Carbon Credits – Panacea or Placebo?

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@ the IERP® Global Conference, October 2022

Carbon credits have been around for a long time. Their basic premise or core principle is to ensure that there is a global mechanism which allows the production and purchase of carbon credits in order to transfer finance and technology from developed to developing countries. This is the basis of the clean development mechanism.This session, by Ralph Dixon, Director of Environmental Investments, YTL Corporation, covered global carbon markets; emission scopes and targets; types of carbon markets; carbon credit pricing by project type; current and projected carbon prices; carbon market ecosystem; global carbon trading platforms; renewable energy certificates; and the project development process.

The presentation was a comprehensive overview of why greenhouse gas inventory is essential and what organisations need to measure and manage their carbon footprint. It also covered carbon credits and how they work, how carbon markets function and what drives carbon prices. Besides addressing the question of whether carbon credits and renewable energy certificates are effective market mechanisms, Dixon’s presentation also gave insights into what the future holds and what needs to happen, for clean development mechanisms to be truly accepted and effective. “Anything used in an incorrect way can be demonised and should be avoided,” Dixon said at the outset of his presentation.

It is really the correct use of a resource or asset that is important, he added. But what exactly are carbon credits or offsets? A carbon credit represents avoidance or removal of one tonne of CO2. It is a tradable instrument that represents the avoidance or removal of one tonne of CO2or an equivalent amount of greenhouse gases (GHGs). Carbon credits are used to offset unavoidable or hard-to-abate emissions as part of an integrated carbon management strategy. These are usually utilised by organisations with unavoidable carbon emissions which invest in carbon avoidance or removal projects.Determining carbon credits is based on carbon or CO2 equivalent emissions.

CO2equivalent comes from seven identified greenhouse gases, and how they are used.These gases are carbon dioxide, methane, nitrous oxide, perfluorocarbons, sulphur hexafluoride, hydrofluorocarbons and nitrogen trifluoride. “Energy is the key area we need to focus on in terms of carbon emissions,” Dixon said, identifying agriculture, food production and food waste, industries like steel, cement, glass, pulp and paper, and other heavy industries as the main producers of carbon dioxide emissions. But the main concern comes from the way fossil fuels are still being used to generate energy in areas like transportation, and to power the various industries.

He also explained the terms Net Zero and Carbon Neutrality.Net zero emissions are achieved when GHG emissions from human activities are balanced by anthropogenic removals, i.e., deliberate human activities over a specific period. Carbon neutrality is a state in which CO2 emissions are balanced by CO2removals over a specified period of time. For organisations, being net zero means having firstly reduced GHG emissions according to a stated trajectory, and having come as close as possible to net zero; and extracting from the atmosphere the CO2equivalent of the residual emissions of the specified period. At the corporate level, the term ‘carbon neutrality’ is used with different meanings.

However, the most widely used definition describes carbon neutrality as the achievement of the previously defined emissions reduction target, combined with the purchase of carbon credits to offset residual emissions over a specified period. Trying to attain carbon neutrality is less onerous than trying to attain net zero. “Net zero means you have to do everything you can internally to reduce your emissions,” he said. “If you are a bank, you could reduce your emissions by using less grid energy. To do this, you may set up solar farms, for instance, to replace your grid energy with solar power or you can buy solar power from a service provider.”

Global carbon markets are currently divided into Compliance Carbon Markets and Voluntary Carbon Markets. In Compliance Carbon Markets, mandatory systems regulated by government organisations cap emissions for specific industries. The Compliance market was worth US$851 billion in 2021; nearly 90% of this came from EU-ETS markets. In Voluntary Carbon Markets, carbon credits can be purchased by organisations which want to voluntarily offset their emissions. A unit of carbon is traded in co2 equivalent (CO2e). These markets are not governed by regulatory obligations. They have increased steadily in value, and reached US$1 billion in 2021.

Explaining carbon taxes, he said that these directly set a price on carbon by defining a tax rate on GHGs or the carbon content of fossil fuels. The emission reduction outcome of a carbon tax is not predefined but the carbon price is. Currently, 44 countries have implemented a carbon tax: Argentina, Canada, Chile, China, Colombia, Denmark, the 27 countries of the European Union, Japan, Kazakhstan, Korea, Mexico, New Zealand, Norway, Singapore, South Africa, Sweden, the UK and Ukraine. Carbon prices vary between countries, and are applied according to the regulations of the respective countries. For instance, some African nations stipulate that carbon credits are to be used only within the country.

Considering the complex nature of the carbon market and the current lack of uniformity or standardisation, how effective are carbon credits and renewable energy certificates as market mechanisms? Also known as Energy Attribute Certificates (EACs), Renewable Energy Certificates are used to reliably evidence renewable energy claims by tracking one megawatt hour (MWh) of renewable energy from production to consumption. It is a recognised, precise tool to achieve renewable energy commitments and can be sold to, and utilised by, organisations which want to demonstrate their energy consumption and emissions.

Carbon price varies according to country, but the price of carbon credits is subject to principles and ethics, said Dixon. “All these things work in theory but the impacts have to be studied very carefully,” he cautioned. “The impacts on the populace – skyrocketing cost of living and the prices of food, energy and fuel – everything will be affected.” The price of carbon credits can range from a couple of dollars a tonne in Poland, to as much as US$130 a tonne in Uruguay or Sweden. But the price of carbon credits can range from US$1 per tonne for a cheap Turkish or China hydro project, and can be used theoretically to offset emissions but in principle, it would not be correct.

When organisations purchase a carbon credit, they do not know exactly what they are buying because each project is completely different; projects could range in character and price from a mangrove project in Malaysia to a wind farm project in India. “This is a key misunderstanding about carbon credits,” he emphasised. “Each carbon project is completely different.” Governments are increasingly resorting to carbon tax because they can decide where to use it as it is revenue which can be deployed for energy or energy efficiency projects, manufacture of energy-efficient devices or as incentives, grants or subsidies for any industry, as is already being done in Singapore, for example.

“One of the most important carbon sinks on the planet is the ocean,” he said. “It absorbs about 30% of all GHGs and converts carbon dioxide in a very complex process. Carbon dioxide is sequestered from the surface and sunk to the sea floor.” Mangroves, marshes, sea grasses, seaweed and kelp are other weapons for this, as are cetaceans like whales and dolphins. Whales are hugely important; one whale can sequester about 40,000 tonnes of CO2 over its lifetime – a huge amount – so “Why go to all the effort of building a biogas plant when you can just protect a whale?” he said. “We need to change the way we think. Some countries which have good ESG credentials still don’t recognise this.”

Nuclear power may also be a solution to climate change; it is now much safer than it used to be. Carbon prices will go further; organisations will have to start thinking about how they will hedge or diversify their risks on carbon. “It is coming. There’s going to be a carbon price for everybody in the world, whether it is a consumer, company or country, and it’s going to be a huge risk for all of us,” he cautioned. “Imagine if it was not US$10, but US$100 a tonne. That would take a huge chunk off the balance sheet,” he said. “Carbon credit has gone through an incredibly difficult process and complex ecosystem, and we should value it for what it is.”

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