As governments press the private sector to limit greenhouse gas emissions, the world’s largest companies have turned to a financial product to offset their environmental footprint: carbon credits.

It’s a hot market, reaching historic highs in volume and on track to reach $ 1 billion in 2021, according to Ecosystem Marketplace, a market publication run by the nonprofit environmental finance research association Forest Trends. And just before the United Nations Climate Change Conference which begins on Sunday, the United Nations Environment Program published a report who said carbon markets could “help cut emissions” with clearly defined rules and transparency.

But why are carbon credits important? And why is it important whether they are used or not?

What is a carbon credit?

A carbon credit is a kind of permit that represents 1 tonne of carbon dioxide removed from the atmosphere. They can be purchased by an individual or, more commonly, a business to offset carbon dioxide emissions from industrial production, delivery vehicles or travel.

Carbon credits are most often created by agricultural or forestry practices, although credit can be granted by almost any project that reduces, avoids, destroys or captures emissions. Individuals or businesses looking to offset their own greenhouse gas emissions can purchase these credits through a middleman or those who capture carbon directly. In the case of a farmer who plants trees, the landowner receives money; society pays to offset its emissions; and the middleman, if there is one, can make a profit along the way.

But this only applies to what is called the “voluntary market”. There is also what is known as the involuntary market or “compliance market”.

What is the “compliance market” for carbon credits?

In the compliance market, or involuntary market, governments set a cap on the number of tonnes of emissions that certain sectors (oil, transport, energy or waste management) can release.

If an oil company, for example, exceeds the prescribed emission limit, it must purchase or use saved credits to stay under the emissions cap. If a business stays below this limit, it can save or sell these credits. This is known as a cap and trade market. The cap is the amount of greenhouse gases a government will allow to be released into the atmosphere and emitters must negotiate to stay within that limit.

Article 6 of the 2015 Paris Agreement directs national leaders to determine this globally. So far, around 64 carbon compliance markets are now operational around the world, according to the World Bank reported in May. The largest carbon compliance markets are in the European Union, China, Australia and Canada.

While politicians and business leaders discussed the establishment of a the price on carbon, the United States does not have a federal cap-and-trade market for greenhouse gases.

Regulators, businesses and environmentalists have debated the globalization of a carbon cap-and-trade market. But it is difficult to agree on a common timetable, a common price, a common measure and transparency, said Alok Sharma, president of this year’s United Nations Climate Change Conference, also known as COP26.

What is the size of the carbon credits market?

The voluntary market is on track to reach a record $ 6.7 billion at the end of 2021, according to to a September report from Ecosystem Marketplace. Currently, traders in the European Compliance Market predict that carbon prices will increase 88% to around $ 67 per metric tonne by 2030, according to to a survey published in June by the International Emissions Trading Association.

The rapid acceleration of the voluntary market during the year is largely driven by recent corporate net zero targets and the interest in meeting the international climate targets set out in the Paris Agreement to limit global warming to 1.5 degree Celsius compared to pre-industrial levels.

What is repression?

Critics of the voluntary market, where a company buys carbon credits from a company outside of a regulated trade, point out that this does not reduce the overall amount of greenhouse gases emitted by buyers. They are simply offset, giving companies a way to pretend they are eco-friendly without reducing their overall emissions. Critics call it “greenwashing”.

Carbon credits can also be purchased from projects that would have happened anyway. For example, an investment company says it pays farmers to convert their fields into forests and sells those credits to businesses, according to at Bloomberg. But several farmers say they have already planted trees as part of a government conservation program.

In addition, some of these carbon credits through these projects are not permanent. For example, FIFA, the governing body of international football, bought credits to help offset World Cup emissions in Brazil. But soon after, the trees were cut down. The project was suspended in 2018, after cutting more trees than all credits sold.

What regulations or oversight does this market have?

The voluntary market operates largely without being controlled by federal or local regulators.

Because the voluntary market has no cap on the number of tonnes of emissions that can be offset, driving oversight is a set of standards. There are a few respected standards bodies that validate carbon credits.

Verra, a Washington, DC-based nonprofit group founded in 2007 by environmental and business leaders to improve quality assurance in voluntary carbon markets, has defined the most widely used standard to validate these credits, called Verified Carbon Standard. Since its launch, the organization has registered 1,750 projects worldwide and verified nearly 796 million carbon units.

The three main elements that make up the Verra Carbon Standard are: accounting methodologies specific to the type of project, an independent audit and a registry system. This is “to make sure the buyer has confidence that they are buying something legitimate and that the sellers themselves have something valuable,” Verra CEO David Antonioli told NBC News. .

Still, the company supports responsibility in the market space, he said.

“[If the voluntary market] is going to be effective in helping to achieve the objectives of the Paris Agreement, it will have to complement… either the action of the government, or the internal individual or internal reductions of the company ”, declared Antonioli. “We want concrete solutions here. And if someone is just compensating, that’s no good… we don’t support that.

What is the US government doing about carbon credits?

The US Department of Agriculture has neither adopted nor set its own standards for carbon credits. But it funds carbon capture projects and publishes data to help agricultural companies capitalize on the market.

“We have to grow … recognizing that there will be a lot of private investment,” said Robert Bonnie, senior climate advisor to the USDA secretary. “We don’t want to move this investment. We kind of want to encourage him to come in. “

The USDA recently launched federal regulations on carbon credits with a proposal climate partnership initiative, which would fund conservation projects on farmed lands and quantify the carbon and sustainability benefits resulting from these projects.

The Growth Solutions Act, waiting to be heard in the House, would help farmers, ranchers and foresters learn about carbon markets and sell carbon credits through a third-party certification process overseen by the USDA.

The Environmental Protection Agency currently operates an Acid Rain Program, which reduces sulfur dioxide emissions by establishing a similar cap-and-trade program. Under this program, sulfur dioxide emitters can sell or keep excess sulfur dioxide permits if they reduce their emissions and have more than they need, or buy permits if they fail. not to keep emissions below the determined level.

Are states creating some kind of carbon trading market?

California is the only state with a state cap-and-trade market for carbon. By 2030, the state Goals reduce emissions to 40 percent below 1990 levels. About 450 market-targeted entities are expected to deliver an overall 15% reduction in greenhouse gas emissions from the business-as-usual scenario in 2020 Companies covered by state law can purchase a certain percentage of carbon credits to stay under emission caps. California carbon credits are expected to increase by around 66% to reach $ 41 by 2030, according to to the International Emissions Trading Association.

In addition to California, Oregon this year considered a bill that would limit emissions from regulated sectors to achieve a 45% reduction from 1990 levels by 2035, and an 80% reduction from levels. 1990 by 2050.

Washington recently passed a law this year that limits the amount of greenhouse gases that can be emitted, then auctions allowances for certain high-polluting sectors until that cap is reached. The state’s goal is to reduce emissions by 95% from 1990 levels by 2050. Each year until then, the cap will be reduced, allowing total emissions to fall. The program’s first compliance period will begin in 2023.