Retiring carbon credits can be a powerful tool for individuals and businesses to offset their carbon emissions and contribute to a greener future. By retiring these credits, we can ensure that the emissions reduction achieved is permanent and not double-counted, creating a more transparent and effective carbon market. 

This approach not only helps combat climate change but also encourages the development of sustainable practices and technologies. 

If you’re into knowing about how the process works, this article will explain everything you need to know about carbon credit retirement. Let’s begin by explaining how these credits work.

Understanding How Carbon Credits Work

Carbon credits are tradable certificates that give entities the right to emit a tonne of CO2 or its equivalent. They are generated by projects that reduce or remove CO2 from the atmosphere like planting trees. 

The credits serve as a permit, allowing the holder to neutralize their emissions. In that way, they work like renewable energy certificates (RECs) which are also a market-based instrument that certifies the holder owns a megawatt-hour of electricity from a clean energy source. 

READ MORE: What are Renewable Energy Credits vs. Carbon Credits

Essentially, RECs are a type of carbon credit alongside many others. These credits come in two major categories: compliance and voluntary markets. 

In the voluntary carbon markets, carbon credits are also called offsets. Emitters voluntarily bought them to offset their greenhouse gas emissions. 

In the compliance markets, businesses’ emissions are ‘capped’. If they go beyond that cap or limit, they’re fined or they can buy carbon credits corresponding to the amount of their excess emissions. 

The Lifecycle of a Carbon Credit

Retiring carbon credits involves a series of stages. But let’s focus on the last three crucial steps that ensure the integrity of the credits, the process of trading them, and what it means to retire them. 

The verification process is critical for ensuring the accuracy, transparency, and integrity of reported project data. Verifiers have to confirm a project’s compliance with the carbon program’s eligibility criteria. They validate the collection of project monitoring data as per program requirements and verify the accuracy of emissions reduction calculations based on approved methodologies.

After a project has undergone the verification processes, it becomes eligible for registration within the program. In other words, the credits they generate are now available for trading. 

Carbon credit trading has become very popular today among individuals and organizations and various carbon exchanges began to emerge. This is happening for a simple reason: Reducing GHG emissions is a global initiative and the carbon market offers great opportunities for entities seeking to cut their emissions.

You can buy or trade carbon credits for retirement purposes through various platforms. There are a couple of online carbon credit marketplaces and spot exchanges to choose from. 

Here are the top four carbon exchanges this 2024 that you can consider. You can also try popular marketplaces like the one that Salesforce launched or that of Alcove’s.

Lastly, let’s move toward the end goal of carbon credit trading – retirement. 

The Retirement Process Explained

Carbon credit retirement also means their death. 

A carbon credit is retired once its benefit has taken place. That means it has been used and the carbon benefit it represents has been claimed by the entity that bought it. 

Retiring your carbon credits requires you to ensure that they are removed from the marketplace and labeled as ‘retired’ in any records or registry. The retired credits must serve their emission reduction purpose only once to prevent double counting. 

Take note that retirement only occurs once the impact has happened. This means retiring your carbon credits depends on what type of credit you purchase. 

If you’ve bought ex-post carbon credits, you can retire them right after your purchase. You can then instantly get the proof of retirement.

For ex-ante and pre-purchase carbon credits, retiring them won’t happen immediately after you bought them. That’s because their impact hasn’t yet occurred and their retirement should be in the future. You should know when the timeline would be from the seller or the marketplace where you purchase the credits. It may take months or even years, depending on the specific project you invest in.

Impact and Benefits of Retiring Carbon Credits

By buying carbon credits, entities help fund efforts that support decarbonization elsewhere. These initiatives often yield positive benefits to the environment and local communities. More importantly, each credit retired helps quantify the actual environmental impact of those projects.

When it comes to the impact of retiring carbon credits on investors, be it individuals or companies, it has two major effects. 

First, it preserves the integrity and effectiveness of emission reduction projects. It prevents double counting or reusing of the credits by multiple entities. This further guarantees transparency and accountability in the carbon markets. 

In effect, carbon credit retirement instills confidence among companies regarding the impact of their purchases or investments. 

Thus, secondly, retiring carbon credits helps build a good reputation and enhance brand value of your company. Take for instance the case of large businesses supporting various carbon reduction projects.

