What are carbon credits?
- A carbon credit represents one ton of greenhouse gas (GHG) emission reductions or removals. It refers to specific units that are traded and used for both voluntary and compliance purposes.
- Carbon credits can be used to mobilize finance, including from private sources, to support GHG emission reduction projects (or ‘mitigation activities’) that face barriers to implementation, such as lack of accessible finance or lack of access to required technologies.
- Buyers of carbon credits may use the credits to comply with international or national mitigation targets (i.e., for compliance purposes) or to meet corporate or organizational objectives (i.e., for voluntary purposes).
- Under the Paris Agreement, carbon credits that have been authorized for a specific use are referred to as “Internationally Transferred Mitigation Outcomes” (ITMOs).
How are carbon credits generated?
- Carbon credits are generated from activities that reduce or remove GHG emissions. These activities are referred to as ‘mitigation activities’ in the context of Article 6 of the Paris Agreement.
- Mitigation activities must be developed in accordance with methodologies, procedures and standards established by carbon crediting mechanisms. Well-known carbon crediting mechanisms include independent mechanisms such as the Gold Standard and the Verified Carbon Standard, as well as UNFCCC-managed mechanisms such as the Clean Development Mechanism (CDM) and its successor, the Article 6.4 Mechanism.
- Credits are generated based on the extent of emission reduction (i.e., emissions reductions or removals) that an activity achieves compared to a baseline scenario (see Figure 1). Carbon crediting mechanisms develop and approve methodologies that specify how to calculate baselines and to measure the mitigation achieved by an activity.
- Carbon crediting mechanisms also specify processes for the development of mitigation activities (such as stakeholder consultation requirements), the validation of a mitigation activity’s design by an independent auditor, and for the monitoring of activity implementation and independent verification that emissions reductions or removals have been achieved.
- Following the verification of emissions reductions or removals by an auditor, the mitigation activity proponent will request the carbon crediting mechanism to ‘issue’ a corresponding amount of carbon credits.
- Carbon credits are issued into a registry account specified by the activity proponent. Each carbon crediting mechanism has a registry for the purpose of issuing and tracking carbon credits.
FAQs
- A carbon credit represents one ton of greenhouse gas (GHG) emission reductions or removals. It refers to specific units that are traded and used for both voluntary and compliance purposes.
- Carbon credits can be used to mobilize finance, including from private sources, to support GHG emission reduction projects (or ‘mitigation activities’) that face barriers to implementation, such as lack of accessible finance or lack of access to required technologies.
- Buyers of carbon credits may use the credits to comply with international or national mitigation targets (i.e., for compliance purposes) or to meet corporate or organizational objectives (i.e., for voluntary purposes).
- Under the Paris Agreement, carbon credits that have been authorized for a specific use are referred to as “Internationally Transferred Mitigation Outcomes” (ITMOs).
- Carbon credits are generated from activities that reduce or remove GHG emissions. These activities are referred to as ‘mitigation activities’ in the context of Article 6 of the Paris Agreement.
- Mitigation activities must be developed in accordance with methodologies, procedures and standards established by carbon crediting mechanisms. Well-known carbon crediting mechanisms include independent mechanisms such as the Gold Standard and the Verified Carbon Standard, as well as UNFCCC-managed mechanisms such as the Clean Development Mechanism (CDM) and its successor, the Article 6.4 Mechanism.
- Credits are generated based on the extent of emission reduction (i.e., emissions reductions or removals) that an activity achieves compared to a baseline scenario (see Figure 1). Carbon crediting mechanisms develop and approve methodologies that specify how to calculate baselines and to measure the mitigation achieved by an activity.
- Carbon crediting mechanisms also specify processes for the development of mitigation activities (such as stakeholder consultation requirements), the validation of a mitigation activity’s design by an independent auditor, and for the monitoring of activity implementation and independent verification that emissions reductions or removals have been achieved.
- Following the verification of emissions reductions or removals by an auditor, the mitigation activity proponent will request the carbon crediting mechanism to ‘issue’ a corresponding amount of carbon credits.
- Carbon credits are issued into a registry account specified by the activity proponent. Each carbon crediting mechanism has a registry for the purpose of issuing and tracking carbon credits.
- The Paris Agreement is an international legally binding treaty that was adopted by 196 countries at the twenty first session of the Conference of Parties (COP 21) of the United Nations Framework Convention on Climate Change (UNFCCC), on 12 December 2015, in Paris, France.
- The Paris Agreement sets a long-term temperature goal (Article 2): global emission reduction targets to hold global temperature to well below 2°C above pre-industrial levels and encourages efforts to limit warming to 1.5°C above pre-industrial levels.
- The Paris Agreement sets expectations on Parties to achieve these goals: Parties must submit their national plans and targets (Nationally Determined Contributions) every five years with increasingly ambitious targets in each round of submission, while also being encouraged to develop their long-term greenhouse gas emission development strategies.
- Article 6 of the Paris Agreement allows Parties to voluntarily cooperate to achieve their emission reduction (mitigation) targets set in NDCs. For countries interested in purchasing Article 6 credits, this is because some mitigation can be achieved more cheaply abroad than through domestic mitigation measures. For countries looking to sell Article 6 credits, Article 6 participation can provide a source of finance and/or technology to implement mitigation activities that would otherwise not be possible (for e.g., because they lack the resources, technology, or capacity). Development cobenefits from mitigation activities can also be achieved.
- Article 6.2 of the Paris Agreement provides an overarching framework for “voluntary cooperation” to achieve global climate goals: Parties can trade emissions reductions authorized by the relevant host country (called Internationally Transferred Mitigation Outcomes, or ITMOs) to support achievement of their nationally determined contributions (and to promote sustainable development) providing that there is robust accounting and no double counting.
- Article 6.4 of the Paris Agreement provides for the creation of a centralized international crediting mechanism for the issuance of mitigation outcomes that also contribute to sustainable development, which is placed under the supervision of the UNFCCC.
- It is the successor of the Clean Development Mechanism, which operated under the Kyoto Protocol.
- Initial rules, modalities and procedures have been agreed but guidance for the implementation of this crediting mechanism has not been finalized yet.
Articles 6.2 and 6.4 are complementary
- Article 6.2 sets the rules for international cooperation on the trading of mitigation outcomes while Article 6.4 creates a crediting mechanism (e.g. which will develop and approve methodologies to calculate emission reductions, issue credits, and provide a registry).
- In practice, this means that Parties can transfer Article 6.4 credits (known as Article 6.4 emission reductions, or A6.4ERs) that have been authorized as ITMOs under Article 6.2.
- However, it is important to note that ITMOs can be issued by other carbon crediting mechanisms (providing that they fulfill all requirements under Article 6.2), provided that the relevant host country authorities have authorized the use and transfer of such ITMOs.
- One key difference is also that Article 6.2 is based on voluntary cooperation and can be tailored by the trading countries, while Article 6.4 is centrally regulated by the Article 6.4 Supervisory Body.
- Additionally, Article 6.2 does not require (but encourages) contributions to adaptation and overall mitigation goals (through credit cancellation). Article 6.4 requires credits 5% of proceeds towards the Adaptation Fund, as well as 2% of credit cancellation to contribute to the Overall Mitigation of Global Emissions (OMGE).