Explainer: What you should know about carbon credits

In the face of escalating climate change impacts and the growing demand for businesses to reduce their carbon footprints, interest in carbon credits is growing.

The Kyoto Protocol of 1997 and the Paris Agreement of 2015 were international pacts that laid out international CO2 emissions goals. Carbon dioxide is a greenhouse gas that captures and retains heat close to earth and is responsible for roughly 80 per cent of global warming.

While the Kyoto Protocol required only developed countries to reduce emissions, the latter recognised that climate change is a shared problem and called on all countries to set emission targets.

Under the Paris Agreement, countries are requested to submit new or updated Nationally Determined Contributions (NDC) every five years, starting in 2020. According to Climate Watch, a platform that captures data on countries climate progress, Kenya emits about 70 million tonnes of CO2 per year.

At the opening ceremony of the inaugural Africa Climate summit currently ongoing at the Kenyatta International Convention Centre (KICC), President Ruto said that carbon sinks were an unparalleled economic goldmine.

“The restoration and expansion of Africa's natural carbon sinks are not just an environmental imperative; they are an unparalleled economic goldmine. They have the potential to absorb millions of tons of CO2 annually which should translate into billions of dollars, improved livelihoods,” he said.

As President Ruto steers the discourse around carbon credits, last week, more than 500 civil society organisations implored him to steer the conference away from carbon markets and other strategies that they perceive as “false solutions.”

These groups argue that such approaches are predominantly driven by Western interests. They urged Dr Ruto to consider alternative solutions such as climate justice, reparations, adaptation and mitigation finance that are more inclusive and sustainable.

And despite the ongoing discussions and debates surrounding carbon credits, there remains a significant lack of understanding about what they are. Here is what you need to know:

• What are carbon credits?

Carbon credits are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases. One tradeable carbon credit equals one tonne of carbon dioxide, or the equivalent amount of a different greenhouse gas reduced, sequestered, or avoided.

Carbon credits can be bought by countries as part of their NDC strategy, by corporations with sustainability targets, and by private individuals that want to compensate for their carbon footprint. Within this framework, companies are allocated carbon credits, which diminish over time. If they have a surplus, they have the option to trade it with other companies. Companies like Tesla have sold carbon credits to other car manufacturers.

• How do they work?

Carbon credits are generated by projects carrying out emissions reduction or removal outside a country’s boundary. These credits are transferred to be accounted for within the boundary, often – but not always – by financial purchase through a market. Carbon credits are most often created through agricultural or forestry practices, although a credit can be made by nearly any project that reduces, avoids, destroys, or captures emissions.

• How do companies use carbon credits?

By paying someone else to either reduce their emissions or capture their carbon, companies can compensate for their environmental footprint and even, in the most ambitious cases, use carbon credits to get to carbon-neutral status.

There are three basic types of carbon credits: those from reduced emissions, removed emissions (carbon capture and planting forests), and avoided emissions (for example refraining from cutting down rainforests).

• What is the relationship between carbon credits and carbon markets?

Carbon markets are trading schemes that create financial incentives for activities that reduce or remove greenhouse gas emissions. In these schemes, emissions are quantified into carbon credits that can be bought and sold.

• What is a carbon market place?

The carbon marketplace is where carbon credits and offsets are bought and sold. It functions as a platform for individuals, companies, and governments to purchase credits or offsets to compensate for their own emissions.

• Why are carbon markets and carbon credits controversial?

Quarters of climate scientists, experts and civil societies argue that carbon credits do nothing to mitigate global heating and some were also linked to human rights abuses, including forced relocations and killings of environmental defenders.

Other carbon offset projects in the unregulated carbon market have been found to be fraudulent and exploitative. Further, they are opaque and lacks standardisation.