By Dr Olufunso Somorin, Regional Principal Officer for Climate Change and Green Growth, at the African Development Bank
Carbon credit has been fronted as an important tool in the reduction of greenhouse gases emissions especially by countries and industries.
What is carbon credit?
This is a concept that emerged during the Kyoto Protocol discussions in 1997, with the objective to manage/reduce carbon dioxide and other greenhouse gas emissions that occur due to industrial activities, which are responsible for climate change. A carbon credit refers to a tradeable permit that gives the owner the right to emit a specific amount of carbon dioxide or other greenhouse gases. One carbon credit allows for the emission of one ton of carbon dioxide, or the equivalent in other greenhouse gases. Both companies and nations are allotted a certain number of credits, which they can trade to help balance total world emissions. Carbon credit schemes usually fall under two main categories. Those under the compliance market (Clean Development Mechanism (CDM) and those under the Voluntary Carbon Market (VCM).
Why the need for carbon credits? (Answered in Q1)
To address global warming, the 2018 Intergovernmental Panel on Climate Change (IPCCC) report set a target for the world to reduce GHG emissions to 45% below 2010 levels by 2030 and to net zero by 2050. Carbon credits provide a platform for high emitting countries and companies to decarbonize as they enable the support for efforts and actions that reduce the amount of greenhouse gases in the atmosphere around the globe.
Why do the carbon prices keep changing?
Carbon credits are traded on both private and public markets and the price is majorly driven by supply and demand dynamics in the market. Due to the disparity in supply and demand in different countries, prices of carbon credits tend to fluctuate.
Are there other alternatives to carbon- credit?
As the objective of carbon credits is to reduce emissions to address climate change, alternatives do exist that enable emission reduction, such as pursuing a low carbon development pathway. Both governments and private sector can invest in emission reduction projects such as shifting to renewable energy sources of electricity in place of use of fossil fuels, improved energy efficiency, climate smart agricultural practices and afforestation. These actions are effective and contribute to reduction of greenhouse gas emissions, which is the same objective that carbon credits seek to achieve.
Another alternative to carbon credits is an innovative financing mechanism by the African Development Bank (AfDB), called the Adaptation Benefits Mechanism (ABM), which focuses on adaptation action, which is Africa’s greatest need. The continent contributes the least to greenhouse has emissions (about 3% of global emissions), yet suffers the greatest brunt of the effects of climate change. To enable flow of resources and action to address adaptation efforts for Africa, the Adaptation Benefits Mechanism’s aim is to mobilize new and additional financing from the public and private sectors, so as to enhance climate adaptation action. The ABM will certify the social, economic and environmental benefits of adaptation action, whose value will then be captured in the issued certificates.
What are the limitations/challenges associated with carbon credit?
As carbon credits enable companies to offset their emissions, there has been increasing concerns that participating companies are not as active in making efforts to reduce emissions as they are aware that they can offset their emissions through projects, rather than address the root cause of the emissions.
It is difficult to determine the true impact of carbon credits due to double counting. This refers to a situation where two or more companies or countries purchase carbon credits from the same project and then respectively report emission reduction efforts, giving the impression that emissions have been reduced more than they actually have.
Majority of the large-scale mitigation projects are still going to high income countries and by-passing African countries, who could greatly benefit from climate action resources that result from carbon trading.