How do I buy carbon credits? That’s a question many of us have been asking as awareness of climate change continues to grow, and both companies and individuals are increasingly looking for ways to reduce their carbon footprint.
Firstly, there is no net-zero without carbon credits. As we try our best to reduce carbon emissions, there will be a residual amount, ie the hard-to-abate emissions that cannot be reduced. This may be because we do not have control over the residual emissions, or simply because the infrastructure isn't there to support the net-zero operations. Here is where purchasing carbon credits becomes essential. These credits allow us to neutralize the residual, unavoidable emissions by investing in projects that reduce or remove an equivalent amount of carbon footprint we have generated into the atmosphere, and thereby helps us to achieve net-zero. Generally speaking, 1 Carbon Credit equals to 1 ton of CO2e (carbon dioxide or carbon dioxide equivalent) avoided or removed out of the atmosphere.
The process of carbon credit purchase can be complicated for those who are just starting. The carbon market is highly fragmented and complex to navigate. Therefore, in this article, we will walk you through the fundamentals of carbon credits, explain how they are created and verified, and outline the best ways to buy them to ensure you can make informed decisions about your carbon offset investments.
If you're asking yourself, "How do I buy carbon credits?" or "How can I offset my carbon emissions effectively," this ultimate guide will provide you with the necessary steps to get started.
The Importance of Carbon Credits in Fighting Climate Change
Before diving into the specifics of how to buy carbon credits, it's essential to understand their importance in the broader context of climate change mitigation.
According to the Intergovernmental Panel on Climate Change (IPCC) latest report, every increment of warming makes the world increasingly dangerous. Beyond 1.5°C of warming, humanity will face new risks including sea level rise, permafrost degradation, biodiversity loss, water scarcity, more extreme weather, and food insecurity.
These threats underscore the critical role of carbon credits. Carbon credits not only help businesses offset their emissions but also support various carbon offset projects worldwide.
These projects range from nature-based solutions such as reforestation to technology-based initiatives such as biochar and direct air capture.
By purchasing carbon credits, companies and individuals contribute to global efforts to reduce greenhouse gas emissions and contribute to a more sustainable future.
What are Carbon Credits
Carbon credits are certificates representing the reduction of one metric ton of carbon dioxide (CO2) emissions. They are a key component in carbon trading systems, designed to combat climate change by incentivizing emission reductions. There are two primary markets for carbon credits: the Compliance Market and the Voluntary Carbon Market (VCM).
The Compliance Market
Within the Compliance Market, governments and/or international regulatory bodies establish mandatory caps on emissions for specific industries. Companies must adhere to these limits or trade carbon credits to offset their emissions. Simply put, these markets are regulated by carbon reduction regimes and is usually targeted to energy-intensive emitters such as airlines, oil refineries.
The Voluntary Carbon Market
The Voluntary Carbon Market allows individuals, small businesses, companies, and organizations to voluntarily purchase carbon credits to offset their emissions, supporting projects that reduce or sequester CO2. This is the market we will focus on in this article
For small businesses aiming to achieve net zero, participating in the Voluntary Carbon Market can be an effective strategy to offset the residual emissions that are difficult to eliminate through operational changes alone.
How to Buy Carbon Credits (as a Company)
Buying carbon credits can help neutralize a company’s carbon footprint, but there are essential steps to follow first.
Step 1: Calculate the Company’s Emissions
Start by calculating your company’s carbon emissions. Each carbon credit offsets one metric ton of carbon dioxide or its equivalent.
For example, if your company emitted 500 metric tons of greenhouse gases (GHG) in a year, you would need to buy 500 carbon credits to offset these emissions.
This carbon accounting ensures your firm doesn’t emit more than it can offset and helps finance carbon mitigation projects.
Step 2: Decide How Much to Offset
After determining your total carbon footprint, decide how much of it you want to offset. As a rule of thumb, the Science Based Target Initiative allows companies to neutralize 10% of the residual emissions with carbon credits.
