The role of carbon mitigation and removal credits
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The role of carbon mitigation and removal credits

Published Tue Aug 30 2022

Introduction

In this article we introduce topics related to mitigation (or avoidance) and removal-type carbon credits, and the role that each has to play in the Voluntary Carbon Market (VCM) as a tool to fight climate change.

An emerging narrative within the space is that removal-type carbon credits are ‘better’ than mitigation credits. Here, we explore this topic, and aim to understand whether things can be as simple as ‘better’ and ‘worse’, or if the conversation is more nuanced than this.

To explore this topic, this article takes into consideration the following factors:

  • The role of different types of carbon credits within the market;
  • Carbon project costs and feasibility of acquiring carbon credits;
  • Carbon credit integrity.

The basics

Carbon credits are used to help organizations or individuals who wish to offset their unavoidable carbon emissions by supporting high-impact carbon projects across the globe. Carbon credits should be used as part of the carbon mitigation hierarchy, which prioritizes emissions reductions and mitigation of one’s own footprint prior to taking compensatory measures such as using carbon credits to ‘offset’ emissions.

A carbon credit is a certificate representing one tonne of carbon dioxide equivalent that is either:

  • prevented from being emitted into the atmosphere (these are avoidance or reduction-type credits); or
  • removed from the atmosphere as the result of a carbon-reduction project (these are removal-type credits).

Note that some projects include aspects of both of the above, i.e. they integrate technologies that both mitigate and remove greenhouse gasses.

The term ‘credit’ is used because the organization or individual who pays for the impact delivered by the project (split into discrete units of 1 tonne of CO2 equivalence) is credited with the impact of the funding. The purchaser of the carbon credit doesn’t do the ‘work’; rather, they pay for it.

Importantly, they can only be credited for the funding when the carbon credit is ‘retired’ (or offset). Retirement simply means that the carbon credit can no longer be transacted to any other end-consumer, and the beneficiary of that credit is entered into a ledger that assigns their contribution to the project, this information cannot be changed once the retirement has happened.

This process of retiring on behalf of a beneficiary is important for the integrity of the market because it removes the risk of a ‘double-spend’, meaning that the credit itself cannot be credited to more than one individual or organization.

The types of carbon credits that can be created, acquired, and retired on the market are diverse. Important criteria include:

  • Standard: there are different carbon standards that issue carbon credits, including Verra, Gold Standard, American Carbon Registry, and Climate Action Reserve.
  • Technology: carbon credits can be issued from projects using a range of mitigation and removal technologies; from renewable energy and energy efficiency projects, to nature restoration and Carbon Capture and Storage.
  • Spot and forward: carbon credits that have already had a carbon impact and been issued can be purchased on the ‘spot’ market, or forward carbon for projects that have not yet had an impact but are committed toward a future achievement can be purchased.

For an overview of common offset project types, see our article Introducing KLIMA, Leveraging the Supply of Carbon.

In addition, there are a number of different reasons why an organization or an individual may choose to select a certain type of carbon credit to offset:

  • Price: they may be price sensitive and require lower-cost carbon credits that still give them assurances around the integrity of the carbon credit they use to offset their emissions.
  • Values: they may be pursuing carbon neutrality and want to offset their residual carbon footprint with credits that perhaps best correspond to the source of their carbon emissions (such as protecting rainforest for a net importer of timber materials) or their values (such as delivering co-benefits to specific community groups or regions that may be part of their supply chain).
  • Climate impact: they may be pursuing a carbon negative strategy that explicitly aims to have a net negative carbon impact by using both mitigation credits to achieve neutrality and removal offsets to draw down carbon from the atmosphere.
  • Availability (supply): although certain preferences for carbon credits may be held, they may not be fulfilled due to the poor liquidity and fragmentation of the market.

In the below graphic, we illustrate the different types of carbon credits, with the common technology types that can be used to create them.

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Carbon credit integrity

In order for a carbon credit to be issued and used to deliver against a robust carbon strategy, it must be able to demonstrate that the emissions reduction it enables is real, measurable, permanent, additional, independently verified, and unique (see our About carbon offsets page for more on this).

