What are carbon credits and how do they work?

Published on 19/04/2022 by Ojasvini

Carbon credits might be one of the many tools organisations can potentially use to help reduce greenhouse gas (GHG) emissions. This article will discuss carbon credits in detail, why companies invest in carbon credits, and how businesses can go carbon neutral.

Carbon credits could help reduce carbon and other greenhouse gas emissions

Our environment faces many challenges —from the depletion of non-renewable resources to the pollution of water, air, and other natural deposits. Such environmental challenges might require businesses to invest in eco-friendly projects and opportunities. Likewise, one of the major concerns for companies should ideally be to limit GHG emissions. According to a report by NBC News, many of the world’s largest organisations are using carbon credits to counterbalance their carbon footprints —meaning the total amount of GHG emissions that are generated by a company or individual’s actions. Organisations can perhaps reduce their carbon emissions by adopting various environment-friendly measures to contribute to a sustainable environment. Appropriate sustainability software along with carbon credits, in this case, can potentially help businesses manage and assess their impact on the environment as well as promote social responsibility. 

What are carbon credits?

Carbon credits are essentially sanctions or certificates that permit the owner —be it a business, landlord, state government, or any other local authority— to release a certain amount of carbon dioxide or other greenhouse gases into the environment. The main motive for creating carbon credits could be the possible reduction of damaging emissions due to varied industrial activities and helping to minimise the effects of global warming. 

With climate change becoming an existential threat, businesses might be focusing on cutting emissions, thereby helping to rebalance the environment. Investing in carbon credits could be one way of doing so. These units can be purchased by businesses to compensate for their harmful emissions and to bring their carbon footprint value to zero potentially. Every carbon credit unit sold might effectively help cancel out a company’s carbon footprint.

What is the price of a carbon credit unit?

As per a report by ABC News, the price of Australian carbon credit units was over $55 a tonne at the beginning of 2022. However, the report clearly states that the prices have fallen by over 30% after a change in the federal government’s policy.

How carbon credits work

Carbon credits potentially allow individuals or businesses to offset their own polluting activities by actually paying for certain projects that might help reduce carbon emissions elsewhere. For instance, a company in Italy could pay for a specific renewable energy project running in Brazil to compensate for its own emissions. 

Generally when you buy these credits, you would be essentially paying for a reduction in GHG that has already been taken place. However, there might be times when a specific project would not have enough funds to be implemented in the first place. Here, you could purchase these credits beforehand —meaning before the project actually commences. By doing so, you would be able to fund its implementation, potentially helping it to cut GHG emissions on your behalf for the coming years. 

There might be many carbon offset activities or projects such as forest restoration, biogas generation, building wind farms, and increasing insulation in buildings. The buyers can potentially purchase credits from industries and other non-profit organisations supporting such carbon-offsetting projects. In these circumstances, a polluter aiming to go carbon-neutral might have to buy carbon credits equivalent to the pollution they would be causing to the environment. 

How can you earn Australian carbon credit units?

Australian carbon credit units (ACCUs) are provided by the Federal Government’s Clean Energy Regulator for qualified activities as per the Carbon Farming Initiative directives. According to the Clean Energy Regulator, you can earn ACCUs for emission reduction or storing carbon dioxide in soil and vegetation. The report further says that you can start a Climate Solutions Fund project whether you are a businessman, farmer, state government, or local authority. With the help of such projects, you would be able to earn ACCUs for up to seven years.

Each carbon credit unit is equivalent to one tonne of carbon dioxide or the same value for other greenhouse gases. For instance, the Mount Alfred Reforestation Project and other similar projects that help reduce carbon dioxide and other greenhouse gas emissions, can earn carbon credits for up to 25 years. 

5 Steps to help your business go carbon neutral

There might be many different projects running in Australia that can generate carbon credits. To create carbon credits, the project owners must follow specific guidelines and certain methods that ensure a particular project could help reduce emissions. The Climate Active Program by the Australian Government provides a list of carbon credit units that might be eligible for building carbon-neutral claims. Below are some steps businesses can follow to increase their chances of going carbon neutral.

Step 1: Measure your carbon emissions

In this step, you would need to calculate the carbon emissions related to every relevant business activity such as travel, electricity consumption, and events. Following that, you should assess your total emissions. 

Step 2: Set a target for becoming carbon neutral

The next step would be to set an actionable target for reducing your carbon emissions and ideally becoming carbon neutral. For instance, you could use specific software to reduce paper waste or become plastic-free.

Step 3: Make reductions where possible

Based on your carbon footprint, you should ideally minimise your emissions by making the necessary changes to save energy and adopt recycling measures.

Step 4: Offset the remaining carbon emissions

You can consider offsetting your remaining carbon emissions by either investing in renewable power generation or paying someone else to offset your carbon emissions by purchasing carbon credits or planting enough trees to balance out the carbon dioxide emitted.  

Step 5: Evaluate your progress

The last step would be to continuously evaluate your progress to manage your future initiatives and approach. This could help ensure that your next carbon reduction cycle is more efficient than your last. 

Why do companies invest in carbon credits?

Businesses and individuals might choose to invest in carbon credits because of the following considerations:

  • To control climate change and potentially reduce harmful emissions
  • To keep control of their carbon footprint economically
  • To establish an internal carbon cost specifically for their industry
  • To participate in corporate social responsibility and sustainability

Carbon credits might be one of the ways to get ahead in taking action against GHGs and climate change. As part of a broader perspective, an effective carbon management strategy can contribute to sustainability. As per a study by Capterra, ‘the majority of managers (82%) said their company has sustainable measures in place’. The report further mentions that about 48% of businesses agree that they would continue investing to reduce their carbon footprint. 

What’s the final takeaway?

As per a report by Green Collar, the carbon pricing scheme called ERF in Australia reached a net worth of $6.5 billion in a year after it was started in 2012. This study indicates that many organisations might invest in carbon credits to reduce their greenhouse gas emissions in order to help stop climate change. Given the significant demand for carbon credits, it is evident that the world would need a voluntary carbon market that is transparent and environment-friendly. To meet their zero-emission target or become carbon neutral, organisations would need to reduce their carbon footprint as much as possible.

Looking for sustainability software? Check out our catalogue!

This article may refer to products, programs or services that are not available in your country, or that may be restricted under the laws or regulations of your country. We suggest that you consult the software provider directly for information regarding product availability and compliance with local laws.

About the author

Content Analyst for Australia. Focusing on insights about software technolgies critical to SMEs. Insipred by growing tech trends and how these help SMEs to grow.

Content Analyst for Australia. Focusing on insights about software technolgies critical to SMEs. Insipred by growing tech trends and how these help SMEs to grow.

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