Before making the payment, consider the best time to buy credits within their lifecycle for optimal benefits.
Where to Buy Carbon Credits
When it comes to buying carbon credits, several methods are available, each with unique characteristics, benefits, and drawbacks.
Here, we will explore four main channels for purchasing carbon credits: project developers, brokers / advisors, exchanges and marketplaces.
For SMEs and individuals, we recommend purchasing carbon credits from Marketplaces. This is because small companies and individuals do not require high volume of credits to offset their carbon footprint, and most marketplaces impose low or no minimum purchase requirements.
However, please note that carbon credit market is highly fragmented, with each marketplace offering only a limited number of projects. To save your time and effort in finding suitable projects , you can use VitaEQ, an open platform that helps you to search large number of projects from all major carbon marketplaces in one go. VitaEQ currently holds over 140 projects, and it is one of the largest platforms showcasing carbon credit projects.
Buying Carbon Credits from Marketplaces
A carbon credit marketplace is a place where carbon credits are traded. These marketplaces operate as intermediaries, by connecting buyers (businesses and individuals looking to offset their emissions) with sellers who provide carbon credits from various types of carbon projects. Marketplaces provide a transparent environment where prices are determined by supply and demand dynamics, and transactions can be conducted efficiently online.
Pros:
- Transparent Pricing: Open marketplaces provide features price per tCO2, allowing customers to instantly discover price for various types of projects.
- Low / No Min. Purchase: These platforms impose low or no minimum purchase requirements
- Transaction Speed: Often customers can acquire the credits they want instantly online
Cons:
- Limited Projects: Most marketplaces are small platforms offering very limited amount of projects. Within these projects, credits are also often sold there.
- Fragmentation: There are many small marketplaces, and it often requires substantial amount of time to navigate across multiple platforms before finding the most appropriate projects to purchase. (To safe time, we recommend to use VitaEQ to search all projects from major marketplaces in one go)
Buying Carbon Credits Directly from Project Developers
Buying carbon credits directly from project developers involves purchasing credits from the entities that develop and manage carbon reduction projects. These projects could include reforestation, renewable energy, carbon capture, and more. By purchasing directly, buyers can often engage more closely with the specifics of the project, understanding its environmental impact in greater detail.
Pros:
- Early Access to New Projects: Buy working directly with project developers, customers can get early access to upcoming projects.
- Potentially Lower Costs: Without intermediary fees, direct purchases can sometimes be more cost-effective.
Cons:
- Future Contracts: Most credits are not instantly available as it requires time for the projects to be developed before credit issuance
- Resource Intensity: It requires extensive knowledge and significant effort to verify the legitimacy and effectiveness of the project, as well as negotiate the pricing.
- Higher Administrative Burden: Managing and negotiating directly with project developers can be time-consuming and complex.
Buying Carbon Credits from a Broker / Advisor
Brokers act as intermediaries between buyers and sellers in the carbon credit market. They have established networks with various project developers and can offer a broad portfolio of carbon credits from different projects worldwide. Brokers typically charge a fee for their services, which can cover the cost of sourcing and verifying carbon credits.
Pros:
- Access to a Variety of Projects: Brokers provide access to a wide range of projects, allowing you to diversify your carbon offset portfolio.
- Expertise and Verification: Brokers perform due diligence and verification, reducing the risk of purchasing low-quality or fraudulent credits.
- Convenience: Brokers handle much of the administrative and logistical work involved in purchasing carbon credits.
Cons:
- Min. Purchase Requirement: Brokers / Advisors often impose a high minimum purchase requirement for their projects, and mainly target large corporations with high volume demand for carbon credits.
- Lack of Transparency: May not provide detailed information about pricing.
- Price: Brokage fees can be high and the ultimate price per tCO2 can be much higher compared to projects featured in open marketplaces or exchanges.
