A carbon credit is a reduction in emissions of carbon dioxide (or other damaging greenhouse gases) created through climate-positive projects and intended to compensate for (or credit) carbon dioxide emitted through planet-warming human activities. Credits are measured in tonnes of carbon dioxide-equivalent; meaning that one tonne of carbon credit is equivalent to the reduction of one tonne of carbon dioxide (or other climate-warming greenhouse gases).
Carbon credits are either compliant or voluntary. The EU for example, is a compliance market. As such, Emission Trading Scheme companies, governments or other entities buy carbon credits in order to comply with mandatory, legally binding caps on the amount of CO2 they are allowed to release each year (or face fines or other legal penalties).
Within the voluntary market, the demand for carbon credits comes from individuals, companies and sub-national governments alike, who purchase carbon credits in order to mitigate their emissions of CO2 (or other nefarious greenhouse gases). The voluntary market has been growing rapidly over the past few years, and as of 2021, is on track for an annual market value record of $1B+, that's a whole-market increase in value of 60% from last year. The market for carbon credits is huge and growing; it could be worth $50B by 2030, according to latest research outlined by McKinsey.
The voluntary carbon market is particularly important because it provides the vital private financing many projects require (such as projects to protect biodiversity, pollution prevention/reduction, public health improvements, amongst others), and mobilises capital towards innovation that would produce efficiencies and lower the cost of emerging climate technologies.
Given the importance of the voluntary market, it is still in its nascent stages of development and is currently highly fragmented and complex, with many players and doubts over accuracy of real-world carbon reduction. The lack of verification of data, transparent pricing and offset tracing beyond purchase are the key issues facing the voluntary market. The latter requires a robust, secure and transparent foundation from which to thrive if it is to support climate transformation in a meaningful, verifiable way.
Whilst many steps have been taken to track carbon credits, such as through independent certification programs, this approach still lacks accuracy and transparency, because there exists no single method of standardization. We are addressing this lack of standardization, transparency and trust through the technological advantages of the blockchain.
