By Utkarsh Hathi | November 11, 2024
Carbon credit is a certificate that represents greenhouse gas (GHG) not emitted in the atmosphere or captured from the atmosphere. One credit represents one metric ton of GHGs. Companies purchase these credits to compensate for their emissions and financing projects that reduce emissions elsewhere.
In a Voluntary Carbon Market (VCM), buyers of these credits are not under a legal obligation to reduce emission. They buy carbon credits voluntarily to meet climate targets and have better environmental reputation. On the other hand, buyers in compliance carbon markets are legally obliged to reduce
emission.
Credits are verified using standards set by global agencies such as The Integrity Council for Voluntary Carbon Market (ICVCM) which is based in London. It was established in 2021 to create quality standards for carbon credits to increase credibility of the voluntary carbon market. Global registries such as Verra and Gold Standard follow these standards to determine the authenticity of carbon projects.
What are High Integrity Labels?
ICVCM came up with Core Carbon Principles, a list of criteria to measure the reliability of a project. Additionality and Permanence are two important criteria here, which the projects need to meet to receive high-integrity label.
Additionality assesses whether the project would have happened without the revenue generated from the sale of carbon credits. If it can happen without the revenue from carbon credits, it fails the criteria. Most renewable energy projects run independently without depending on carbon credit revenue, failing to meet the criteria. 59% of Indian carbon projects listed on global registries are energy generation projects, shows data from Bloomberg.
Permanence requires the effect of a project to last longer and be irreversible. For instance, the impact of afforestation project can be reversed by deforestation, fire or land use change.
ICVCM announced in August this year that carbon credits for renewable energy projects will not get their “high-integrity label” anymore.
Why does the market lack credibility?
Projects with questionable quality have been approved and sold in the past across the world. Indian hydro power projects are one such in example. Some of them generated carbon credits despite damaging the environment and reducing lesser amount of emission than promised. These credits were bought by firms in Germany, shows a report from the CORRECTIV, a German publication.
Once a certifying authority starts processing the application of a project, the applying organization needs to approach a third party to verify the project. The relationship between the third party and project organization is of a quid pro quo, said Trishant Dev, Program Manager of Climate Change at Centre for Science and Environment, a public interest research organization. Since a company needs to identify a third party by itself and the third party wants continuing business with the company, projects with questionable credibility are certified.
The principles are there in most standards, but they are not followed in practice, it needs regulation from the government on sellers and verification authorities,” said Dev.
How will the ICVCM announcement impact the carbon market?
It can improve the credibility of credits and companies could pay more to purchase quality carbon credits. This can impact the demand and cost of the credits, said Dev. Existing credits generated by renewable energy projects could find it hard to get buyers as they are not of high-integrity, resulting in surplus of those credits.