Buying Carbon Credits from an Exchange
Similar to stock exchanges, carbon exchanges are for trading carbon credits. These platforms facilitate the buying and selling of carbon credits (often in large quantities at wholesale price) between various parties, including businesses, governments, and investors globally. Exchange platforms provide a transparent environment where prices are determined by supply and demand dynamics, and transactions can be conducted efficiently online.
Pros:
- Transparent Pricing: Market-based pricing, reflecting current supply and demand conditions.
- Wide Range of Credits: Access to a broad selection of carbon credits from different projects and geographical locations.
- Efficient Trading: Efficient trading process, often with advanced tools for managing transactions.
Cons:
- Complexity: Professional expertise is required to trade on global platforms
- Min. Purchase Requirement: High minimum purchase volume is often required
- Limited Project Info: Exchanges are financial trading platforms and may not feature as comprehensive project level that may interest individual buyers (eg. co-benefits, project history
- High Set-Up Cost: It is expansive to setup and hold accounts from trading to retiring credits
How Much is a Carbon Credit Worth?
The price of a carbon credit can vary widely, depending on different factors such as the type of project, geographical location, market demand, and the verification standards applied.
For instance, the average price of a carbon credit on the Voluntary Carbon Market increased by 82% from 2021 to 2022, going from $4.04 to $7.37. It then decreased slightly to $6.97 in the first 11 months of 2023.
Understanding the factors that influence the value of carbon credits can help you make informed decisions about purchasing carbon credits and budgeting for your carbon offset strategies.
Factors Influencing the Price of Carbon Credits
Type of Project
The type of project generating the carbon credit significantly impacts its price. Credits from projects that are more labor-intensive or require advanced technology, such as carbon capture and storage, tend to be more expensive than those from simpler initiatives like tree planting.
Geographical Location
The location of a carbon offset project also plays a critical role in determining the price of carbon credits. Projects in developing countries may offer lower-cost credits due to lower operational costs, while projects in developed countries or regions with stringent environmental regulations may command higher prices.
Market Demand and Supply
The dynamics of supply and demand in the carbon market can cause price fluctuations. High demand for carbon credits, driven by increased regulatory pressures or corporate sustainability commitments, can drive up prices. On the other hand, an oversupply of credits can lead to lower prices.
Verification Standards
Carbon credits that adhere to rigorous verification standards and are certified by recognized bodies (such as the Verified Carbon Standard (VCS), the Gold Standard, or the Climate Action Reserve) generally come at higher prices. These certifications ensure that the credits are genuine, additional, and permanent, providing greater assurance to buyers.
The Lifecycle of Carbon Credits
Now let’s consider the different stages of the carbon credit lifecycle to help you determine the optimal timing for buying carbon credits.
Stage 1: Methodology Development
Before carbon reductions are certified, they must meet specific criteria using established methodologies or protocols. Project developers can propose new protocols, and buyers can support this development financially.
Stage 2: Project Development & Registration
In this stage, developers design and develop the project with investor support. After independent validation and approval by a carbon offset program, the project can be registered and generate credits. Investing at this stage allows companies to lock in lower prices.
Stage 3: Project Verification and Credit Issuance
The project is implemented, monitored, and verified, this process can take up to a year. Approved reports lead to the issuance of carbon credits, which are deposited into the developer’s registry account. Buying directly from developers can reduce transaction costs but may involve quality concerns.
Stage 4: Carbon Credit Transfer
Issued credits can be transferred between accounts within a registry. Buyers can then use these credits to offset their emissions and retire them.
Stage 5: Carbon Credit Retirement
Once used, credits must be retired, or in other words removed from circulation.
Summing Up
Buying carbon credits is a practical approach for businesses to offset residual emissions and work towards net zero. By understanding the carbon offset lifecycle and the various purchasing channels, businesses can make informed decisions on buying carbon credits that align with their sustainability goals.
With this guide, you now know how to buy carbon credits and can confidently embark on your carbon offset journey.