Chapter 1 - Carbon Credit Principles

1.01 Carbon Credits Intro (13 min.) Sample Lesson
1.02 What is a Carbon Credit (18 min.)

Chapter 2 - Credit Development Process

2.01 Credit Development Process Intro (11 min.)
2.02 Registration (5 min.)
2.03 Validation (2 min.)
2.04 Monitoring (2 min.)
2.05 Quantification (6 min.)
2.06 Verification (6 min.)
2.07 Issuance (3 min.) Quiz: 2.07 Issuance

Chapter 3 - Carbon Markets

3.01 Voluntary and Compliance Markets (7 min.)
3.02 Supply and Demand (14 min.)
3.03 Compliance Markets (16 min.) Quiz: 3.03 Compliance Markets

Chapter 4 - Carbon Capture & Storage

4.01 Carbon Capture & Storage Intro (5 min.)
4.02 Credit Generation Pathways (16 min.)
4.03 Challenges with CCS (14 min.)

Carbon Credits: Financial Incentive to Reduce Emissions / Chapter 1 - Carbon Credit Principles

Lesson 1.01 Carbon Credits Intro

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Transcript

01. Lesson 1.01:Carbon Credits Intro 02. Assumptions 03. Framing Climate Change 04. Role of Carbon Credits 05. Mitigation Hierarchy 06. Definitions 07. Compliance Markets 08. Voluntary Markets 09. Market Participants

01. Lesson 1.01: Carbon Credits Intro

Hello. My name is Amy Zell and I'm here in the SAGA studios recording this course. I'm very excited to be speaking to you about carbon, my absolute favorite topic. We're going to be covering some really interesting info and I am excited that you're along for the ride.

02. Assumptions

Before we get too far, like a good engineer, I am going to state my assumptions. First, we are assuming that is real and is being accelerated by humans. Second, many jurisdictions around the world have put a price on carbon. We're not here to debate these facts. We're not here to have a conversation about climate change. Rather, I want to help you understand how to use carbon pricing frameworks to your advantage and make money for reducing your emissions.

03. Framing Climate Change

That said, I do believe framing is important and so I'm referring to the experts. The Intergovernmental Panel on Climate Change released their 6th assessment report and it was pretty dire. Essentially, what they're saying is climate change is being accelerated by all thees we're putting into the atmosphere and we need to act quickly to reduce those emissions. The estimated cost of reducing those emissions is pretty significant. The UNEP is estimating it could be $140 - $300 billion per year by 2030.

04. Role of Carbon Credits

So in this course, we're going to be talking about carbon credits and what they are, what the principles of carbon credits and carbon trading is. So we're going to get into this in detail a little later in this chapter but at a high level, I want you to understand what we're talking about as I'm framing what carbon credits are. So carbon credits are when one company reduces their emissions beyond business as usual and they quantify those emission reductions and they sell the right to claim those emission reductions to another company. So as you can see there, the emission reductions are being transferred to a facility that's still emitting and they're paying for that right. So what's really important is the flow of those dollar signs. The company that reduces is getting paid to reduce those emissions.
The question around carbon credits that always comes up is around greenwashing and so I want to address that right off the bat. First of all, when you're talking about greenwashing, people say, why should this company just get to pay their way out of the problem? And to that, I think it's important to look at what are the alternatives, what would they have done in the absence of buying these credits. And so in a voluntary system, the key word is voluntary, they're not required to do anything. They're not required to reduce their emissions at all. They're choosing to invest in these emission reductions. In a compliant system, again, there is carbon trading, credit trading. The alternative to purchasing a credit is most often writing a check to the government. And as good as those programs are to redistribute those funds, it's not a 1:1 emission reduction. So what we're here, or what I'm here to explain to you is the benefit of carbon trading, because each carbon credit is one real permanent additional tonne of CO₂ that's been reduced or removed from the atmosphere.

05. Mitigation Hierarchy

When we're talking about carbon credits, and particularly in the voluntary market, a term that comes up quite often is the mitigation hierarchy. So it's pretty straightforward, it's what you see on the screen there. Companies should avoid new sources of emissions, reduce what they're already emitting, and then invest in carbon credits or emission reductions that are done outside of their sphere of control. We don't want to see companies just buying carbon credits because, hey look, we do need to reduce our emissions. That's a really important step of this mitigation hierarchy. We understand that, I don't know if any companies can actually operate without any emissions whatsoever, so we do understand that there will be a component of investing, but we do want to see companies doing what they can to reduce emissions first. Research has shown that or studies have shown that companies who are purchasing credits are the ones who have most likely already reduced internally. There's very few companies that are doing absolutely nothing to reduce their footprint and are just buying credits to neutralize their entire footprint. That's often what we're told is greenwashing, but it's not all that common in the industry. That said, as I mentioned, we do want to prioritize avoiding and reducing, but investing in credits has a very important role to play.

