How Does Carbon Offsetting Work?
When entities, like companies or individuals, want to reduce their carbon footprint, they should first minimize their own carbon emissions. There eventually comes a technological cap on how much an entity can reduce its carbon footprint, however, it’s challenging to become a net-zero emitter of carbon emissions. The next step after that is to pay other companies enough to incentivize them to reduce their carbon footprint or capture carbon from the air. The additionality concept is critical in the carbon credits scheme - the money paid for the credits needs to drive change towards environmentally friendly practices - and it should be clear that without this money, the positive change would not have happened.
For example, an air travel company should first implement every emission-reducing improvement to their planes to minimize emissions. Still, it’s impossible with today's technology for the air travel company to have zero emissions. They can then pay farmers to change from conventional farming practices to sustainable farming practices, also known as regenerative farming, and build organic carbon levels in the soils.
What’s also important is that there would be no leakage with the change. For example, in farming, we shouldn’t just encourage farmers to plant trees everywhere because that would reduce yields, which would simply mean that we will cut down forests elsewhere to achieve those yields that the population needs.
Another fundamental concept is permanence - any positive change must be permanent - meaning, for example, with soil carbon, the farmer shouldn’t be able to destroy the soil to release the carbon back into the air. To protect against unforeseen consequences, a 5-20% permanence pool from the credits generated is created to cover any force majeure or fraud events. Permanence pool size depends on the risk level and acts as insurance against permanence issues.
2020 was also the first year ever where more credits were retired than generated. Major companies in the world are currently buying up carbon credits at lower prices and retiring them in the future because it’s expected the prices will rise. The credit prices have been increasing each year, now reaching around $20, and is expected to rise to around $35-100 by 2030.
Why is it important?
Sustainable development goals is a big thing now, and a lot of big corporations want to make sure that they follow the SDG.
The Sustainable Development Goals (SDGs), also known as the Global Goals, were adopted by the United Nations in 2015 as a universal call to action to end poverty, protect the planet, and ensure that by 2030 all people enjoy peace and prosperity.
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