The carbon markets: explained
Looking to cut through the noise and understand the basics of the carbon credit markets? Learn about how the market works and what it will take to get us to net zero.
Coenraad Vrolijk
26th Dec 2023
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Carbon removal vs carbon avoidance
Carbon removal involves sequestering carbon from the atmosphere through natural or chemical processes and ensuring that it is stored for the long term. Avoidance, on the other hand, constitutes a range of undertakings that purport to stop events and practices that would otherwise produce carbon dioxide. Avoidance includes halting deforestation, building renewable energy projects, persuading individuals to embrace less carbon-intensive cooking practices, and more.
While many avoidance projects have merit, many more are false promises built on false premises. For example, a recent investigation found that, of the 50 best-selling projects issuing carbon credits (both removal and avoidance credits), 32 did nothing to reduce emissions because these reductions would have been made irrespective of the credits they produced. High-quality carbon removal projects largely avoid this pitfall – a lack of additionality, in the carbon lingo – as their primary reason for existence is the removal of carbon from the atmosphere.
Carbon removal is not without its own controversies. Mass planting one type of tree may capture carbon but reduce biodiversity. Industrial forests sequester less carbon dioxide than do old-growth forests. Some technologies that extract CO2 from emissions are energy-intensive themselves. Others may have side effects we do not fully understand. Yet carbon dioxide removal must be a part of the net-zero equation. For many human activities today, the production of carbon dioxide is impossible to avoid; and despite all reduction efforts thus far, global carbon dioxide emissions are forecast to grow, not shrink, over the next several years.
The carbon removal market
A carbon removal credit represents, in theory, the removal of one metric tonne of carbon dioxide from the atmosphere. A credit is certified by one of a number of global registries after its experts have deemed a project capable of removing and permanently storing that tonne of CO2. At this point, the credit becomes available for sale. The same registry will later audit whether the credit has materialized – which is to say, whether the tonne of carbon it represents has been sequestered. Once used as an offset, the credit is retired and cannot be bought or sold again.
All of this means that buyers may not know for years after the purchase date whether a credit they own has in fact resulted in the long-term removal of a tonne of carbon dioxide. This time lapse leaves buyers exposed to reputational and regulatory risks should their coffers of verified credits come up short.
In these cases, why not simply buy replacement credits on the market – either absorbing the additional cost or using a cash payout from an insurer? A few carbon insurers offering cash benefits already exist, and while prices have fluctuated significantly in recent years, a removal credit could be purchased in 2022 for between $15 and $30.
The trouble is the scarcity of high-quality credits – that is, those credits likely to represent the actual, verified removal of carbon dioxide from the atmosphere. These are the only credits that a growing list of scientists and regulators consider valid in carbon-offset accounting, and they will likely become more expensive as that consensus builds. Traders already have trouble sourcing these credits, and demand is forecast to soar ahead of 2030, when almost half of the world’s top 2,000 companies are aiming to hit net zero. Needless to say, prices will likely climb even more steeply as 2050 looms, the Paris Agreement’s worldwide net-zero target date.
The case for in-kind insurance
At CarbonPool, we have embraced carbon removal as a solution but are looking at its potential flaws head-on, with plans to source the carbon credits for our claims payments only from projects that are additional, measurable, verifiable, and permanent. This means that if our clients come up short on carbon removals, we will make them whole using credits that were of the same quality or better than those they had counted on.
Even the carbon market’s critics admit that carbon offsetting must play a role in our efforts to keep temperature rises below 1.5°C, and even carbon removal sceptics see that there is no path to net zero without removals. Carbon insurance that pays out in carbon removals will shift the market toward well-regulated, high-quality credits that a growing consensus of experts believe can have a meaningful impact on the race toward net zero.
