Carbon Credits Are A Useful Tool In Combating Climate Change – Analysis


By Zhangchen Wang

“Climate change has reached an extremely dangerous stage in which it is necessary to take all feasible measures without discrimination to combat it.” This sentence, while certainly true, is also becoming a platitude. Carbon credits have always been one of the more controversial options to address climate change, but it will undoubtedly have a positive impact on a variety of aspects if used correctly.

Carbon credits refer to the quantifiable greenhouse gas reductions or removals achieved through projects or activities such as renewable energy initiatives and reforestation efforts. By assigning a financial value to reductions in greenhouse gas (GHG) emissions and making them tradable credits, carbon credits incentivize sustainable practices such as reduction in carbon emissions, sustainable investment, and international green cooperation. Nevertheless, it is also true that the criticisms of carbon credits have never ended. It is, therefore, important to acknowledge these concerns and provide thoughtful responses to address them effectively in order to make full use of carbon credits in combating climate change. 

The carbon credit market functions on the principle of supply and demand. At present, there are mainly two types of carbon credit market: the regulatory compliance market and the voluntary market. The compliance market is established and regulated by governments, trading credits according to the enforced emission reduction targets. In contrast, the voluntary market is driven by individual initiatives to offset emissions voluntarily; usually used as a way to convey a positive attitude toward environmental responsibility. The entities that seek to offset their GHG emissions—both voluntary and regulatory—can purchase from those entities that earned carbon credits. 

As previously mentioned, carbon crediting offers a multitude of benefits, making it an effective tool in the fight against climate change. One of the biggest—and most evident—benefits of carbon credit is that it is very helpful in reducing carbon emissions. From the perspective of those on the demand side the emission reduction target provides entities, or those on the supply side, with a tangible economic incentive to cut down GHG emissions as their costs will rise due to additional emissions. For example, the European Union Emission Trading Scheme (EU-ETS) is one of the first carbon credit cap-and-trade systems in the world, and it sets a cap on overall emissions and allocates emission allowances accordingly. Based on the current market price of carbon credits, for the carbon-emitting entities, each additional metric ton GHG generated will lead to a cost increase of US$40-80 per metric ton. Companies involved in the EU-ETS would therefore have a higher incentive to reduce emissions and trade their unused allowances for extra revenues. 

The carbon market is currently worth US$2 billion, and this is set to grow to US$250 billion by 2050. The prospect of making profits from selling carbon credits also incentivizes the supplier to keep investing in carbon reduction activities such as afforestation projects. For example, Indonesia’s Rimba Raya Biodiversity Reserve is one of the tropical lowland peat swamp forests protection zones in the world. It was among the first REDD+ projects validated under the Verified Carbon Standard (VCS), and it is expected to generate approximately 2.7 million carbon credits per annum until 2073. There are protected areas around the world where commercial motivations for establishing them outweighed the environmental motivations, but these reserves are still home to countless species of flora and fauna and animal species, significantly contributing to biodiversity. It is also worth mentioning that blue carbon ecosystems—mangroves, seagrasses, and tidal marshes—are also significant contributors to carbon credits since blue carbon can sequestrate up to 10 times more carbon than “green carbon” forests. In this regard, research programs dedicated to blue carbon research are compatible with high development opportunities from a commercial perspective as a nature-based climate change solution. 

While being a valuable tool in the fight against climate change, criticisms against carbon credits have never ceased to exist. The criticisms mainly focus on the additionality, permanence, and credibility of carbon credits, as well as the potential of enabling businesses to engage in ‘greenwashing’. It has to be admitted that these accusations about carbon credits are not groundless. In terms of additionality, critics argue that the emissions reductions claimed by some carbon offset projects would have occurred anyway even without the offset project. For example, no one can claim the carbon sinks produced by forests that have existed on the earth for thousands of years without taking any measures. “Permanence” is a problem that is usually mentioned together with additionality. It refers to the situation in which people are concerned about the long-term permanence of emission reduction projects since the trees planted for additionality might be lost again and release the previously captured carbon back into the atmosphere. 

However, as long as a long-term, stable environmental protection policy can be maintained, these two issues will not have a significant negative impact on the effectiveness of carbon credits. The first thing that all carbon credits projects must agree on is that the revenue gained from carbon credits must be used primarily to combat climate change. It is important to ensure that the revenue of carbon credits is used for new carbon offsetting projects such as reforestation to ensure that additionality can be guaranteed. After that, it is necessary to ensure that reforestation is not a temporary project to prevent continuing deforestation during reforestation to guarantee permanence. All in all, it is necessary to set up a globally acknowledged mechanism to monitor, verify, record, and regulate the carbon credits claimed by countries and organizations. 

In other words, all the current questions and concerns about carbon credits are caused by the lack of a recognized management mechanism. International organizations and major countries—especially those leading in the field of environmental protection—should take the initiative to assume the responsibility of organizing and setting international carbon credit standards. In this case, there will also be corresponding regulations to ensure the credibility of carbon credits. 

Lastly, critics also worry that carbon credits will entice businesses to engage in greenwashing by purchasing offsets and not making genuine efforts to reduce their GHG emissions. For now, it is necessary to admit that greenwashing is indeed the motivation for some carbon emitters to buy carbon credits. However, at least they are still engaging in this carbon reduction initiative and providing the carbon sequestration projects with financial support. Also, due to the need to balance environmental protection and economic development, the current requirements for carbon offsetting for most entities are not very strict. With the gradual implementation of increasingly stringent emission caps in the future, greenwashing will also gradually become infeasible in terms of costs. 

Carbon credits provide a mechanism to quantify and incentivize emission reductions at a time when the world is trying to mobilize all the forces to fight climate change. It represents a crucial step towards a more sustainable future, and it encourages the adoption of more methods to reduce GHG emissions. Additionally, considering the fact that almost all of the criticisms facing carbon credits are due to the lack of a well-established management mechanism, more standardized frameworks formed through multilateral cooperation will definitely help it to maximize its potential.

About the author: Zhangchen Wang is a Research Assistant Intern, BCCC Program

Source: This article was published by ICAS


The Institute for China-America Studies (ICAS) is an independent nonprofit, nonpartisan research organization dedicated to strengthening the understanding of U.S.-China relations through expert analysis and practical policy solutions.

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