As countries take steps to decarbonize their economies and reverse climate change, carbon credits are proving to be a potent tool for governments globally to ensure carbon emissions are reduced.
An incentive-based system, carbon credits are designed to motivate companies to limit their greenhouse gas emissions and choose a greener path to conduct their business operations. Let’s understand what carbon credits are and how they can open up new business opportunities for companies.
Firstly, the terms carbon credits and carbon offsets are frequently interchanged, but they are entirely different and should not be confused.
Carbon credits are like permits that work like permission slips for emissions. For example, a unit of carbon credit permits a business to generate 1 tonne of CO2 emissions. These credits followed all the United Nations Climate Change accords and the 1997 Kyoto Protocols when carbon was recognized as a tradable good.
Governments allocate carbon credits to every business organization based on the nature of their business activity. These credits act as a cap for carbon emissions.
If the organization generates fewer tonnes of carbon emissions than allocated, it can trade, sell, or hold the surplus credits. When a company trades or sells its carbon credits, they earn a profit. It’s like reward points for low pollution of the atmosphere.
In carbon offsets, businesses earn carbon credits on removing a tonne of carbon dioxide from the atmosphere. It can be done via operating renewable projects, carbon and methane capture, improving energy efficiency, land use for reforestation, and other eco-friendly processes as a part or outside of their regular business activity.
Businesses can trade the offset credit points generated with other companies looking to reduce their carbon footprints. There are no geographical boundaries with whom companies can exchange or sell carbon credits, as climate change is a global concern.
Did you know Tesla earned carbon credits revenue worth $1.46 billion in FY 2021? It was almost 3% of the total revenue. Tesla earns carbon credits from its various clean energy initiatives.
The carbon credit market plays a vital role between all the buying, selling, and trading of carbon credits. The market decides the price for carbon emissions as per the evolving market conditions.
Every year, governments systematically reduce the allocation of carbon credits to companies to force them to choose a greener path and penalize polluting companies. It makes the carbon credit market dynamic and encourages businesses to choose low-carbon paths.
There are two types of carbon credit markets -one is regulated, and the other is voluntary.
The regulated marketplace is called a cap-and-trade program and is a common term for government environmental regulatory programs.
The cap-and-trade program works in many ways to reduce companies’ carbon footprints. For example, as regulators lower the total carbon emission cap each year, carbon credits in the open market become more expensive. As a result, companies will have more incentive over time to invest in clean technologies and reduce carbon footprints.
While the voluntary carbon credit market is optional and is driven by companies, who take responsibility for offsetting their own emissions and do more than what is stipulated by the government. These companies are primarily driven by corporate social responsibilities, ethics, and the intention to make the atmosphere greener.
The global carbon credit market is shaping up rapidly as economies around the world are racing to become carbon net zero. In 2019, the global carbon credit market was valued at $211.5 billion, and it is expected to grow at a CAGR of nearly 31% from 2020 through 2027, with a value reaching $2.7 trillion.
While it is difficult to gauge the market size of the voluntary carbon market, rough estimates show that it has quadrupled since 2020 and has reached $2 bn in 2022.
In 2021, the value of traded carbon dioxide permits in the global market grew by 164% to $851 billion, and 90% of the worldwide trade was done from the European Union’s Emission Trading System (EU ETS), which is the world’s most established carbon market.
Most carbon credits are priced between $40- $80 per metric tonne of CO2. This number varies greatly depending on market conditions and other factors at play.
India has very ambitious climate goals with a long-term goal of reaching net zero emissions by 2070. It is also committed to reducing the emission intensity of its GDP by 45% by 2030 compared to 2005 levels, or 60 million tonnes a year. Carbon net zero provides a massive opportunity for Indian businesses to tap the rapidly growing carbon credits markets.
Between 2010 and 2020, India issued 17% of all voluntary carbon market credits issued globally, bringing in significant capital for climatic financing.
Indian companies must depend on international carbon marketplaces and often trade them at lower prices to meet their carbon credits requirement or sell extra carbon credits. So, a domestic union was formed to establish a national carbon marketplace to help Indian businesses achieve their climate goals.
Indian companies such as Adani Green, carbon offsetter- EKI Energy Services, etc., have shown interest in developing a national carbon credit market. The lower house of the Parliament has also passed the necessary amendments in the Energy Conservation Bill 2022 in that direction.
Companies that choose a greener path to business activities would gain significantly from the evolving carbon credit market. For instance, Tata Power sold 87,351 Certified Emission Reductions (CERs) in FY 21, generating revenue of ₹1.44 crores. And, with a target of a fivefold increase in green capacity by 2030, Tata Power will gain significantly from the carbon offsets. In addition, civic bodies like Chennai and Indore Municipal Corporation are earning revenue by selling carbon offsets in the International markets.
Companies involved in sectors such as renewables, carbon capture, waste management, sustainable development, emission reduction technologies, and clean technologies benefit the most from the country’s clean development mechanism program.
So, are you ready to get started on lowering your carbon emissions and earning carbon credits and offsets? If you haven’t begun yet, now is the time to do so, considering the market potential for carbon credits.
Disclaimer Note: The numbers mentioned in this article are for information purposes only. He/she should not consider this a buy/sell/hold from Research & Ranking. The company shall not be liable for any losses that occur.
What are carbon credits?
Carbon credits are a kind of permit allowing companies to generate one tonne of CO2 emissions. Governments allocate credits to companies based on the nature of their business activity, which can act as a cap for carbon emissions.
What are carbon offsets?
In carbon offsets, companies earn a carbon credit point when they remove one tonne of CO2 from the environment. Generating offset carbon points can be done via operating renewable projects, carbon capture, improving energy efficiency, land use for reforestation, etc.
What is the carbon credit market?
Companies trade surplus carbon credits for monetary consideration in a carbon credit market. For example, carbon credits are bought by companies facing a carbon credits deficit or require more carbon credits points than allocated.