To explain how carbon offsetting works, we need to provide you with a quick introduction to carbon markets. Bear with us! Carbon markets are, in a sense, marketplaces where emissions are traded. Countries and companies fund projects that reduce (future) GHG emissions in exchange for carbon credits. Carbon credits are tradeable permits or certificates that represent a certain reduction in GHG emissions (usually 1 permit = 1 ton CO2-eq). As these carbon credits can be deducted from a country’s or companies’ GHG emissions, carbon markets are a method for countries and companies to reach their GHG (reduction) targets.
Countries and companies often participate in different types of carbon markets. The signing of the Kyoto Protocol obliged many countries to limit their carbon emissions and introduced the concept of “emissions trading” (described above). Emissions trading makes the process of cutting emissions cost-efficient, as companies that can limit their emissions relatively cheaply are able to sell carbon credits to companies that struggle to cut theirs. The Kyoto Protocol introduced three instruments to facilitate the trading; Emission Trading Schemes (ETS), Clean Development Mechanisms (CDM), and Joint Implementations (JI). Although there are some differences between the three, all carbon markets set up with any of these three mechanisms are mandatory carbon markets, as the countries participating in them are bound by international treaties (as the Kyoto Protocol) to limit their carbon emissions.
Voluntary markets are mainly used by companies to offset their carbon emissions. These markets are voluntary because companies are not subjected to legislation forcing them to limit their carbon footprint. Instead, companies participate in voluntary carbon markets for sustainability reasons, marketing/PR purposes, or both. Because of the difference in motivation, the story behind the offset project is just as important (if not more) as the amount of CO2-eq that is being offset. Taking part in the voluntary market is always possible, even if one is already taking part in a compliance market like the EU Emission Trading System. It is possible to sell carbon credits obtained in the mandatory market on the voluntary market so that companies can use them to meet their CO2 emission ambitions.
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Are there any ways to save carbon credit like you save money in a bank? Can carbon credit become a product for investment? If yes, how do you stack it/save it?