Carbon credits, also called carbon offsets, have a crucial role in reaching net zero emissions goals. And while each carbon credit is not created equal, they all start in the same place and go through a similar lifecycle process.

So, whether you’re directly reducing footprint or supporting projects that cut emissions somewhere else, offsets let you do both.

In this article, we’ll explain what happens during the entire carbon credit lifecycle, from point of creation to retirement. We’ll explore where carbon offsets come from and take a look at key players or parties involved.

Understanding the full carbon offset lifecycle will help you navigate the fast-changing carbon market.

Tracing the Lifecycle Stages of a Carbon Credit

A carbon credit is also referred to as a carbon offset in the voluntary carbon market. Individuals or firms can use the credits to voluntarily offset their carbon emissions.

Each credit represents a tonne of carbon reduced or prevented from entering the air.

As such, offsets act as a means that help tackle climate crises while allowing different entities to use them, regardless of location.

The life of a carbon offset goes through four general stages:

Development
Validation/verification
Registration & issuance
Retirement

The image traces the lifecycle of a carbon offset credit while naming the parties involved in each stage.

1. The conception of a carbon offset: Project DevelopersCarbon emission reductions happen all the time, but not every reduction qualifies as an offset.

Before a carbon reduction becomes a carbon offset, it has to meet a set of quality criteria based on methodologies specific to a certain kind of carbon project.

The term “methodologies” may sound complicated. But they refer to the detailed procedures that developers use to quantify a project’s emissions reduction potential.

They’re also known as protocols, the blueprint for how various project metrics are calculated.

Each carbon project is unique, be it renewable energy or agricultural project. And so developers have to take several variables into account when developing them. They begin the process by designing the project and formalizing it in a Project Design Document (PDD).

Using a specific methodology, they then outline the project activities in the PDD. Some of the approved methodologies and protocols include:

American Carbon Registry (ACR) methodologies
Climate Action Reserve (CAR) protocols
Clean Development Mechanism (CDM) methodologies
Verified Carbon Standard (VCS) methodologies

Next, project developers establish a baseline of emissions reduction which is for assessment by a 3rd-party body. This is the 2nd stage of the carbon credit lifecycle explained in the next section.

Once the reduction impact of a project has been assessed (via a certain methodology), the developer now holds the carbon rights to that project.

Of course, the work of a project developer, whether it’s an individual or an organization, doesn’t end there.

They have to register the project with an approved registry like the Verra. This body tracks offset projects and issues their corresponding credits. More on this in the 3rd stage of the lifecycle process.

Project developers also need to conduct regular monitoring and reporting of project activities on the ground.

Monitoring involves keeping track of the updates or progress of the project metrics. While reporting involves preparing the necessary documents about the project.

Right now, there are 170+ types of projects that produce carbon credit offsets according to Ecosystem Marketplace. But they fall under eight major categories as shown below.

 

2. The birth of a carbon offset

The second stage in the life of a carbon credit offset is undergoing a validation and verification process. Under this step are two responsible parties.

The Job of 3rd-Party Auditors

The first one is an independent, 3rd-party auditor also called the validation/verification body. This body comprises subject matter experts who can validate a project’s emission reduction claims, both projected and actual achievements.

Essentially, the VVB validates the following elements of a carbon offset project from the developer’s document:

Baseline scenarios
Monitoring process
Methodologies for calculating emission reductions

For example, professional foresters, agriculturalists, or community development experts often audit/validate forest carbon projects. The carbon program standard (e.g. Verra VCS) must accept these auditors to process the registration.

Auditors ensure the integrity and accuracy of the data and information published by the developer on the project. Some of the widely known carbon project auditors are QAS, EPIC Sustainability, First Environment, and SCS Global.

Upon successful completion of the validation, the auditor will issue a validation report and validation statement. These documents confirm that the project has been designed and implemented in accordance with the carbon certification standard.

The Verification Process.

Verification is key when it comes to ensuring that project data reported is true, transparent, and has integrity. In other words, it’s verifying that the project is actually doing what it says it’s doing.

Verifiers have to confirm that a proposed project meets a carbon program’s eligibility criteria. They can then verify by confirming that project monitoring data was collected in accordance with a program’s requirements.

They also verify that the calculations of the project’s emission reductions were done based on the approved methodology/protocol.

The verification process often involves a site visit while monitoring data to confirm that they’re accurate.

After the project has been validated and verified, it’s now ready for registration.

But wait, there’s another key party to consider to ensure the quality of the carbon credit – the carbon ratings agency.

The Role of 3rd-Party Rating Agencies

Carbon rating agencies rate or score the likelihood that the carbon offsets issued via the project have indeed reduced a certain amount of carbon or its equivalent.

Different rating agencies use various frameworks or criteria in providing their scores. Some rate using an alphabetic scale (e.g. BeZero) – AAA, AA, A. Others give their ratings by using the scale of A (highest rate) to D (lowest rate) like how Sylvera does.