Giant technology companies like Microsoft and Apple have been investing millions in carbon offsets from projects that either reduce or sequester carbon from the atmosphere. 

As they do that, they’re not only addressing their emissions but also dealing with their corporate sustainability. 

The Role of Carbon Credits in Corporate Sustainability

So, how do carbon credits become the new currency of ESG investing to meet environmental obligations and corporate sustainability? 

READ MORE: ESG Investing with Carbon Credits – What Investors Need To Know

In the U.S., the coin of the realm is dollars while in the EU, it’s Euro. In the ESG world, it’s the carbon credit. Carbon credits are taking a small space on the ESG goals of businesses. 

But as more companies are pledging to reach net zero, these credits are also gaining more momentum in ESG investing to ramp up carbon emission reductions. And slashing emissions has now become a critical element of corporate and environmental responsibility to help fight climate change. 

Corporations use carbon credits to reach their net zero, carbon neutrality, or carbon negative goals. As such, research firms estimated that the carbon market will grow as much as 30x more by 2030. If that happens, the market will be as huge as the NASDAQ stock market by the decade’s end. 

According to the independent firm Katusa Research, the overall carbon market (compliance and voluntary) could be on equal footing as the oil market.

Source: Katusa Research

The burning of fossil fuels emits carbon dioxide, contributing to climate change. Different corporate climate goals mean different things. 

Achieving carbon neutrality means balancing emitted and removed CO2. Daily actions like driving emit CO2, but walking or using renewables can reduce it. Carbon credit offsets fund CO2 removal projects. 

Carbon negative goes beyond neutrality, removing more CO2 than emitted. For instance, Microsoft aims for carbon negativity by 2030, promising to remove all emissions since its founding. H&M and Ikea also strive for “climate positive,” akin to carbon negativity efforts. Their strategies involve sustainability investments and reduced emissions.

Best Practices in Carbon Credit Retirement

Now, that you know how carbon credits work, the importance of retiring them, and the processes involved, there’s one more thing left to keep in mind. What are the best practices to follow when retiring carbon credits?

We summarize them in two essential points: selecting the right carbon credit projects and transparent reporting of the retirement. 

As mentioned earlier, there are plenty of projects generating carbon credits. There are 170+ of them as per the Ecosystem Marketplace report. 

So, you must choose the ones that suit your purpose very well. If you’re into nature-based initiatives, you may pick from the different forestry and land use projects, i.e. REDD+. But if you’re operating in the power sector, you may want to go for renewable energy such as supporting solar or wind projects.

Regardless of your choice, be sure to be informed of the existing standards and methodologies for that project. This is crucial so that your carbon credit investment would count by actually reducing emissions. That entails being transparent in reporting your retirement. 

Transparency is one of the biggest concerns plaguing the carbon market right now. Questions were raised as to the effectiveness of carbon projects in delivering their emission reduction promises. This caused a rapid decline in voluntary carbon credit prices, particularly the nature-based offsets. 

Yet, current and future innovations in carbon credit markets show that they are here to stay and will continue to play a significant role in curbing GHG emissions. 

The Future of Carbon Credits

Recent innovations such as the launch of insurance products that protect carbon credits indicate that the market is heading in the right direction. Application integration like the case between Alcove and Shopify is another important market development that tackles transparency in credit retirement.

The use of blockchain technology is also considered a solution to make carbon credit retirement easier to track. Add to this the big players entering the market to further address transparency in tracking the lifecycle of each credit. For example, the NASDAQ exchange launched an innovative technology to revolutionize the industry.

Nasdaq’s new approach uses smart contracts for secure transactions and promises to bring much-needed standardization to attract investors​​.

Moreover, announcements by countries to integrate carbon markets into national registries also suggest that trading and retiring carbon credits would become the standard in curbing emissions and fighting the climate crisis.

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Britain is gearing up to impose a carbon tax on imported goods in a move announced by the Treasury aimed at safeguarding UK firms against being outcompeted by foreign manufacturers.

The proposed tax, also called the Carbon Border Adjustment Mechanism (CBAM) is set to take effect in 2027. It aims to ensure that imports like iron, steel, aluminum, ceramics, and cement face a similar carbon price to domestic goods. The move intends to maintain fairness in the market.

What is the UK CBAM?

Governments use a carbon price as a tool to curb emissions by imposing charges on carbon pollution. The goal is to encourage industries to reduce their greenhouse gas emissions.

