Carbon Credits: The Momentum of an Expanding Market

The climate urgency has placed greenhouse gas emissions reduction at the forefront of concerns. In this context, the carbon credit market is experiencing rapid growth, becoming a cornerstone in the fight against climate change.

The carbon market is an economic system established to combat climate change by regulating and reducing greenhouse gas (GHG) emissions. The fundamental principle of this market revolves around the reduction of GHG emissions by assigning economic value to carbon emissions. Companies or individuals can use carbon markets to offset their greenhouse gas emissions by purchasing carbon credits from entities that remove or reduce GHG emissions.

There are approximately thirty regulated carbon markets worldwide, with the European Union (EU) being the first to establish such a market.

I. What is a carbon credit?

Originally, the carbon credit system was introduced in 2005 by the European Union to measure, monitor, and reduce emissions from sectors emitting greenhouse gases (GHGs).

In practice, the carbon market operates as follows: emission credits are granted for sequestering or avoiding 1 ton of carbon. One carbon credit is equivalent to 1 ton of CO2.

Other GHGs are also considered in this system, such as carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride.

Mandatory vs. Voluntary

An important distinction lies in the nature of carbon credits: mandatory or voluntary. Mandatory carbon credits are linked to government regulations and are necessary to comply with legally imposed emissions limits.

Governments set emission caps for each industry and allocate a certain number of carbon credits to them. If a company emits less than the set cap, it can sell its unused carbon credits to another company in need of offsetting excess emissions. This financial incentive encourages businesses to reduce their emissions and invest in cleaner technologies.

On the other hand, voluntary carbon credits are often associated with private initiatives or companies wishing to offset their excess emissions voluntarily. For example, a company not subject to mandatory carbon market regulations may voluntarily engage in a climate strategy. These voluntary carbon credits are used to strengthen sustainability commitments, even beyond legal requirements.

Credits vs. Offsets

Another crucial distinction is between carbon credits and offsets. Carbon credits are generated by greenhouse gas emissions reduction projects. These projects can include tree planting, renewable energy implementation, or energy efficiency improvements. Carbon credits are then traded on markets, allowing companies to offset their own emissions.

Offsets, on the other hand, are often used to neutralize inevitable emissions that a company cannot immediately reduce. It is a common practice to achieve carbon neutrality. Companies invest in offset projects, such as tropical forest conservation or carbon capture, to balance their net emissions.

II. How Does the Carbon Credit System Work?

How are carbon credits purchased?

The exchange of emission allowances can be done through:

• Dedicated financial markets.

• Directly by the emitter or through intermediaries.

• Over-the-counter (OTC) trading.

Who Can Sell Carbon Credits?

• Industrial Companies: Industrial companies emitting greenhouse gases (GHGs) are often major players in the carbon market. They initially receive emission allowances based on their emission history or criteria set by the government. If they emit less than their allocated cap, they can sell surplus carbon credits.

• Energy Producers: Energy producers, such as power plants, can also sell carbon allowances if they successfully reduce emissions below their allocations. However, they may also be required to purchase carbon credits if they exceed their quotas.

• Government Entities: In some cap-and-trade systems, government entities may also be allowed to sell carbon credits. This depends on how regulations have been designed.

• Emission Reduction Projects: Besides companies and industrial entities, emission reduction projects can generate carbon credits that can be sold in the market. For example, a reforestation or renewable energy project can generate carbon credits that the project developer can sell to companies looking to offset their emissions.

What Is the Price of a Carbon Credit?

The price of a carbon credit varies from one project to another. It can range from a few cents to around fifty euros. Its price depends on several factors:

• Project cost, which encompasses all actions necessary for project implementation.

• Certification costs, which vary among different standards; the audits assessing project impacts have a significant cost.

• Intermediation costs, which include all costs added by intermediaries who aggregate projects, give them value, and ensure their quality through a data reporting system.

Note that prices can also vary depending on location, certification type, activity type, and co-benefits.

III. Analysis of the Carbon Credit Market in Asia

Asia has emerged as a major player in the global carbon credit market in recent years, thanks to national initiatives aimed at promoting greenhouse gas (GHG) emissions reduction and carbon offsetting. Among Asian countries that have taken significant steps in this direction are China, South Korea, Japan, and more recently, Thailand.

In 2021, China launched its national carbon market, becoming the world's largest carbon market in terms of covered emissions. This initiative is part of China's efforts to curb its polluting emissions as it ranks as the world's top emitter of GHGs. China is also making substantial investments in renewable energy and has committed to achieving carbon neutrality by 2060. These developments have significantly boosted the demand for carbon credits in the Asian market.

South Korea and Japan have also developed their own carbon markets to encourage emissions reduction. These countries have implemented cap-and-trade systems, incentivizing businesses to invest in cleaner technologies and reduce their GHG emissions.

More recently, Thailand joined this trend by launching its first carbon market called FTIX, through the establishment of the Thailand Voluntary Emission Reduction Program (T-VER) developed by the Thailand Greenhouse Gas Management Organization (TGO). This marks a significant step toward Thailand's goal of achieving carbon neutrality by 2050 and combating climate change. FTIX is operated by the Federation of Thai Industries (FTI), representing approximately 12,000 private companies across 45 sectors. This platform enables businesses and government agencies to buy and sell carbon credits while monitoring their emissions through an online dashboard.

Under the T-VER project, carbon credit trading has continued to grow, increasing from THB0.85 million at the project's inception in 2016 to THB146.7 million as of July 2022. The total trading volume of carbon credits reached 1.92 million tons of carbon dioxide equivalent (tCO2e), with an average carbon credit price of THB76.35 per ton.

However, compared to Thailand's 2021 greenhouse gas emissions of 257.77 million tCO2e, the volume of carbon credit trading under the T-VER project remains relatively low, accounting for just 0.1% of total greenhouse gas emissions in 2021.