Projects must meet specific criteria to be eligible for a rating by an agency. While the criteria may vary, in general, projects must satisfy at least 3 things: carbon score, additionality, and permanence.

Also, rating agencies also require that the project has been audited as part of their scoring framework. Plus, there should be enough information on the project design and monitoring process available to base the ratings on.

Here’s an example of how Sylvera rates ARR projects.

Now that it’s officially (and proudly) born, the carbon credit offset can now move on with its life.

3. Carbon offset in action

This stage in the carbon credit lifecycle involves the carbon registries.

Carbon Registries

Registering a carbon offset project in an approved registry is easy if the previous steps above are taken into consideration.

Projects are certified and issued carbon credits called in various names, depending on which registry they’re registered in. For instance, under the Verra VCS program, the credits are called Verified Carbon Units or VCUs.

Under the Gold Standard offset program, they call carbon credits Verified Emission Reduction or VER. While Climate Action Reserve refers to them as Climate Reserve Tonnes or CRT.

Regardless of their names, registries characterize carbon credit offsets through a number of quality assurance metrics. They’re confirmed via the validation/verification tasks explained in the prior step.

Each offset represents a reduction or removal of one tonne of CO2 equivalent achieved by the project.

The procedures to follow to get a project registered, certified, and issued with credit offsets depend on the specific registry chosen by the developer. The same goes for the rules or requirements provided.

Once the offset credits are issued to a project, they can now be in action. That means developers can look for their buyers in the carbon market.

4. Carbon offset retirement

Carbon offsets are bought by two parties – speculative investors and end buyers.

End buyers can be individuals, corporations, and governments. Buying carbon offsets can happen out of compliance to laws (compliance/regulatory carbon market). Or it can also be a voluntary decision to tackle emissions (voluntary carbon market).

Heavy industrial emitters are the major buyers of carbon offsets as part of their compliance requirements. But plenty of large firms are also buying because of their climate commitments.

If you prefer to buy offsets directly from project developers, you can do so.

Yet, buyers can also get offsets from brokers, traders, and exchanges. They can then use those offsets to address their current emission reduction measures.

But there’s another way to make money out of trading carbon credits. It’s via speculative marketplace/exchanges and carbon ETFs.

Speculative investors buy offsets through futures contracts with the intention to sell them later at a higher price, hopefully.

Top carbon exchanges include the CME Group, Xpansiv CBL, Climate Impact X, ICE, AirCarbon and Carbon Trade Exchange.

No matter how or where the carbon offsets are bought, once they’re used and reported as emission reduction, they should be retired.

Retirement of offsets also means their death. They should not be around anymore and are not for resale. They must serve their emission reduction purpose only once to avoid double counting.

That also means removing them from the marketplace and labeling them as retired in any records.

A retired carbon credit offset can now say goodbye to its not-so-popular yet critical world of reducing emissions.

If you’re interested to know more about carbon offsets, read our primer here. Or if you want to learn how to make money with them, go over this comprehensive guide.

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New opportunities in carbon markets are giving US small landowners alternatives to logging while mitigating climate change.

According to the nonprofit American Forest Foundation, the largest portion of forest land in the United States (39%) is family owned (properties between 30 – 2,000 acres). The rest are under the government, timber companies, and other entities’ ownership.

In this case, connecting small-scale landowners with carbon markets matters a lot.

In Pennsylvania, logging has been the common option to earn for smallholders to pay for their annual land taxes.

A landowner noted that many see timber as ‘free money up in the woods’. He further said that:

“It’s sort of the culture here. When we bought the property [55 acres behind their rural home in Pennsylvania], everyone was like, ‘Are you going to log it?”

But for him and his wife, they found a different solution – carbon credits.

Paying US Small Landowners for Capturing and Storing Carbon

Forest trees are nature’s technology for removing carbon. They represent the most viable, scalable, and cost-effective way to help address climate change.

That’s why American Forest Foundation developed the Family Forest Carbon Program. It brings together small landowners, companies, and policymakers to improve forest health.

The program seeks to help family forest landowners with as little as 30 acres access the fast-growing carbon markets.

The couple signed a 20-year contract with the program to pay for their work in growing and protecting trees to suck in and store carbon. They’ll receive income through carbon credits sold to companies wanting to reduce their emissions.

These credits are otherwise called carbon offsets – emissions reductions done elsewhere to cover for an entity’s hard-to-abate footprint. Carbon offsets have been a major measure among companies’ net zero emissions targets.

Corporations can gain more value in seeking natural climate solutions like protecting forests, including:

High integrity verified carbon credits generated by American small-scale landowners
An avenue to provide economic support for rural American families and communities
A critical role in improving forest health and wildlife habitat

US small landowners, in turn, will get cash for their efforts in tending forest trees. They can then use the income to cover their tax payments and stay away from logging.

