Carbon Credits: What are they and how do they work?
Learn more about carbon credits, why they came to be, and how you can potentially earn money from them.
If you are new to the world of carbon credits, getting to grips with exactly what they are and how they work can feel overwhelming, but we’re here to help!
In this post we’ll explain:
What a carbon credit is
The history of carbon credits
How to sell carbon credits
Who can benefit from carbon credits
Note: To learn more about the key terms, check out our carbon credit glossary for the most common phrases and acronyms.
Every individual, or business, has a carbon footprint (the total amount of greenhouse gas emissions associated with an individual or business) - these emissions accumulate and contribute to climate change. While we can’t avoid having a carbon footprint, there are ways to minimise it. Alongside reducing their carbon emissions, a business (or individual) can offset their emissions through purchasing carbon credits.
What are carbon credits?
A carbon credit is a financial mechanism. It’s like a permit or certificate that represents the equivalent of 1 tonne of carbon dioxide (1 T CO2e), and is awarded for removing, reducing or avoiding carbon dioxide emissions in the environment. They were created to help incentivise us to change our behaviour by penalising those who emit carbon, and reward those who sequester carbon. The using of a carbon credit to balance out emissions is called offsetting.
In New Zealand, carbon credits are currently supplied by the government through the Emissions Trading Scheme (ETS), and are referred to as New Zealand Units (NZUs). They are awarded to landowners who have eligible forests. Carbon credits can also be supplied through voluntary schemes, such as Native CarbonCrop Units (Native CCU) - more on this below!
Landholders with eligible forests are able to registering their forests for carbon credits and sell these credits to others who want to offset their carbon emissions. Carbon credits are allocated for every year a registered forest sequesters carbon from the atmosphere, meaning an income from carbon can be earned for many years.
Voluntary vs Compliance Markets
Most established markets for carbon credits are associated with national or regional governments, like the NZ ETS, but carbon markets exist outside of the public sector.
There are two carbon market types, these are:
1 Compliance Market (also known as the Mandatory or Regulatory market)
Regulated markets often run on a governmental level in a ‘cap-and-trade’ style system (e.g. ETS). ‘Cap and trade’ systems allow trading of carbon credits so organisations can meet regulatory requirements, but the overall number of carbon credits available is limited so emission targets are met. In this system, the price of credits is determined by the regulator.
2 Voluntary market
Similar to the compliance market, but unregulated, giving more flexibility and innovation. Instead of being regulated by a government body, carbon credits are recognised by other parties such as businesses and nonprofit organisations. These carbon credits can be used by businesses and individuals to offset their carbon emissions in the same way as in the compliance market, but the price is set by the free market, not a regulator. An example of carbon credits in the voluntary market is the Native CarbonCrop Units.
More and more businesses are making commitments to curb their emissions. To meet growing demands, the voluntary carbon market will need to expand at least 15x, and potentially 160x (based on studies by the TSVCM).
This is astonishing growth in demand. With so many options to buy and even more opinions, a buyer needs to be confident they’re buying a genuine, certified, high-integrity offset.
How do you sell carbon credits?
No matter who issues your carbon credits, they can be sold to people who want to offset their carbon emissions. This is done through trading platforms, similar to how you would sell commodities.
If you have been issued ETS carbon credits, your credits will be held in an online registry called the Emissions Trading Register (ETR). To sell them you will need to move them into a marketplace. If you have been issued CarbonCrop Units these can be loaded directly into a marketplace to make things easier for customers to sell their carbon credits. Marketplaces enable landholders and others to sell carbon credits both nationally and internationally, such as Carbonz.
As with any commodity the price of a carbon credit changes over time. While the NZ government sets the price of New Zealand Units (approx. $85 at time of writing), this price changes depending on demand and government policy. Similarly, the price of a voluntary carbon unit can fluctuate significantly, with the market determining the price at any given time.
Who can benefit from carbon credits?
Carbon credits are a tool for meeting climate change objectives globally, and the NZ ETS is a key instrument in helping reduce climate change in New Zealand. Native CarbonCrop Units offer an alternative credit in the voluntary market for native forests that are ineligible for the ETS.
Carbon credits provide a great opportunity for landholders to help the planet, and monetise their land. Many farmers choose to diversify their income through carbon forestry, especially on low-productivity, marginal farmland. Other landholders are already supporting native regeneration on their properties and want to fund these endeavours. Carbon credits are a long term investment that can continue to provide an income stream for many years to come.
There are many businesses and individuals entering the voluntary market, making commitments to reduce their carbon emissions by specific dates. Having the carbon credit system in place enables these businesses to improve their practices and measurably offset their emissions. As a result of this, demand for carbon credits is expected to grow.
CarbonCrop can help you take the next step on your carbon journey. We make it simple and easy to register your forests for carbon credits and earn a carbon income - either through the ETS or in the voluntary market.
If you’ve got forests now, or are planning to plant, you may qualify for carbon credits.