What are Carbon Credits: Benefits for Investors and Organizations

A Path to Saving the Planet

Our beautiful earth is slowly depleting due to most of the activities we carry out on it daily. How so? Well, these human activities lead to the excess production of carbon dioxide and greenhouse gas (GHG) emissions which leave major consequences on our environment and global climate.

In a bid to control these activities and caution against our reckless emission of carbon into the atmosphere, an effective approach was developed. It is called carbon credits.

Utilizing carbon credits is one such tactic that aids in allocating financing for sustainability projects that reduce the overall quantity of carbon in the atmosphere.

In this article, we are going to look at:

• What carbon credits are and how they work.
• How Investors and Organizations benefit from it, and
• How Blockchain technology can improve it.

Let’s dive right in.

What Are Carbon Credits?

Carbon credits also known as carbon offsets are financial that is issued by governments or other entities to reward businesses and organizations that reduce their emissions. They enable businesses to offset their carbon footprint, assisting them in achieving the objectives of the Paris Agreement.

The removal or prevention of 1 metric ton of carbon dioxide from the atmosphere through an emission reduction scheme results in the creation of a carbon credit.

How do Carbon Credits Work?

While organizations, people, and countries must make every effort to move toward a net-zero future, this transition cannot be made quickly.

Fossil fuels, which provide energy that is polluting and emits greenhouse gases, are still used to generate electricity in a large portion of the world. The power source for a large portion of the transportation industry is still petroleum.

Carbon credits offer a remedy that can lessen the current effects of these emissions on climate change.

When carbon credits are bought, the money is used to fund initiatives designed to lower emissions and remove carbon from the atmosphere.

Following that, project developers can sell carbon credits to finance current or upcoming carbon offset projects. The projects that generate carbon credits aim to minimize greenhouse gas emissions while also focusing on waste reduction, methane capture, and energy efficiency.

Any project that reaches these objectives and lowers carbon emissions by a ton can start producing and trading carbon credits.

Carbon credits: How Investors and Organizations benefit from it

Recent years have seen an increase in interest in carbon-related investment funds that profit from economies switching away from fossil fuels.

According to the Wall Street Journal, carbon-credit trading funds have been among the best-performing investments in the commodities sector over the past years.

The number of participants trading both the European and North American carbon markets has increased by 85% in 2020 compared to 2017, according to Intercontinental Exchange, which runs both the European and American emissions trading markets.

Also, according to Statista the value of the global carbon market soared 164 percent in 2021 to a record high of 760 billion euros.

Corporations are permitted to produce emissions up to a specific level by using carbon credits, which are either purchased by companies or given away free of charge by governments.

Companies can exchange their unused carbon credits with other businesses that might require higher amounts if they don’t use their allowance. For instance, Tesla claimed that it sold carbon credits worth US$354 million in the second quarter of 2021.

Additionally, trading carbon credits is fairly popular, and not just among enterprises. In a manner akin to trading physical commodities, some investors may deal in carbon credits. with no desire to obtain the underlying but rather to profit from price changes and to settle their position before the delivery date.

Will blockchain improve carbon credits?

The issue with carbon credits is that they are frequently not transparent; their source of renewable energy cannot always be confirmed, and they don’t necessarily correspond to actual advantages like lower pollution levels or better health outcomes.

On top of this is that carbon credits are overpriced.

But thanks to blockchain technology, these problems are solved in the following ways:

1. With the use of blockchain technology, a new system might be developed where investors are more concerned with the quality of the products than with the price they would receive when selling them.
2. Additionally, it can be used to support the development of a new carbon credit market that is simple and practical for both companies and investors. It will be simpler for buyers and sellers to locate one another online, increasing the likelihood that they will meet in person and complete deals directly rather than going via a middleman like eBay or Craigslist. This might result in fewer fraudulent claims and less time being wasted on deals that weren’t profitable enough to warrant further investigation.
3. Investing in carbon credits should be a safe investment since blockchain technology has the potential to change the sector by reducing prices and boosting security.
4. Additionally, blockchain technology aims to address these issues by developing a system that gives each participant in the process access to precise information about how their actions affect the environment. Anyone can also view the precise amount of carbon that has been bought and sold through this system.

Closing Thoughts

It could be argued that by allowing another company to pollute more than its allotted amount, the advantage of one company reducing emissions is diminished (through trading carbon credits).

There is a case to be made, nevertheless, that this adds to the incentive to minimize pollution

They will suffer financial consequences if they go over the cap, but they can boost revenue if they stay below it. It also indicates that developing, cleaner industries won’t need government assistance during both their development and operation periods but rather can be funded by dirty organizations.

Companies will need to look into greener options more as the cost of polluting rises along with the price of carbon credits.

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