Chancellor Jeremy Hunt highlighted the role of their British CBAM version, saying:

“This levy will make sure carbon-intensive products from overseas — like steel and ceramics — face a comparable carbon price to those produced in the UK so that our decarbonization efforts translate into reductions in global emissions.”

The UK government noted the new tax would help address “carbon leakage” which has become more pressing. This means avoiding emissions being displaced to other countries that have lower or no carbon pricing mechanisms in place. 

The CBAM will work hand-in-hand with the UK Emissions Trading Scheme. It’s the same as how the EU’s CBAM functions in parallel with the EU’s ETS. 

RELATED: EU Enacts New Reporting Rules for CBAM: Here’s What To Know

According to the Treasury, these plans will help level the playing field and encourage greater investment in net zero efforts. 

Under the proposed CBAM, charges will be determined based on the volume of carbon emissions produced during product manufacturing. The difference between the carbon price applied in the country of origin and that paid by comparable UK manufacturers will also influence these charges.

What Emissions Scope is Covered? 

The importer of imported products covered by the UK CBAM will be liable for the tax based on the products’ embodied emissions. It will not include the trading of emissions certificates.

The emissions scope categories that would be under CBAM are as follows:

The UK CBAM will also extend its coverage to Scope 1, Scope 2, and specific precursor product emissions found in imported products. This extension aims to align with the coverage provided by the UK ETS.

The UK ETS is designed to regulate and put a price on GHG emissions produced by domestic industries. Operating on a cap-and-trade mechanism, this system allows the market to determine the value of emission allowances. The total carbon emissions allowed and the corresponding allowances are capped under this scheme, gradually decreasing over time.

As part of the strategy to address the risk of carbon leakage within sectors covered by the UK ETS, a segment of UK ETS allowances (UKAs) is allocated to operators in exposed sectors without charge. This allocation ensures that certain operators receive allowances for free, thereby reducing their exposure to the carbon price. 

However, this measure also retains the economic motivation for these operators to invest in decarbonization initiatives. Thus, it maintains the overall emissions cap across the sectors included in the ETS.

Closing Carbon Loopholes

Following a consultation on solutions for carbon leakage, the Treasury reported that 85% of respondents identified the issue as a present or future risk to their efforts in achieving decarbonization.

There’s a growing concern that while companies in the UK work towards reducing GHGs, equivalent efforts are not mirrored abroad. This gap may result in emissions merely shifting to countries without ambitious net zero targets, providing limited global environmental benefits.

To address these concerns, implementing a suitable carbon price like CBAM is considered a significant step to mitigate carbon loopholes.

The Treasury plans to engage in further consultations in 2024 concerning the levy’s specifics. These include its design, implementation, and the comprehensive list of goods and products subject to the levy. 

Moreover, it seeks input from various sectors, including power, aviation, and industry, regarding the UK Emissions Trading Scheme.

READ MORE: UK Carbon Credit Scheme, ETS, Under Fire for Profitable Plant Closures

The Chairman of the Environmental Audit Committee emphasized the necessity of addressing emissions associated with imports, constituting 43% of the UK’s consumption emissions. This is to prevent undermining the UK’s decarbonization efforts. 

Implementing an appropriate carbon price at the border will play a crucial role in closing carbon loopholes.

The UK’s introduction of the carbon tax marks a significant step toward aligning carbon pricing and ensuring fairness in global markets. By covering a wide scope of emissions, the CBAM intends to close carbon loopholes, encouraging industries to invest in net zero efforts and supporting the nation’s decarbonization journey.

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The Commodity Futures Trading Commission (CFTC) introduced proposed guidance regarding the trading of voluntary carbon credit (VCC) derivative contracts. It sets out factors for designated contract markets (DCMs) to address specific provisions of the Commodity Exchange Act (CEA) and CFTC regulations. 

The CFTC proposal seeks input on various VCC-related issues through 17 specific questions as part of the Biden Administration’s focus on climate issues. Comments for the proposal are open until Feb. 16, 2024.

What is CFTC’s Proposed Guidance All About?

Highlighting the importance of the proposal, CFTC’s Chairman Rostin Behnam noted:

“Today’s action by the CFTC is the culmination of a two-year examination of carbon markets, and many more years of in-depth work regarding the impacts of climate on financial markets.” 

