sustainable initiatives. It is important to strike a balance between usingcarbon credits as a valuable tool to reduce emissions and ensuring that they are not used as a substitute for proactive emission reduction measures.
In contrast to these concerns, a study by Trove Research in 2023 showed that companies that already buycarbon credits are more likely to accelerate their efforts to reduce emissions compared to those that have not yet invested in the voluntarycarbon market. The voluntary purchase ofcarbon credits links the company's emissions to a set price. Consequently, this expenditure is reflected in their annual budget and provides a tangible incentive to drive internal business processes for emissions reductions. The study also found that engaging withcarbon credits encourages companies to take their climate impact more seriously and increase their investment in reduction strategies.
In recent years, companies have increasingly set net zero targets that are in line with SBTi (Science-Based Targets Initiative). When companies commit to these science-based targets (SBTi), they set ambitious goals to reduce their greenhouse gas emissions in line with what science deems necessary to limit global warming to well below 1.5 degrees Celsius above pre-industrial levels. In addition to comprehensive reduction measures,CO2 certificates can play an important role for companies in achieving these goals, especially in industries where it is difficult to completely eliminate emissions. By contributing to high-quality climate protection projects, companies can offset their remaining emissions and demonstrate their commitment to the reduction targets set.
In addition, the demand forCO2 certificates leads to the direct financing of new climate protection projects that could not otherwise be realized. This promotes the growth of sustainable initiatives and strengthens innovation in the fight against climate change. Through this mechanism,CO2 certificates become an important driver of urgently needed investments in climate protection projects that have a positive impact on both the environment and society.
In summary,carbon credits in the voluntary market are a valuable tool for tackling climate change and promoting sustainable projects if used correctly. Through effective and transparent use ofcarbon credits, we can promote real change and drive the transition to a green economy.
Despite existing challenges,carbon credits are gaining increasing importance and public attention. Various stakeholder groups are actively working to develop standardized and improved methodologies, clear guidelines and transparent reporting mechanisms to improve the integrity and effectiveness ofcarbon credits.
According to estimates by the Taskforce on Scaling Voluntary Carbon Markets(TSVCM), the demand forCO2 certificates is expected to rise sharply by 2030, with an increase by a factor of 100 by 2050. This positive development points to a fundamental change in the voluntarycarbon market, the value of which will reach a considerable 50 billion US dollars or more by 2030.
Companies around the world are looking for ways to integratecarbon credits into their sustainability strategies so that they are accepted by investors, society and policy makers. On our blog, we will cover more in-depth topics such as how to effectively communicate climate contributions as a company and why regional carbon offset projects also play a crucial role in mitigating climate change. Please continue to visit our blog for informative articles that will help you on your way to a greener and more sustainable future.
"Nature is already providing us with solutions that are affordable and highly scalable. I am proud that Pina Earth develops high-quality projects and implements credible climate protection measures."
Leos Bloch, Lead Business Development at Pina Earth
Liu, Z., Deng, Z., Davis, S. et al. Monitoring global carbon emissions in 2022. Nat Rev Earth Environ 4, 205-206 (2023).
Sarah Meßmer has been supporting Pina Earth's clients in effectively communicating their climate contribution since 2023. Prior to Pina Earth, she had already gained extensive experience in corporate consulting, including through her involvement in the student consultancy 180 Degrees Consulting Munich and at BCG.
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