Companies are increasingly recognizing their impact on the climate, taking ownership of their carbon footprint, and seeking innovative ways to reduce it. They are developing strategies to decarbonize their operations, with carbon credits playing a crucial role in achieving net-zero emissions goals.
While carbon credits can vary widely in their attributes, they all go through the same lifecycle process from project ideation to carbon credit retirement.
In this article, we’ll walk you through the stages of the carbon credit lifecycle, from creation to retirement.
You will learn:
- What is a Carbon Credit?
- How are Carbon Credits Generated? Understanding the Carbon Credit Lifecycle Until Retirement
- Why is Carbon Credit Retirement Important?
What is a Carbon Credit?
A carbon credit represents the mitigation of one metric ton of carbon dioxide (CO2), either by preventing its release into the atmosphere or by actively removing it. Organizations and individuals can purchase carbon credits to offset emissions generated by their operations or daily activities.
At Viridios AI, we have categorized the universe of carbon credits using the following taxonomy:
Agriculture, Forestry and Other Land Use (AFOLU)
Encompasses nature-based solutions driven by the utilization of land and ecosystems.
Energy Efficiency and Fuel Switch
Captures initiatives aimed at lowering energy consumption or decreasing the carbon intensity of energy sources.
Captures the displacement of fossil fuels in electric grids with renewable energy sources.
Captures the avoidance and destruction of GHG emissions from sources (e.g. manufacturing, agriculture, landfills, wastewater treatment plants, utilities, etc.) that are not related to the combustion of fossil fuels.
How are Carbon Credits Generated? Understanding the Carbon Credit Lifecycle Until Retirement
Carbon credit retirement is an important part in the lifecycle of a carbon credit.
But to understand the concept of carbon credits retirement, it is necessary to be familiar with the entire carbon credit lifecycle. Every project goes through five general stages:
1. Project development
Project developers identify and assess initiatives with the capacity to decrease or eliminate carbon emissions. Developers may also be the project owners, which could be landowners, actors from the private sector, municipalities, public entities, etc.
The project developer’s responsibility is to ensure that the project aligns with the chosen standard for project registration (e.g., VCS or Gold Standard) and meets the requirements of the selected methodology. They must also secure financial viability and engage with the relevant stakeholders linked to the project.
The outcome of the project development process is a Project Design Document (PDD) that is submitted to the registry for review. This document must provide evidence of alignment with the selected standard and its safeguards, as well as ensuring that carbon emissions and reduction estimations follow the selected methodology.
Check out the chart below with issuance information by category from recent years:
Source: Viridios AI Data
2. Project Design Validation
This is the second stage of a carbon lifecycle.
After the PDD is submitted, third-party auditors evaluate the project’s design, implementation, and monitoring procedures.
This process guarantees the project’s adherence to selected methodologies and standards. The auditor assesses baseline scenarios, monitoring plan, emission reduction calculations, and compliance with the safeguards.
If the review process is successful, the third-party will publish a Validation Report and Validation Statement. After approval from the registry, the project is then granted the ‘Registered’ status.
3. Monitoring and Verification
After registration, a project can begin monitoring its emission sources, reductions, and/or removals. Typically, after a year of monitoring, the project owner submits a Monitoring Report that estimates the net carbon avoided or removed from the atmosphere according to the methodology requirements.
Another third party will review this document against the requirements and often conduct a site visit to verify the reported data.
The third party will then issue a Verification Report with their findings. If successful, a Verification Statement will indicate the number of credits verified and the period during which they were generated, or their respective vintages (years).
4. Purchase process
After carbon credits are verified, they are then eligible to be issued and become available for trading. This means they enter the market and can be directly sold to companies that will retire them or enter the secondary market where they will continue to be traded until they are retired to offset their carbon emissions.
The price of a carbon credit is influenced by various factors such as project type, location, vintage, co-benefits, and market dynamics.
The credits are tradable through various platforms, including marketplaces like Patch, exchanges like ACX or CBL, and brokers. The pricing of the credits is determined by supply and demand dynamics, which are greatly influenced by the quality and credibility of the associated projects.
Occasionally, project developers manage to secure direct offtake agreements, but the majority of transactions are facilitated by brokers. Brokers engage in competitive bidding for bulk offset credits from verified projects, maintaining an inventory to serve a variety of clients.
Although integrity initiatives like ICROA, and now ICVCM, mandate a certain level of transparency and access to project documents and credit tracking, project- and vintage-specific prices are typically disclosed solely to buyers and sellers.
It’s crucial to highlight that participants in the Voluntary Carbon Market must carry out due diligence to verify the high integrity and certification by reputable bodies of the carbon credits they acquire.
5. Carbon offset retirement
The ultimate goal of the carbon credit lifecycle is retirement.
When a company retires a carbon credit, it indicates that an equivalent amount of carbon emissions has been offset and thus, ‘canceled’ from their greenhouse gas accounting.
When a credit is retired, it is effectively removed from circulation and is not available for resale. That also means removing them from the marketplace and labeling them as retired in its respective registry.
Check out the chart below with retirement information by category from recent years:
Source: Viridios AI Data
Why is Carbon Credit Retirement Important?
Organizations and individuals can use carbon credits as a tool to decarbonize and “offset” emissions.
By purchasing carbon credits, companies help fund projects that support decarbonization elsewhere and often yield positive benefits to the environment and local communities.
However, for tangible impact to occur, a credit must not simply be held or traded – it must be retired.
The impact of retirement on carbon investors has two main effects. First, it decreases the supply of carbon credits, leading to an increase in their market price. This is advantageous for investors who possess carbon credits since the value of their holdings rises.
Secondly, retirement guarantees that carbon credits are not double-counted or reused by multiple parties, thus preserving the integrity and effectiveness of emission reduction initiatives.
This ensures transparency and accountability in the carbon market, instilling confidence among businesses and individuals regarding the environmental impact of their offsetting activities.
Carbon credits have a crucial role in combating climate change as they provide incentives for reducing emissions and funneling funds for decarbonization elsewhere, often in developing and least developed countries with potential to support sustainable development.
The lifecycle of carbon credits, from project development to retirement, encompasses their creation, monitoring, allocation, trading, along with efforts to reduce emissions and offset carbon.
Learn more about carbon credit retirement and carbon credit lifecycle by booking a demo with our specialists!
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About the authors:
María Elisa Vollmer is Head of Project Data at Viridios AI. She has five years of experience in sustainability consulting for the public, private, and non-profit sectors. Her diverse background blends international development, environmental policy, and economics. She has a Master’s in Applied Economics from George Washington University and an undergraduate degree in Environmental Policy and Planning from Virginia Tech.
Mariana Marins is Content Marketing Manager at Viridios AI. Mariana has 9 years of experience in marketing across different markets and companies, both in the non-profit and private sectors. Her background includes marketing and GTM strategies, CX, inbound marketing, SEO, and content production.She holds a Bachelor’s degree in Communications/Marketing, a MBA in Business Management and Design Thinking, and an Innovation Leadership Program Certificate from The Hebrew University of Jerusalem.