The Role of Carbon Credits in the Paris Agreement

With the upcoming Paris Agreement, many countries are committing to cutting their emissions. To meet their targets, some of these will need to purchase carbon credits from other emitters that have made reductions. This is known as carbon offsetting, and a credit represents one metric ton of greenhouse gas (GHG) emissions that have been reduced somewhere else.

The current voluntary carbon market, which accounts for about 70% of the global total in 2019, offers a good opportunity to scale up the use of credits. However, if it is to do so, it needs better standards and infrastructure to ensure the integrity of the market. Moreover, it must also send clear demand signals.

Currently, the quality of carbon credits on offer in the voluntary market varies widely. This makes it difficult for buyers to identify and buy the best credits for their business. Adding more consistency and clarity would enable the carbon market to grow further.

In the short term, this could be accomplished by establishing minimum standards for the verification of credits to ensure their authenticity and that they represent genuine emissions reductions. This would require the establishment of a common set of criteria, called “core carbon principles,” and an attribute taxonomy to classify different types of projects. A standardized approach will also make it easier to match the right suppliers and buyers for particular credits, which will help reduce transaction costs.

The longer-term solution is to create a new kind of carbon credit that better reflects the true economic value of natural capital, like a stable climate and thriving ecosystems, as well as progress on social measures such as gender equality. This is the kind of credit that Gold Standard advocates for, as it would shift the way prices for credits are calculated so that they reflect the real value of the impact they deliver.

To achieve this, the potential supply of carbon.credit must increase dramatically. This is a challenge, as most of the potential supply comes from avoiding nature loss or from the sequestration of GHGs in soil and forests and requires large upfront investments. Many of these projects are highly risky, and it is difficult to attract financing. The long lag times between project completion and the sale of credits can also add to the risks.

Despite these challenges, we see signs of progress. Many companies are taking steps to address their internal emissions reduction goals, and some are embracing the idea of using carbon offsets to close the gap between their ambitions and their actual footprint. Some are even experimenting with setting their own internal carbon fee to drive innovation in their supply chains, such as Swiss retailer Coop and Microsoft.

The Paris Agreement is a powerful statement of commitment to limit the climate threat, but its success will depend on leadership by both wealthy and developing countries. In the meantime, a robust voluntary carbon market can provide businesses with an important bridge to sustainable production and support their efforts to flatten the emissions curve.