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What are carbon credits?

Carbon Credits

Carbon credits are produced by private sector initiatives that quantifiably reduce carbon emissions. The most compelling aspect of carbon credits is that they use “ex-post” accounting. In other words, they are performance based (in arrears). So, a carbon credit is not issued until after the carbon emissions reduction has been created and verified by internationally approved auditors under internationally approved standards.

Carbon Credits can be produced by a number of activities, such as:

Renewable Energy: Replaces fossil fuel powered energy generation.
Improved Land-Use Management: A farmer may switch from nitrogen-based fertilizers (nitrogen is a powerful greenhouse gas) to an organic fertilizer or may rotate crops less frequently.
Reforestation: Companies may plant trees, or even certain species of fast-growing tall grasses, in previously degraded areas. Trees and grasses absorb carbon dioxide.
Avoided Deforestation: Agricultural conversion of forests (deforestation) creates emissions in four ways. First, it reduces the carbon absorption mechanism that trees provide. Second, it usually involves “slash and burn” techniques, which of course cause emissions. Third, it involves “tuning the soil”, which exposes the portion of organic (carbon-based) matter in mineral to oxygen, which then creates CO2 and methane. This can be a particularly large source of emissions in pure organic soils like “peat” soils. Lastly, the industrial agricultural plantation that replaces the forest uses nitrogen-based fertilizers, creating even more greenhouse gasses. Hence, projects that avoid deforestation and conversion of forests to agriculture (known as REDD+ projects) are a powerful tool in combatting climate change. These avoided deforestation projects, which most often involve tropical forests, have a massive collateral benefit of biodiversity conservation as well. And, in many cases, there is a strong social component to these projects since they support forest-dependent indigenous peoples.