Welcome to AC Mindset’s Carbon Investing Primer, where we seek to educate about the principles behind carbon markets. To start, we’re defining the types of credits that can drive the transition to a low-carbon, resilient future while potentially earning attractive returns.
Carbon Credits
Carbon credits are based on avoidance, reduction, or removal of greenhouse gasses (GHGs). and typically represent one metric ton of carbon dioxide equivalent (CO2e) emissions. Credits are often traded for compliance reasons in markets where government regulations require companies to track and meet carbon footprint targets or in voluntary markets where companies and organizations voluntarily purchase credits to offset emissions from day-to-day activities. The concept of carbon credits and carbon markets have existed for decades but are now poised for significant growth as the general public and policy makers become more mindful of climate change and as technological solutions have enabled more accurate measurement and tracking of emissions.
Carbon Offsets vs Carbon Insets
Carbon offsets involve investing in external projects to offset carbon footprints while carbon insets focus on emission reduction measures within a company’s supply chain. 82% of carbon credits traded today are offsets, but we anticipate insets to gain share as supply chain innovations should reduce a company’s need to purchase offsets over time.
REDD+ Carbon Credits and Regenerative Agriculture
REDD+ (Reducing Emissions from Deforestation and Forest Degradation) is a UN framework that incentivizes forest conservation to combat climate change. The framework helps standardize how forest-related carbon projects are evaluated and how project developers generate and trade carbon credits. REDD+ projects are the most popular source of carbon credits traded in voluntary markets today. Regenerative agriculture, which enables farmers to sequester carbon in farmland soil, is a newer type of carbon project and complements the REDD+ framework for those interested in purchasing carbon credits.
High Quality Carbon Credits and Regenerative Agriculture
Carbon credits have been scrutinized in recent years as concerns regarding quality and true climate impact have arisen. Skepticism primarily stems from concerns over the additionality, accuracy, and permanence of GHG reductions. Critics argue that without stringent verification, transparency, and adherence to high standards, the market for carbon credits risks undermining efforts to combat climate change by providing a false sense of progress.
In response to these challenges, there is a growing emphasis on creating high-quality carbon credits that are rigorously verified and genuinely contribute to a permanent impact on atmospheric GHG levels. GHG reductions and removals from regenerative agriculture can meet these expectations, particularly when coupled with the right technology solutions and legal mechanisms. Regenerative farmers utilize known methods to take carbon from the atmosphere and put it back in the ground, and the tools now exist to ensure this carbon sequestration can be accurately quantified and tracked in perpetuity.
By adopting stringent standards, transparent reporting, and independent verification, the carbon credit market can better support meaningful climate action, and we expect regenerative agriculture will be an important source of credits for the foreseeable future. We look forward to sharing more about carbon credit quality in our next edition of this newsletter, and for further discussion of this topic, please see our Agriculture Capital Carbon webinar. Click the link to request the video.