A big concern, however, arises from this logging alternative. It’s the high costs involved (up to $200,000) for project development, its monitoring, and so on.

This is where the model of agricultural coops kicks in to bridge the gap.

US small landowners don’t have the ability to market directly to carbon credit buyers. But they can come together and form an aggregate to access carbon markets.

Tipping the scale on the value of forests

The US Senate had recently passed a climate legislation that’s seen to boost the efforts of family forest landowners.

The approved bill will provide $450 million to help private landowners toward forest management practices with climate benefits. It contains specific provisions on promoting carbon programs like the Family Forest Carbon Program.

Once signed into a law, the bill will unlock the power of small forest landowners to fight climate change.

This kind of program will help tip the scales on the value of forests, making standing trees more valuable than harvested timber. Then, in turn, it will guide private landowners to come up with sustainable forest management practices.

As per Sarah Hall-Bagdonas, senior forestry manager for the Family Forest Carbon Program:

“The majority of landowners don’t actually say their number-one interest is in timber but the majority do end up timbering their land… So the voluntary carbon market [VCM] really provides them with another option besides the timber market.”

The VCM value more than doubled to almost $2 billion from 2020 to 2021 as reported by the Ecosystem Marketplace. This growth can be a good opportunity for both timber management and carbon markets to flourish.

Yet, another issue emerges – carbon price.

Logging firm owners believe that the financial incentive to reduce timber harvest and store carbon instead is not enough.

A timber company director said that the carbon price has to be a lot more than its present value. It should be around $30 – $60 per ton of carbon, or 2x – 3x today’s price.

Still, many other US small landowners are also joining the new opportunities that carbon markets offer.

Some of them are not only protecting forest health but also safeguarding biodiversity and rare species. Many are also managing wildfire to protect centuries-old trees that sequester carbon.

With more and more efforts like the American Forest Foundation reaching out to family forest owners, their participation in carbon markets will grow.

Other couples begin the same journey by comparing timber and carbon prices. But some remarked that carbon credits feel like a real opportunity.

Another small landowner couple in western Pennsylvania said that:

“This is the business of conservation that is being sustained, supported by a different type of economy… other than conventional forest products. This is something that’s absolutely new.”

The post US Small Landowners Are Taking Cut of the Carbon Markets appeared first on Carbon Credits.

Intercontinental Exchange (ICE) plans to auction 500,000 nature-based carbon credits for GreenTrees.

ICE is a leading global provider of data, technology, and market infrastructure. It operates large exchanges such as the New York Stock Exchange and clearing houses that help people invest and manage risk across asset classes.

GreenTrees tops the list of reforestation program operators in the United States by credit issuance. It’s wholly owned by ACRE Investment Management LLC.

ICE Nature-Based Carbon Credits Trading

The deal with GreenTrees promotes ICE’s expertise in the space of carbon trading.

Last May, ICE created its first nature-based futures contract called NBS future. It trades under the contract code NBT that delivers verified carbon unit (VCU) credits.

ICE NBT futures have several certifications. These include Verra VCS Agriculture, and Forestry and Other Land Use (AFOLU) Projects. It also has certifications from the Climate Community and Biodiversity (CCB) Standard.

An entity can generate NBS carbon credits via different schemes like planting trees or protecting forests.

ICE has a 10-year history in doing carbon auctions. In fact, it has conducted carbon allowance auctions on behalf of the UK Government since 2012.

ICE has operated environmental markets for about 20 years, offering customers access to the largest markets in the world.

Over this period, ICE traded:

100+ billion tons of carbon allowances,
250+ million renewable energy certificates, and
about 3 billion carbon credits that’s equal to ~1.4 billion Renewable Identification Numbers.

Last year, ICE traded almost $1 trillion in the notional value of carbon allowances. This corresponds to more than half the estimated global annual energy emissions.

ICE’s Managing Director of Utility Markets Gordon Bennett commented that:

“Leveraging our long history in environmental markets and our global customer base… our goal for the carbon credit auctions is to bring price discovery and transparency to the primary market… This allows buyers to invest in high quality carbon credits from leading carbon credit project developers.”

One of those project developers that ICE refers to is the GreenTrees. And their deal allows ICE to host auctions of voluntary carbon market credits for the first time. It involves half a million sales from GreenTrees reforestation credits.

GreenTrees Reforestation Program

As per Manager and Co-Founder of GreenTrees, Chandler Van Voorhis,

“Forestation is nature’s technology for removing carbon and represents the most viable, scalable, cost-effective means for answering climate change now and in the future… GreenTrees is the only carbon removal project that is open to small, medium and large landowners, covering acres from as low as 7 acres, up to 3,500 acres.”