He further said that the agency’s objective is to help advance integrity leading to transparency, liquidity, and price discovery. These are all CFTC’s hallmarks in regulating markets and setting standards. 

The Voluntary Carbon Market Proposed Guidance outlines three things for DCMs to consider: 

List only derivative contracts resistant to manipulation, 
Monitor contract terms in relation to the underlying commodity market, and 
Adhere to product submission requirements under Part 40 of CFTC Regulations and CEA section 5c(c). 

The guidance aligns with ongoing initiatives to enhance VCC quality and VCM integrity. These particularly include the recent launch of the Core Carbon Principles (CCPs) by the Integrity Council for the Voluntary Carbon Market (ICVCM).

Moreover, the CFTC proposes DCMs factors in essential VCC commodity characteristics when designing VCC derivative contracts. This also involves focusing on three crucial considerations: quality standards, delivery points and facilities, and inspection provisions. 

These guidelines fit into the distinct market and regulatory framework of the CFTC and the commodity-related markets it supervises. The VCM is one of them.

VCCs are tradable instruments that enable voluntary buying and selling rights to claim removal of or reductions in greenhouse gas (GHG) emissions. However, the VCMs encounter challenges in assessing VCC quality and associated carbon pricing. The CFTC’s guidance seeks to address these concerns. 

What are CFTC’s Criteria for VCC?

The CFTC’s initial set of quality criteria for VCCs includes transparency, additionality, permanence and risk of reversal, and robust quantification. These align with Core Carbon Principles (CCPs) 7, 1, 2, and 3, respectively. 

READ MORE about CCPs here. 

The guidance also discusses governance, tracking systems for VCCs, and avoiding double counting, which are crucial for carbon crediting programs responsible for issuing and monitoring the credits. 

However, the CFTC’s guidance doesn’t talk about broader social and environmental considerations evident in voluntary quality efforts. This is why the agency is requesting feedback on whether DCMs should consider those concerns in VCC derivative design, even if it’s not part of the proposal.

The CFTC lacks direct statutory authority to impose standards on the VCC market. Instead, it relies on its broad anti-fraud and anti-manipulation authority along with oversight of CFTC-regulated exchanges, guided by core principles. 

The agency has been taking actions to help carbon markets establish standards. Holland & Knight traces CFTC’s efforts in a timeline:

Source: Holland & Knight

In October last year, U.S. lawmakers pushed the CFTC to deal with the integrity of carbon credit markets and regulate them.

The Proposed Guidance interprets the principles concerning VCC derivatives, guiding exchanges on demonstrating compliance regarding derivatives’ susceptibility to manipulation.

Essentially, the guide indirectly sets standards for the voluntary carbon credit market through the exchanges it oversees.

Much of what’s outlined in it is probably already part of exchanges’ diligence processes for listing VCC derivatives. However, the Guidance emphasizes that exchanges listing VCC contracts must rigorously vet the deliverable VCCs, including thorough reviews of relevant accreditation and verification providers. 

Failure to do so might invite regulatory scrutiny if issues arise with the derivatives they list. This pressure on exchanges will likely push accreditation and verification providers to approve or verify higher-quality VCCs.

Looking ahead, although certain voluntary carbon standards may not be explicitly included in the final guidance, DCMs should stay attentive to evolving VCM consensus. 

The CFTC guidance urges vigilance in various areas, recognizing voluntary carbon credit derivatives as new and evolving products requiring factors for consideration in product design and listing to foster transparency and liquidity in carbon markets.

READ MORE: Whistleblower Alert: Carbon Markets Tipsters Wanted By CFTC

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The Securities and Exchange Commission (SEC) has introduced a transformative climate disclosure rule aimed at revolutionizing the reporting landscape for public companies. 

This proposed rule seeks to mandate detailed disclosure of emissions, climate risks, and strategies for achieving net zero emissions, marking a significant leap towards corporate transparency and sustainability. 

Key Aspects of the Proposed Rule

At the core of the SEC’s proposed rule lies a call for comprehensive reporting, compelling companies to provide detailed insights into their climate-related facets. This includes the delineation of risks associated with climate impact, emissions data, and robust plans for achieving net zero emissions.

