Understanding Carbon Credits: A Solution for Carbon Emissions
The effects of climate change are not only limited to unusual weather patterns but have also given rise to new economic concepts. One such concept is the carbon credits market, which allows companies and countries to offset their carbon dioxide (CO₂) emissions. In this new ecological market, developing countries have emerged as unexpected beneficiaries. These countries, with lower industrial development, are comparatively less polluting. Some of these countries have vast subtropical forests, making them attractive to developed countries who want to exploit their natural CO₂ absorption capabilities, turning them into a gold mine for billionaire investors.
What are Carbon Credits?
Carbon offsets, also known as carbon credits, are an international instrument that allows companies and countries to compensate for the more challenging-to-eliminate CO₂ emissions. Even if a company optimizes its production processes, uses clean energy, and minimizes emissions in the supply chain, there will always be a small margin of CO₂ emissions that need to be offset by purchasing carbon credits.
Each carbon credit represents one ton of CO₂ emissions, which are then compensated through actions and investments elsewhere in the world to capture and process that ton of emissions.
CO₂ has a price, and it's not related to the climate. The term "carbon credit" is not a coincidence, as these credits have a price set in different global markets, much like currencies. The higher the price of these credits, the more companies have to pay to offset their emissions.
However, there is no global regulatory standard for setting prices, and even the interested company can set them. The average price is around $9.87 per credit. According to the World Bank, the global carbon pricing mechanism has raised nearly $100 billion in 2023. "Carbon pricing can be an effective way to incorporate the costs of climate change into economic decision-making, thus incentivizing climate action," said Jennifer Sara, Global Director for Climate Change at the World Bank.
Not all carbon credits are equal. The concept of additionality is a relevant factor in determining the value of a carbon credit. This principle, introduced by the Gold Standard in the Paris Agreement, states that the value of a credit increases when the investment made in that offset activity would not be possible without support.
Renewable energy projects, such as solar or wind power, have low-value carbon credits. Generating energy through solar or wind power is more cost-effective than using gas or fossil fuels, so the development of these technologies is not necessarily linked to carbon processing but to energy profitability. The same cannot be said for forest or jungle protection, where this investment is crucial and, therefore, their credits have a higher market value.
Forests as Natural Carbon Sinks
In recent years, companies that capture CO₂ from the atmosphere, store it, and process it to promote tree regeneration in other parts of the world or under the seabed have proliferated. This is known as carbon sequestration or cross-border carbon export.
However, it is much simpler and more efficient to process CO₂ naturally by allowing trees and plants to capture it and eliminate it through photosynthesis. This is why forests are highly valued for carbon credits and bring more benefits to the emitting territory by protecting the forest mass. According to the United Nations, a single tree can capture up to 150 kilograms of carbon dioxide per year. It is estimated that the world's forests store around 296 gigatons of carbon in both surface and underground biomass.
Opportunities for Developing Countries
The issuance of carbon credits presents an opportunity for countries without significant industrial potential but with abundant forest resources. These credits can attract foreign investment, which, unlike mining or other extractive investments, is based on the conservation and expansion of natural spaces.
Therefore, the larger the forest area, the greater the capacity to import processed CO₂ emissions and the higher the foreign investment in the form of carbon credits.
The Ecological Boom in the Congo
Recently, Bloomberg reported on the investment that CO₂ capture company dClimate, backed by billionaire Mark Cuban, plans to make in the Democratic Republic of Congo. The agreement involves paying the country a fee for the rights to sequester 100 million tons of CO₂ or the equivalent in about 500,000 hectares of peatlands and forests. In return, the company will pay $1 billion to the Congolese state.
The company will monitor the land to demonstrate that deforestation in that area is being avoided and will sell the generated credits in the open market at a price ranging from $7 to $10, making a profit of 10% to 20%. In simple terms, this means paying to fertilize and preserve Congolese forests.
"We will choose this particular area and make these payments dependent on preserving and continuing to preserve that area over the next decade," said dClimate co-founder Siddhartha Jha in an interview with Bloomberg.
Envy Among Neighboring Countries
The deal secured by the Democratic Republic of Congo has been met with envy in neighboring Gabon, as their credits do not reach the same value. The reason for this is additionality.
The World Bank estimates that the forests in the Congo capture 822 million tons of greenhouse gases each year, but without the investment obtained from carbon credits, their forest mass and peatland areas would be lost. In contrast, Gabon has a powerful tropical timber industry, so, as with wind energy, there are other interests in the conservation of these forests besides carbon credits.