GreenTrees’ approach enables landowners to enjoy carbon income in the earlier years.

The design of its approach not only gets the forest up fast but also trains the slower-growing hardwoods to grow up and straight. This, in turn, produces more valuable timber that one day will deliver long-term asset value.

By partnering with GreenTrees to plant forests, measure the carbon they capture, and sell the credits, landowners get an extra revenue stream. It also gives landowners a way to protect their land while contributing to restoring a vital ecosystem that can fight climate change.

According to Van Voorhis, GreenTrees can now connect one of the largest global networks of companies to landowners with ICE hosting the auctions of their reforestation carbon credits.

Each auction will give 250,000 Emission Reduction Tons (ERTs) from GreenTrees’ reforestation projects. The American Carbon Registry (ACR) will issue those ERTs.

Each ERT represents one metric tonne of CO2 removed from the atmosphere.

The trading powerhouse believes that firms will increasingly invest in emissions reductions and removals. And as demand rises for these assets, price risk management will also become more important.

ICE aims to host two carbon credit auctions for GreenTrees in the 4th quarter this year.

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The real value of the voluntary carbon market is now around $2 billion, with rising price trends of ~170 types of carbon credits as per a recent Ecosystem Marketplace (EM) report.

EM, a Forest Trends initiative, has been tracking and reporting on the state of the VCM since 2006.

Their latest briefing reveals that the current VCM is almost $2 billion. And about 500 million carbon credits were traded in the same year, surpassing the previous EM report by 66%.

Also, global prices are climbing upwards by 60% more in 2021 ($4.0) than in 2020 ($2.5).

Lastly, EM stated that there are over 170 types of carbon credits falling under 8 categories traded in 2020-2021.

Global Voluntary Carbon Market Value and Prices

The future of voluntary carbon markets (VCM) looked brighter as more interests and investments poured into carbon projects. Plus, global climate and sustainability goals are driving record high demand.

The previous partial year report of EM indicated that VCM value is about $1 billion. But its recent and final brief stated that the real market value is nearly $2 billion.

The chart shows the VCM size by value of traded carbon credits from pre-2005 to year-ended 2021. The market’s total or cumulative value reaches $8 billion.

Likewise, global carbon credit prices are also trending upwards.

The annual global average price per ton went up from $2.5 in 2020 to $4.0 in 2021. That represents about a 60% increase to a point never seen since 2013.

Among the eight categories of carbon credits, prices for projects with non-carbon benefits are higher.

Non-carbon benefits refer to the co-benefits that a certain project provides. Examples are local community support and biodiversity conservation.

Alongside sustainable development goals, the co-benefits are either integrated from the outset into carbon standards or bolted onto carbon credit projects with validated GHG emission reductions/removals.

In particular, projects under Gold Standard (one of the major carbon standards) saw a 35% increase in price from 2020 ($3.7) to 2021 ($5.0).

Plan Vivo also recorded a higher price increase of 15% for the same period. The bulk of its transaction volume, 79%, was from projects under the category of Forestry and Land Use (Afforestation, Reforestation, and Revegetation or ARR).

The most common co-benefits certification standard in use today is the CCB (Climate, Community, & Biodiversity) Standards. It’s an add-on for Verified Carbon Standard (VCS) carbon credits that also jumped in volume by 277%.

The table below shows the overall VCM transaction volumes, prices, and values by category, comparing 2020 and 2021 results.

Types and Categories of Project-Specific Carbon Credits

As the VCM matures, more and more participants – project developers, investors, buyers, regulators, etc. – are shaping how the market works. They give different attributes and definitions to project-specific carbon credits.

As such, EM tried to simplify things by giving an official Project ID for traded carbon credits data. This is important so that those attributes would be verifiable through the carbon standard that issues the credits.

The Forest Trends initiative also updated its Carbon Offset Project Typology in Q1 of 2022. These updates allowed EM to expand its list of project types, covering 170+ projects.

All project types are then rolled up into 60 project clusters and narrowed down even further into 8 project categories.

The image illustrates EM’s 8 categories with specific examples of projects.

Another remarkable result reported by EM is that project specificity in trade reporting goes with higher voluntary carbon market value and prices.

It means carbon credits that were cross-referenced with carbon standards’ registries have higher prices than those that were not. Cross-referencing involves providing project-specific metrics for the credits like project name or ID.

Most interestingly, the report suggested that the VCM prefers to buy and sell carbon credits via bilateral deals between project developers and end buyers the most .

That only shows that there are growing opportunities for project developers to respond to corporate requests for proposals.

But in the past years, intermediaries and digital spot trading exchanges began to re-emerge into the VCM.

Futures exchanges (e.g. CME Group) are working with spot exchanges (e.g. CTX and ACX) to develop standardized contracts pegged to specific project attributes.

As more players and money are flooding the voluntary carbon market, its value seems to grow even more.

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