06. Definitions

A couple of definitions before we get too far in: carbon neutral and net zero. I'm sure you've heard of these. They're all over the place and you might be asking what do they mean? Carbon neutral is currently defined in the industry and you'll see my little asterisk down there. It's subject to opinion, but it's currently defined as neutralizing your emissions with emission reductions. So as you can see on the left, say 100% of the footprint and the company's reduced 30% of that internal. They might purchase 70% equivalent of their footprint in carbon credits and that would make them carbon neutral.
Net zero is a little different. Net zero is when companies reduce as much as they can internally and they neutralize the remainder of their footprint with removals, carbon removals or removal type carbon credits. This is different than reductions. Reductions are really when you're avoiding new emissions or reducing what was being emitted to the atmosphere. But removals are actually pulling CO₂ out of the atmosphere and that can happen through direct air capture, photosynthesis, think tree growth. And there's some other really interesting removal technologies that are gaining traction, such as biochar or enhanced rock weathering. So the difference really between carbon neutral and net zero is the type of credits you're using to neutralize your footprint.

07. Compliance Markets

When we're talking about carbon markets, there's 2 main types of carbon markets. The first is compliance, which we have on this slide. The next is voluntary, which we have on the following side.
Compliance markets, as you can see from the Carbon Pricing Leadership Coalition, they're expanding. There's about 30 different compliance markets around the world. Up here in Canada, you can see all the different province by province regulations that we have that constitute carbon pricing in Canada. But globally, it's gaining a lot of traction as governments are finding that putting a price on carbon is a very effective way of incentivizing emission reductions.
The most common types of compliance systems are cap and trade or. They are very similar at the end of the day. So cap and trade systems put an overall limit or a cap on the allowable emissions in a jurisdiction for a certain time period. So they might say, we can emit 300 million credits in 2022, something like that. Companies then purchase allowances and each allowance represents 1 tonne of CO₂ equivalent and they need to have enough allowances to neutralize all of their emissions as required by the regulation. There's typically a component of free allowances that are given out to companies. So governments will realize that it would be prohibitively expensive for a company to neutralize their entire footprint. So what they do is they'll get free allowances for a certain amount of that and then companies need to neutralize or purchase allowances to cover the rest. Allowances can typically be traded, hence the cap and trade, but we do also hear of these being called cap and invest systems. It means the same thing, it means you're purchasing or investing in those allowances. If you go over the cap and again this varies based on the jurisdiction, but if you go over the cap, you tend to have to buy very, very expensive allowances from the government. So it's not in your best interest to emit more than the allowances you have purchased.
Carbon tax is similar, in that it's putting a price on carbon. In Canada, most of our provinces would be characterized as a carbon tax or an output based pricing system. Quebec is the exception, they do have a cap and trade system that's linked with California. In the same way that there are free allowances given out in most cap and trade systems, in a carbon tax or an output based pricing system, you typically are not paying for every single tonne of emissions. Governments generally understand that companies need to emit somewhat or some amount in order to operate, but they will recognize that through either a facility specific benchmark or a high performance benchmark. And so that allows you, it recognizes what's a reasonable amount of emissions and you're responsible for what's above that.
Final note I have on that side is that these compliance markets may or may not include emissions trading systems or ETSs. There are cap and trade systems that exist where you can't trade carbon offsets or carbon credits. Similarly, there are some carbon tax systems where there's no trading at all, you're simply paying for your emissions. We're going to talk about that a little bit more later in this course.

08. Voluntary Markets

Voluntary markets are the opposite, I would say, to compliance markets and that this is where companies go to purchase credits if they're not required to do so. It's really difficult to come up with a graphic to show voluntary carbon markets. So what I've put here on the left is a series of, it's certainly not complete, but it's many of the standards or carbon crediting programs in the voluntary market that create the supply of credits into the market. So the global voluntary carbon market is represented by corporates and various participants, credit developers being one, they're going to work with these standards to generate the credits. There's buyers, there's brokers, there's traders, there's marketplaces and exchanges. There's a lot of different participants in the voluntary market. Buyers purchase credits for a variety of reasons. Most commonly, we're seeing purchases being done to achieve a goal, such as becoming carbon neutral or reaching net zero. There's sometimes a lot of pressure from stakeholders or investors to have a certain carbon or emissions profile, which also drives corporate buyers to the voluntary market to make those investments.

09. Market Participants

So as I mentioned, there are many different market participants. This slide I'm going to elaborate on what they each do in the market.
So the standards, so the logos we saw in the previous slide also called carbon crediting programs, they're the ones creating the rules and developing the methodologies. So they're the ones identifying what types of emission reductions projects are eligible to get credits and they sort of act as a governance to make sure that those credits represent real emission reductions.
Project developers are typically consultants who quantify carbon credits. They'll also go through third party verification, they'll move that whole process along.
Retailers and brokers and traders are companies that exist to move the product, the carbon credits, from the project developer to the end buyer. There's often overlap between project developers and retailers and brokers or traders. It makes sense for them to work in the same corporate bubble, but they can be standalone companies as well.
Marketplaces are slightly different. This is where typically a website or a platform will purchase credits from project developers. Then they'll market them and you can go and buy small volumes of credits.
Exchanges is what it sounds like. It's a bit more formal. It's more for the investors. They can go and buy larger volumes of credits and then decide if they want to retire them or use them for a different purpose.
Investors are obviously those who are putting money into these markets.
And buyers are the end users of the credits who would then retire them and make the emissions reductions claim.
So that's it for this lesson. In the next lesson, we're going to discuss characteristics that make up high quality offsets.