Carbon projects using more mature technologies, established measurement, reporting and verification approaches, and that are issued through leading carbon standards such as those endorsed by the International Carbon Reduction & Offset Alliance (ICROA) are able to confidently justify that issued carbon credits surpass these criteria.

With more novel carbon project types, market commentators suggest that there is still some work to be done to understand and remediate uncertainties around the criteria. For example, Sylvera recently spoke to clients about afforestation, reforestation, and revegetation (ARR) credits which are one of the more commonly available types of credit that enables carbon removals.

In their research, Sylvera noted some key takeaways regarding the integrity of these carbon credits, including the following:

  • Many ARR projects still stuffer from imprecise georeferenced boundaries, which inhibits tracking of carbon stock growth; these projects can suffer from additionality issues.
  • High quality ARR projects are expensive, which can limit their development and uptake in the market, meaning lower-quality projects with more risks to their integrity remain most available in the market.
  • Importantly, they noted that planting trees is not a climate panacea and removals “are not inherently better than avoidance credits”.

It is clear that carbon removals represent a growing area of the industry, with a number of start-ups moving in to contribute new methodologies and approaches that fall both inside and outside the main carbon standards. There is little doubt that a number of these solutions will (and must) demonstrate themselves and be able to scale – however, for the time being significant work is required for carbon removals such as ARR to build up the integrity that would enable them to have wide adoption within the VCM.

Cost and supply

Availability and cost form key decision criteria when purchasing carbon credits of any type: constraints around supply and availability can reduce the ability to acquire preferred credits; whereas high costs can both incentivize internal reduction and mitigation activities but also reduce the feasibility of taking compensatory measures using carbon credits if the entity looking to compensate is price sensitive.

When it comes to supply, today there is a significant availability of mitigation carbon credits, whereas the availability of removal-type credits is significantly lower. According to Trove Research, on the Verra and Gold Standard registries – the two most widely used carbon standards – there is roughly 17 times more availability for carbon mitigation-type credits when compared with nature restoration (which contains primarily carbon removal credits), with 461 million tonnes outstanding compared with 29 million tonnes, respectively. As of today, there has been no issuances of high-tech removal solutions such as Carbon Capture Usage and Storage on the Verra and Gold Standard registries.

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In addition to their availability, high-integrity mitigation credits issued by the leading carbon standards typically trade at a lower wholesale premium than the nature-based solutions ($15.10/unit) across all major carbon standards. The average wholesale prices per unit for renewables ($4.20/unit), energy efficiency ($5.20/unit), and fuel switching ($10.20/unit) are roughly 50% to 300% lower (data provided by Allied Offsets). When it comes to experimental carbon removal technologies that are still undergoing research and development and have limited scale, the costs can be orders of magnitude higher than other solutions.

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Ultimately, cost and supply will remain key variables that influence the decision making of anyone looking to use carbon credits as a means to compensate for their carbon footprint. Given that demand for carbon credits is anticipated to scale-up fifteen-fold over the next decade, and that there is increasing interest in removal credits, significant growth of carbon removal project issuances will be required to fulfill market needs moving forwards.

Cost and supply: a case study example with Ethereum’s carbon footprint

The aspiration to offset the historical emissions of the Ethereum blockchain offers an opportunity for the Web3 community to demonstrate climate leadership to compensate for the significant historical carbon footprint of the network’s Proof of Work consensus mechanism. Estimates for the historical emissions are not exact given uncertainties around the location of mining activity and limited analysis of Ethereum’s embodied carbon footprint, but a useful benchmark for the network’s power consumption is 17,500,000 tonnes CO2e according to Kyle McDonald.

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There are a range of strategies that could be implemented to offset the historical footprint of Ethereum. One such approach could focus on using renewable energy carbon credits with vintage years (i.e. the year that credit was created) corresponding to the carbon impact of the network across those years to ‘offset’ the specific carbon impact derived from Proof of Work’s electricity consumption.

To practically offset the carbon emissions of Ethereum using carbon credits that have already been issued (i.e. without incurring risks associated with forward carbon agreements), up to 1/10th of the remaining supply from Verra or Gold Standard could be required – this is theoretically possible but, from a practical standpoint, sourcing such a large amount of credits from the available liquidity in the VCM may be challenging. Sourcing the necessary carbon credits to offset Ethereum using existing ICROA-endorsed carbon removal projects would likely not be possible today.

