What are Carbon Credits?

In a nutshell, a carbon credit is the financial instrument, which represents one metric ton of carbon pollution, and carbon trading is a system which was initiated by the Kyoto Protocol of 1997.

In order to preserve a high probability of keeping global temperature increase below 2 degrees centigrade, current climate science suggests that atmospheric CO2 concentrations need to peak below 450ppm. We are currently at 395ppm and rising faster than at any time in the past 400,000 years, at a rate of 2ppm each year.” This requires global emissions to peak in the next decade and decline to roughly 80% below 1990 levels by the year 2050 (Baer and Mastrandrea, 2006).

What changes hands in carbon trading is the right for industries to emit a certain volume of Co2, putting a price and cap on such emissions.

The European Union Emissions Trading Scheme (EU ETS)

Also known as the European Union Emissions Trading System, this is the largest multi-national carbon emissions trading scheme in the world and a major pillar of EU climate policy. The EU ETS carbon credit scheme currently covers more than 10,000 installations with a net heat excess of 20 MW in the energy and industrial sectors which are collectively responsible for close to half of the EU’s emissions of CO2 and 40% of its total greenhouse gas emissions.

Besides receiving this initial allocation, an operator may purchase EU and international carbon credits. If an installation has performed well at reducing its carbon emissions then it has the opportunity to trade its remaining carbon credits and make a profit. This allows the carbon trading system to be more self-contained and be part of the stock exchange with little government intervention.

These units are a fixed quota issued by NAPS (national allowance plans), given out for a period of several years at once (a ‘trading period’), with a life-cycle of the given trading period by which point the carbon credits must be retired. There are proposed amendments that from the beginning of the system’s third trading period from 2013 should see a centralised EU administrative body replace the current national structures.

EUAs are the emission allowances given to participants in the EU ETS and are traded in a secondary market on the European Climate Exchange (ECX). One EUA gives the holder the right to emit one tonne of CO2. Approximately 2.3 billion EUAs have been issued annually to industries covered under the EU ETS.

At CarbonEnvest we offer two types of carbon credits: Certified Emission Reductions (CERs) and Voluntary Reduction Emissions (VERs). 
CERs are sold by us for INVESTMENT and OFFSETTING purposes
 VERs are sold by us for OFFSETTING purposes only.

CERs (Certified Emissions Reduction)

As of 2008-9 the EU’s decision to accept Kyoto ratified CER’s carbon credits as equivalent to the EU ETS, has been fully integrated. It is now possible to trade EUA’s and UNFCCC (United Nations Framework Convention on Climate Change ) validated CERs on a one-to-one basis within the same carbon trading system.

CER’s are produced by CDMs (Clean Development Mechanisms). The CDM allows industrialized countries to invest in emission reductions wherever it is cheapest globally, and is supervized by the UNFCCC. CDM projects are predominantly located in South America, Asia and Africa, although their global presence is spreading.

Industrialized countries, and companies located in the industrialised world then buy these CERs to offset the deficit between their allowance (of EU ETSs if the country is in the EU) and their Co2 output.

A CER (Certified Emissions Reduction) unit is 1 tonne of its equivalent of GHG (Greenhouse Gas) which has been successfully removed or prevented from reaching the atmosphere and has been Certified as such by the United Nations (UNFCCC). CER’s are traded as a commodity in an open market, much as oil or sugar. The minimum trade is usually 100,000 tonnes.

Volumes for the global carbon market reached $142bln in 2011 and are expected to reach $2-3trillion by 2020. Rapid growth and price appreciation is also expected over the next ten years. Carbon credits can be sold either via international carbon exchanges or via extensive broker network of CarbonEnvest.

At CarbonEnvest we enable our clients to purchase issued Certified Emissions Reductions (“CER”) carbon credits. The investment is SIPP approved, carbon credits are traded on international exchanges, and the purchased carbon credits are held in a recognised carbon credit registry by an FSA authorized custodian.

VERs (Voluntary/Verified Emissions Reductions)

Both refer to the emerging market for carbon credits and carbon trading outside the Kyoto Protocol compliance regime.

Demand for VER carbon credits began gradually and intermittently, but there has been a shift in this market to more structured growth, facilitated greatly by the development of credible intermediaries such as the Bank of New York, which created a registry for VERs in June 2006, as well as the widespread acceptance of the minimum quality standard embodied by the Voluntary Carbon Standard (VCS), designed by the International Emissions Trading Association (IETA), and non-profit organizations The Climate Group and WWF.

There are three main drivers for demand in the voluntary market. Firstly, as a key component of a company’s marketing strategy, linked to corporate social responsibility. For example, many airlines and travel companies offer VER carbon credits to environmentally minded passengers as a voluntary addition to their ticket price, and increasingly build them into the initial price. Secondly, as a profit-making enterprise where financial participants build portfolios of VER carbon credits in order to speculate in this market through carbon trading. Thirdly, as a valuable learning exercise for forward-looking companies in business sectors which anticipate being included in a future compliance regime, and which wish to develop a competitive advantage through familiarity with carbon credit market mechanisms.

VCS (Verified Carbon Standard)

The VCS Program provides a robust, new global standard and program for approval of credible voluntary offsets.

VCS offsets must be real (have happened), additional (beyond business-as-usual activities), measurable, permanent (not temporarily displace emissions), independently verified and unique (not used more than once to offset emissions).