FAQ
Clarity on Carbon Credits Starts Here
Project developers conduct feasibility studies, acquire assets, and identify potential methodologies for quantifying emissions reductions and removals.
Project developers register the project under a crediting program of a third-party standard.
Validation and verification bodies monitor the project and verify that emissions reductions or removals have occured.
The third-party standard issues credits to the project developers.
Project developer sells credits either through brokerages, exchanges, or directly to buyer.
Buyers retire the credits, meaning that they claim the tons reduced or removed and the credit can no longer be traded.
FAQ
Essentially, a Carbon Credit is is a mechanism for compensating for Carbon emissions by funding projects that reduce or remove gases from the atmosphere. It materialize through a tradable permit that allows the holder to emit one metric ton of Carbon dioxide (or its equivalent in other greenhouse gases). Carbon Credits have been invented to incentivize companies to reduce their C02 emissions and enable them to remain competitive while incurring carbon reduction processes costs. Countries, regions or companies can use Carbon Credits to offset their own emissions, up to making their activities carbon neutral, therefore helping them meet their goals for reducing greenhouse gases.
Companies and organizations that reduce their emissions or create products that will enable their customers or themselves to reduce emissions through energy efficiency measures, switching to cleaner fuels or any other innovative technologies, can generate credits.The company that develops or owns the processes to reduce the emissions is the company who owns the credits associated with these processes.
Carbon credits are issued to the sponsor of the reduction or removal methodology of greenhouse gases; such as renewable energy, reforestation, or carbon capture. The Carbon Credits are owned by that company and can be sold on the carbon credit market to other companies. The money goes to the company that sold the credit.
Carbon neutral, Net-Zero are indicators that an entity is generating enough Carbon absorption mechanisms to compensate for the emissions they generate through their normal course of business. There is no Net –Zero obligation in 2025 for any entities, but the Paris Accords have imposed that emission reductions processes be implemented. One solution adopted by many is to purchase Carbon Credits to compensate for their emissions. A company does not have to be Net-Zero to register its credits and can also use and retire their own credits to reduce one’s carbon footprint.
Cap-and-trade programs remain controversial in the United States, but 13 states have adopted such market-based approaches to reducing greenhouse gases, according to the Center for Climate and Energy Solutions. Eleven of them are Northeast states that banded together to jointly attack the problem through a program known as the Regional Greenhouse Gas Initiative (RGGI).
Carbon Credits belongs to the company that created and uses the technology of carbon reduction to manufacture parts. The carbon reduction generation will be realized once the products or processes are in use. This is why the carbon credit generation will require audits on a regular basis to verify that the processes are really implemented. The carbon credit generation will be based on sales numbers and not the production numbers (the end user is the company that does utilize the products: it does not have to be an individual). The products held for sale within distribution company(ies) will be accounted for on an estimated inventory turnover basis.
The United Nations is actively working to regulate carbon credits under the Paris Agreement Crediting Mechanism (PACM) established by Article 6.4. This mechanism aims to ensure the integrity and effectiveness of carbon markets, fostering international cooperation in emission reduction and climate action. Recent developments include the adoption of new standards by Article 6.4 Supervision body, focusing on methodology for developing carbon credits and requirements for greenhouse gas removal projects.
Further to the Paris Agreement, the UN have approved a set of methodologies, standardized baselines, and methodological tools form the framework for achieving emission reductions and removals consistent with the goals of the Paris Agreement. These methodologies are systematic approaches used to quantify emission reductions and removals accurately. In the case of emissions reduction activities, they assist in:
- Establishing a project’s emissions baseline that represents anticipated
- Emissions in the absence of activity implementation;
- Assessing the additionality of activities;
- Monitoring and reporting;
- Accurately estimating emissions reductions.
The carbon market is still relatively young, and prices can fluctuate based on various factors, including technological advancements, policy changes, and market developments. Prices can vary widely, from around $10-$20 per Metric Ton of CO2 for reforestation projects to upwards of $100 per Metric Ton of CO2 or more for projects using advanced technologies. As more companies commit to net-zero goals, demand for carbon credits is expected to rise, potentially driving up prices. Carbon Credits are issued on a yearly basis and have a shelf-life based on the credit generation processes and can vary from 5 to 10 years. Therefore, they can be retained for future sale, but their value will decrease as their maturity approaches.
There are currently no specific US GAAP standards directly addressing carbon trading and carbon credits. Companies participating in carbon trading programs must apply existing GAAP principles by analogy, often treating carbon credits as either assets or expenses, depending on the specific circumstances and intended use. However, the IFRS conceptual framework defines Carbon Credits as an asset. Carbon Credits once generated can either be kept on the balance as assets held for sale or sold to companies seeking to reduce their carbon footprint by retiring carbon credits. The credits can be accounted for as a holding company level or at each factory generating the credits. This is an account methodology choice which remains with the company.
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