Ultimately, a diverse approach must therefore be applied for sourcing and retiring carbon credits to offset significant sources of demand such as Ethereum. This is not only the most feasible approach for a market beset with poor liquidity, but also the approach that will maximize benefits across the breadth of available carbon mitigation and removal projects across the globe – and thus the local communities that these projects are adjacent to.

The big picture: delivering on global carbon targets

When we consider the big picture of our global carbon emissions, we can understand that a diverse set of solutions are required to close the emissions gap. The burning of fossil fuels and deforestation together contribute 73% of global greenhouse gas emissions. Given that our emissions trajectory in the next 10 years will largely determine the feasibility of achieving our mid-century carbon targets, leveraging funding from avoidance-type offsetting to protect forests and fund renewables projects could bring us within striking distance of halting global warming below 2 degrees above pre-industrial levels by focussing on key areas of pollution.

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Decarbonizing energy systems is one of the priority areas for governments across the globe, but only a handful of European countries are actually achieving a decoupling of GDP growth and carbon emissions.

At the global level, the carbon emissions from energy generation continue to grow. Without immediate action to abate emissions from this section, it will be challenging for any solution to scale sufficiently quickly to remove historical and current carbon emissions before the mid-century carbon targets established by the Paris Climate Accord.

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The good news is that, given the nature of renewable energy, its capital costs and lifetime operational costs are typically significantly lower than fossil fuel counterparts. Once the scales tip against fossil fuels and sufficient infrastructure is deployed that enables the scaling of renewables, deep and rapid decarbonization of our energy system can be achieved. The incentives created by carbon credits can, and have been, an important proponent of ushering in a modernized and electrified energy system in many developing countries across the world; this can help us ‘flatten the curve’ of runaway global emissions.

The COVID-19 pandemic was a visceral reminder of the importance of taking early action to ‘flatten the curve’ and mitigate the social and economic impacts of detrimental anthropogenic phenomena, while simultaneously giving us time and space to develop solutions that could eradicate the threat (through vaccines and antibiotics in the case of COVID-19). This two-pronged approach of mitigating risks while working to remove the threat of a given phenomena is equally relevant for climate change. However, within the context of the climate the time horizon is decadal in scope, and incremental impacts of global warming have to date reduced the perceived urgency of taking immediate action at scale.

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The reality is that there is no silver bullet for the social, economic, and environmental issues that we find ourselves navigating as a society. A portfolio of approaches is required when considering complex public policy challenges, and this is particularly true for climate change; we will not be able to avoid the worst risks of global warming without removing carbon from our atmosphere, but it is improbable that carbon removals alone will be able to do 'enough' unless we abate our current carbon emissions trajectory.

The role of KlimaDAO within the on-chain carbon market

KlimaDAO’s position is that the VCM is a critical means of financing high-impact, high-integrity carbon projects across the globe. Supporting these projects can meaningfully enable us to close the emissions gap and move within touching distance of our global carbon targets.

KlimaDAO facilitates the on-chain carbon market, and by doing so enables users of this market to access clear and transparent data around the state of the market, in turn enabling them to make informed decisions around the carbon credits that are used for retirements. Retiring high-impact carbon credits is now easier than ever before using KlimaDAO’s permissionless retirement aggregator.

While KlimaDAO is not itself an arbiter of quality, it remains committed to supporting the integrity of the market – to date, KlimaDAO has only accepted Verra carbon credits into its treasury and aligns with ICROA’s endorsed standard for voluntary carbon credits, which determines that included projects have surpassed strict criteria associated with measurability, permanence, additionality, and third-party verification.

Moving forwards, KlimaDAO aims to scale up the types of carbon credit that are held on the blockchain. So far, the initial pool of primarily mitigation credits within the BCT pool has been diversified to include the C3 NBO pool and Moss’s MCO2 pool. In addition, C3 has announced the intention to deliver its Afforestation, Reforestation-based Offset (ARBO) pool to increase the availability of removal-type credits.

It is clear that, just as mitigation and removal strategies are both necessary pieces of the puzzle, a diversity of carbon credit types will be required to help preserve and foster climate stability. KlimaDAO is putting in place the on-chain infrastructure to support this diversity in the years to come.




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