How do carbon credit exchanges verify emissions reductions?

How do carbon credit exchanges verify emissions reductions?

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Carbon credit exchanges verify emissions reductions by ensuring that carbon credits traded on the market meet certain basic specifications. This is necessary because trading carbon credits involves a complex process that requires the approval of a number of players: standards, rating agencies, projects, and brokers. If one of these players isn't up to par, it can lead to a lowering of the quality of a carbon credit and ultimately make its claim to reduced emissions less credible. The current system is also complicated by the fact that trading in the voluntary carbon space takes place over-the-counter, making it difficult for companies interested in buying credits to track high-quality versus low-quality projects. A recent study by Australian National University environmental law professor Andrew Mcintosh suggests that 70 to 80 percent of credits in the voluntary carbon marketplace are illegitimate, having been claimed by companies that didn't cut their own emissions or purchased them from uncertified sources.

In order to be valid, a carbon credit exchange must have an exclusive claim to GHG emissions reductions. This is achieved through project validation, which is done by a group of independent verification bodies. The verification process looks at the project's design, operation, and impacts. Once validated, the project can be registered with a carbon crediting program. Once a project is officially "registered," it can begin producing credits once it begins operations (next step).

Credits can then be transferred between accounts in the crediting programs, where they are held by various brokers and buyers. Buyers may decide to retire credits (use them) immediately or hold on to them until they're needed for their own offset claims. There are several ways to buy carbon credits, but the most common is for a purchaser to sign a contract with a project developer, in which they agree to purchase a specified amount of credits from the project. This is called an Emission Reduction Purchase Agreement or ERPA.

Another way to purchase carbon credits is for a buyer to sponsor a methodology, or set of rules, for a new type of project. This is typically a more resource-intensive approach, but it can be an effective option for companies with a strong interest in a specific project activity.

Lastly, it's also possible for a buyer to work directly with the project developer and invest in the project, in exchange for rights to some portion of the carbon credits the project generates. This approach can reduce overall transaction costs and provide a deeper understanding of a project's strengths and weaknesses.

There are many firms that act as carbon credit brokers, facilitating smaller transactions and selling credits on behalf of other companies, for a fee. Some brokers also develop their own carbon credits, which they can then sell on the voluntary market. This can be helpful for investors who want to support a new type of project but don't have the resources to get involved in the design, funding, and registration processes that are required.