What Is A Carbon Credit Worth
Since its introduction at the turn of the 21st century, carbon credits have become a buzzword in sustainability. The term was first coined following the landmark Kyoto Protocol. This treaty urged industrialized economies to reduce their greenhouse gas (GHG) emissions below a specific target to curb the dangerous effects of climate change.
Carbon credits are tradeable currency in which businesses buy and sell excess carbon credits to be able to emit carbon dioxide (CO2), the principal GHG, as needed. Any amount of carbon emissions exceeding the number of credits in possession increases climate change risk. Exceed the credit often enough, and the effects might become irreversible.
As a currency, carbon credits are worth something. McKinsey estimates that the global carbon credit market will be upward of USD$50 billion seven years from now, thanks to increased environmental awareness. Here’s everything you need to know about carbon credits and how much you may have to pay.
How Much Is One Credit?
The value of carbon credits is primarily based on the global carbon budget required to keep the yearly temperature increase limited to 1.5oC (34.7oF). According to the World Meteorological Organization, the budget must be equivalent to the natural growth in atmospheric CO2 and the amount the planet and seas absorb.
McKinsey calculates that the global carbon budget between 2016 and 2050 is at 570 gigatons of carbon dioxide (gtCO2). Naturally, as the end goal is to reduce GHG emissions, the budget drops by an increment annually.
The calculations also indicate that the carbon budget for 2030 must be 23 gtCO2 less than in 2022. Assuming the world stays within budget over the next two decades, McKinsey projects it can achieve net-zero emissions by 2050.
Under the current cap-and-trade system, one carbon credit is equivalent to the right to emit one ton of CO2. In simple terms, you’d have to drive from Washington, D.C., to Las Vegas one way to generate that much CO2. Every signatory of the Kyoto Protocol has an Assigned Amount under Annex B, where developed countries have a lower amount than developing countries.
How Much To Pay For One Credit?
The carbon price fluctuates like most currencies and commodities and is dependent on internal and external pricing. Internal pricing refers to the price the carbon trading sector sets via fixed internal carbon fee rates or shadow pricing. Here’s how the two differ:
- The internal carbon fee comes from charging businesses and organizations for emitting GHGs from their activities. It’s a more basic calculation because the rate is usually fixed but generates less accurate results than shadow pricing.
- Shadow pricing refers to the theoretical cost of emissions of an activity. It factors in the potential revenue generated by the activity and subtracts it from the cost of managing it throughout its life cycle.
Meanwhile, external pricing depends on current supply and demand and changes in the political landscape, among other things. The cap-and-trade system (also referred to as emissions trading) is one method. Still, others include carbon taxation and crediting mechanisms. But how do both compare?
- Carbon taxation is as straightforward as it gets: charging businesses and organizations a tax for every ton of CO2 The tax prompts them to switch to more eco-friendly measures to avoid it.
- Suppose a business or organization posts an emission reduction. It can sell its excess credits to another entity via crediting mechanisms. However, a third-party agency must confirm the emission reduction and the credit trade.
Given that so many factors go into determining a carbon credit’s trading price, pinning it to a single figure is impossible. The World Bank’s State and Trends of Carbon Pricing 2022 states that carbon prices currently play between USD$10 and USD$90 per ton of CO2 among major emissions trading markets like the European Union.
Another variable is the type of project carbon trading will be funding. Projects such as tree planting, fuel switching, and biomass charge prices upward of USD$20. The increase in carbon pricing has resulted in increased revenue over the years.
Why Not Just Cut Carbon Entirely?
The swelling carbon revenue may be a cause for celebration had it not been undercut by the rate at which climate change occurs. Many countries continue to exceed their carbon budgets amid the caps. While meteorologists agree that climate change has been happening since the dawn of time, they also agree that human actions have accelerated it.
But as much as businesses and organizations want to cut their carbon, it isn’t possible in some scenarios—at least not yet. For instance, switching their entire fleet of fossil fuel-powered cars for hybrid or fully-electric ones has yet to be cost-effective amid years of impressive advances. Until such a time comes, carbon emissions will be inevitable.
The right to emit CO2 might appear counterproductive for a protocol designed to curb the effects of climate change. But as the status quo stands, businesses and organizations still have to leave a sizable carbon footprint to get anything done. Carbon credits exist to keep their overall emissions in line with the collective effort to prevent the earth from getting any warmer than it already is.