Do Carbon Credits Reduce Emissions – At All?

Also known as carbon offsets, carbon credits were initially devised to facilitate long-term investment in reducing emissions. These permits were introduced as a part of the push toward cap-and-trade programs that gradually reduce the pollution companies can produce. The carbon offset market has boomed recently, but has this new market done anything to lower emissions?

Carbon Market Maker: Cap and Trade Programs

The US carbon cap-and-trade program was instituted as a part of the 1990 Clean Air Act Amendments. The initial program focused on sulfur dioxide emissions associated with natural gas refineries. Further cap-and-trade measures were added in 2005 to include nitrogen oxides. Fossil fuel companies generally preferred this approach to a direct-tax alternative, which would have attached a fixed tax to offending emissions with no market-based recourse.

Read more: ESG: Practical, Not Political

How Do Carbon Credits Work?

Carbon credits are the currency of cap-and-trade programs. Businesses in regulated industries, from technology to industry to manufacturing, are allotted carbon credits. This allotment is “capped” each year, allowing businesses to emit a set amount of pollution. Over time, this cap is gradually lowered, incentivizing energy efficiency programs and renewable energy.

Companies that don’t use all of their credits can sell them to other companies that exceed their allotment. This creates a push-pull incentive to lower emissions, lowering operating costs and selling credits and increasing revenue.

The Economics of Buying and Selling Carbon Credits

The global carbon offset market reached a valuation of $978.56 billion in 2022 and is expected to exceed $2.68 trillion by 2028. The forecast 18.23% CAGR has sparked a rush of third-party carbon credit vendors that buy and sell credits, often reaping a healthy profit along the way.

Credits are traded in two markets. The CCM, or regulated compliance carbon market, has done more to lower emissions and decarbonize the economy. CCM trading primarily occurs within a regulated cap-and-trade program operated by a national or regional regulatory body, such as the European Union’s Emissions Trading System (ETS).

The voluntary carbon market, or VCM, is newer and essentially unregulated.

Concerns About Carbon Credits and Cap-and-Trade

There are some inherent shortcomings to carbon credits. Many environmentalists believe current caps are too high or don’t push polluters to limit emissions fast enough. The system also all but ensures that any cap will always be met based on simple supply and demand economics. Two core components of carbon credits also fall short of the program goals.

Carbon Credit Certification

Despite a range of certification programs, research shows about 78% of carbon credits on the market are worthless. Another 16% were deemed problematic, which means the majority of carbon offset projects are well-intentioned but meaningless. Without substantial standardization and regulation, most carbon offsets fail to meet the standards set by ETS standards.

Loose Definitions

The quality of carbon credits is based on murky standards with indeterminate categorization. Quality assessments based on reforestation, the use of renewable energy, or the removal (carbon capture) and the avoidance of emissions offer imprecise comparisons, making it difficult to determine the value and impact of each credit.

Does Cap and Trade Work?

Carbon credits and cap-and-trade programs are constantly debated. While some well-designed and regulated programs do work, results in some markets are not as encouraging. The European Union’s ETS is a global bright spot, reducing emissions 29% from 2005 levels as of 2018. Meanwhile, California’s emission cap program faltered after meeting early benchmarks. Emissions actually rose 3.5%, with some of the biggest companies in the state’s oil and gas industry producing more pollution than before.

Ownership, Investment, and Opportunity

Businesses of all sizes can benefit from energy-efficient upgrades and internal sustainability initiatives. Whether motivated by revenue from carbon credit sales or lowered operating costs, private industry will ultimately drive the energy transition. We’re working with clients in a range of markets to own their energy environment, invest in smart upgrades, and take advantage of tax credits, rebates, and other opportunities. Speak with a Keen Technical Solutions consultant today to learn more.