One of the primary objectives of the SEC’s proposal is to arm investors with consistent, comparable, and meaningful climate-related information. This will enable investors to make more informed decisions, considering a company’s environmental impact and climate risk profile in their investment strategies.

Moreover, standardizing reporting obligations across companies issuing securities is another key aspect of the proposal. This seeks to establish uniformity in disclosures, potentially reducing discrepancies and enhancing the overall quality of information provided by companies.

Most notably, SEC’s proposed rule will significantly impact the practices of accounting, auditing, and assurance for public companies and their service providers. It involves adapting existing frameworks to accommodate the new reporting requirements. 

It may also call for developing new methods and standards for evaluating and reporting climate-related information. 

Overall, the proposed climate disclosure rule cover two major aspects:

Climate-Related Financial Impacts: The regulation tackles how climate-related impacts should be included in financial statements (e.g. balance sheet, income statement, cash flow).
Narrative Disclosures: The rule also involves narrative disclosures in form SK. It will likely include discussions on risks, business strategy impacts, and metrics like greenhouse gas inventory.

Implications and Challenges for Companies

The SEC’s disclosure rule also poses a number of implications and challenges. 

The first one is increased reporting obligations for companies. They will face additional reporting demands that may require thorough data gathering, accurate presentation, and strengthened internal controls to comply with the new regulations. 

RELATED: SEC New Climate Disclosure Rule Turns into a Battleground

Companies also have to go along the transition from voluntary to regulated disclosure. This represents a significant change, requiring gradual efforts until they become accustomed to the new reporting requirements. 

However, for companies that are already complying with similar disclosure rules, it would be easier for them to embrace the proposed changes. Given the overlap with other existing regulations, determining the costs of the SEC’s rule alone would be hard. 

But according to the SEC, the required reporting will cost a small publicly listed firm about $420,000 a year on average. For a larger company, it will be $530,000 a year.

Source: U.S. SEC

Role of Carbon Credits and RECs

The SEC’s proposed rule acknowledges the relevance of carbon offsets and renewable energy credits (RECs), underlining their importance in climate-related reporting. Companies increasingly leverage these instruments for decarbonization, establishing  market-based mechanisms to advance sustainability goals.

However, discussions have emerged regarding the adequacy of the SEC’s requirements, raising concerns about the need for more comprehensive disclosures. It’s crucial for investors and stakeholders to understand how the use of these credits impacts a company’s risk profile, business strategy, and long-term financial implications. 

In particular, the proposed rule outlines the following key areas for disclosure:

Climate-Related Risk: Companies’ use of voluntary carbon markets in their transition risk strategy.
Business Strategy Alignment: How the use of carbon credits or offsets aligns with a company’s business model, strategy, and future outlook.
Targets and Goal Disclosure: Requirements for companies to disclose if their sustainability targets involve the utilization of RECs and offsets.

While the proposed rule has been in existence for about 18 months, awaiting finalization, stakeholders have actively engaged in the process, submitting over 20,000 comments during a consultation period. 

However, the final timeline for its completion remains uncertain, leaving companies in a state of anticipation regarding the impending changes.

How to Prepare for SEC’s Proposed Climate Disclosure Rule: A Roadmap for Companies

Despite the uncertain timeline, companies are advised to prepare by focusing on “no regret” actions, according to Matt Handford, Principal, Climate Change and Sustainability at Ernst & Young. He further shared insights on how companies can better prepare for the new disclosure requirements. 

Key areas to focus on per Handford’s advice include the following:

Emissions Understanding and Accounting: 

Companies need to treat emissions data with the same rigor as financial data, ensuring completeness, accuracy, and reasonableness of their emissions inventory.

Data Hygiene and Quality Assurance: 

Emphasis should be on the quality of data and the reliability of sources, underpinning robust documentation and validation processes.

Reassessment of Climate-Related Claims: 

Companies are reassessing their public claims related to carbon neutrality and net zero targets, ensuring robust strategies and execution plans to meet these objectives.

Engaging Internal Stakeholders: 

Collaboration across various internal departments, including finance and legal, is pivotal to comprehensively address climate-related disclosures and strategies.

The SEC’s proposed climate disclosure rule represents a transformative era in corporate reporting, mandating transparency and accountability regarding climate-related information. As businesses gear up for these regulatory changes, thorough preparation and collaborative approach will be crucial in meeting the evolving disclosure obligations and steering towards a more sustainable future.

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