The Price of Pollution

Decoding Carbon Credits

Pollution is arguably the biggest problem humanity has at hand. We produce 2.12 billion tonnes of waste every year, and our small planet simply cannot keep up. Global Warming due to excess greenhouse gases is an ever-looming threat and can be seen in effect, melting the icecaps and the average global temperature rising every year.

Ever since the Akali Act of 1863, we have seen hundreds, if not thousands, of air pollution legislations, but rarely have they created an entire market the way Carbon Credits have ever since they were introduced with the Kyoto Protocol in 1997.

What Are Carbon Credits?

Carbon credits are tradable permits or certificates that represent the right to emit one metric ton (1,000 kg) of carbon dioxide (CO₂) or its equivalent in other greenhouse gases (GHGs). These credits are often part of a "cap-and-trade" system. A government or regulatory body sets a cap on the total emissions allowed for certain industries. Companies receive a limited number of credits. If a company emits less than its allowance, it can sell its extra credits to businesses that have exceeded their limits. This creates a financial incentive to invest in cleaner technologies. Credits can also be generated by projects that actively reduce emissions, such as renewable energy farms or reforestation efforts.

There are mainly 3 Types of Carbon Credits - Removal, Avoidance, and Reduction credits. Avoidance credits represent emissions prevented through clean energy or efficiency projects, Reduction credits reflect a measurable decrease in existing emissions, such as through improved industrial processes, and Removal credits involve extracting carbon dioxide from the atmosphere via methods like afforestation or direct air capture. While avoidance and reduction prevent future emissions, removal actively reduces atmospheric Carbon Dioxide.

Carbon Credit Markets

Carbon markets are of 2 types - Compliance Markets, which are part of the aforementioned Cap and Trade Systems, and Voluntary Markets. 

Compliance markets are regulated by governments where Carbon Credits help to meet legal emission reduction targets. Regulatory bodies set caps on the total amount of greenhouse gas emissions by entities ( like factories, power plants, airlines, etc.) Then each entity is allocated or can purchase a specific amount of carbon credits. If they emit less than their allowance, then they can sell their excess credits to others, but if they emit more, then they must buy credits or pay significant financial penalties. Some compliance markets are the EU ETS (European Union Emission Trading System), UK ETS ( Post Brexit), China’s National ETS, Korea’s K-ETS, and many more. The total value of major compliance carbon markets is somewhere around USD $850 billion.

Voluntary Markets, unlike compliance markets, are not mandated and regulated by governments but rather driven by choice. Individuals, corporations, or organizations voluntarily purchase carbon credits to offset their own emissions, demonstrate corporate social responsibility, or meet internal sustainability goals. The price of credits in voluntary markets is determined by supply and demand, and the market often prioritizes projects with additional co-benefits like biodiversity preservation or community development. Voluntary Carbon markets can help offset unavoidable emissions (especially hard-to-decarbonize sectors like aviation). The Voluntary Market is much smaller than the compliance market for obvious reasons. The global voluntary carbon credit market size was estimated at USD $4.04 billion in 2024 and is projected to reach USD $23.99 billion by 2030.

Mechanisms Of Carbon Credit Generation and Trade

Carbon Credits are generated by undertaking projects that reduce, remove, and avoid Greenhouse gas emissions. This project may involve techniques like renewable energy installations (like wind or solar), reforestation, methane capture from landfills, or advanced technologies like direct air carbon capture. A suitable methodology is then selected, which outlines how emissions reductions will be calculated, the baseline scenario, and how results will be monitored and reported. These methodologies are defined by recognized standards such as Verra (VCS), Gold Standard, or the Clean Development Mechanism (CDM). Once the methodology is selected, the project undergoes validation by an independent third party (known as a Designated Operational Entity or DOE) to ensure feasibility and compliance. Projects are then registered with a certified carbon registry and are verified by auditors. Once verified, the registry issues Carbon Credits.

Once carbon credits are generated and issued, they can be bought, sold, or retired through different market channels. Carbon Credits can be traded directly by project developers or with the help of Carbon Brokers. This secondary market includes spot trading, futures contracts, and over-the-counter (OTC) deals. Several specialized platforms and exchanges now support carbon credit transactions, including Air Carbon Exchange and Xpansiv CBL. These markets play a crucial role in determining the price and liquidity of carbon credits globally.

Criticisms of Carbon Credits

Despite being hailed as a great step towards environmentalism, Carbon Credits are not all good. The main argument against Carbon credits lies in the Transformation of environmental responsibility into a commodity that can be bought and sold. Corporations can ignore all environmental concerns and dodge any real consequences by buying carbon credits. It can be argued that if carbon goals can be met through buying carbon credits, then there are no problems, but all environmental concerns can’t be extinguished through carbon credits. If we take an example of a factory in Delhi polluting the air and harming the local population, and then offsetting it by buying carbon credits produced by afforestation in Haryana, is that really an equitable exchange?

Other criticisms of carbon credits focus on the reliability and fairness of offset projects, particularly in the forestry and land-use sectors. One major concern is the overestimation of emission reductions, where project developers may use unrealistic baselines or insufficient monitoring to claim greater carbon savings than actually achieved.

Future

As the world gets a better grasp of carbon credits and they grow in prevalence, I believe carbon credits can be a double-edged sword.  On one hand, carbon credits seem to have bridged the gap between business and environmentalism through a new form of trade that primarily benefits the earth. On the other hand, Carbon credits can also become something that allows corporations to buy their way out of environmental responsibility; either way, the growth of the carbon credit market is very much certain. As this market expands, regulation, transparency, and accountability will be crucial to ensure its climate integrity. High-quality credits must represent real, measurable, and additional emission reductions or removals. Corporations must view offsets as a supplement to, not a substitute for, reducing their own emissions.

To conclude with a thought-provoking question - Carbon Credits can be bought and sold freely, but what is the real Price of Pollution?

Author: Ayushman Roy 

Illustration: Soham Seth