Carbon credits

A carbon credit represents a measurable and verifiable removal, reduction, or avoidance of greenhouse gas (GHG) emissions - a tonne of CO2 equivalent that is not in the Earth's atmosphere.

It makes a difference whether or not emissions are being drawn down from the atmosphere—commonly referred to as carbon removal—or if the flow of emissions into the atmosphere is being reduced or avoided. The classification into removal vs. reduction/avoidance credits is a good example of the diversity of carbon credits and form the core of carbon accounting and reporting best practices.

But within these broad categories, many more differentiating criteria dictate the price carbon projects can expect to get for their credits. A few important ones are:

• Project type. Different approaches to reducing greenhouse gases in the atmosphere are more or less effective - techniques like reforestation, protecting forests from deforestation, renewable energy projects (solar, wind, hydro), methane capture, soil carbon, or carbon capture and storage (CCS) projects.

• Country. Project costs are higher in some countries than others, plus credits from some countries may be perceived as higher-quality than from other countries.

• Carbon standard. Some standards are more rigorous than others or demand additional data points to be collected during project monitoring and verification.

• Co-benefits. Some projects seek additional certification from standards like the Climate, Community and Biodiversity Standards (CCB Standards), which certifies additional benefits like an increase in biodiversity or specific Sustainable Development Goals (SDGs).

The unique attributes tied to a carbon project results in credits being traded and sold like differentiated products (e.g. wine) rather than like commodities (e.g. corn or rice). Subsequently, the majority of carbon transactions happen over-the-counter (OTC) and behind closed doors, meaning credit prices remain unknown to the broader market. This makes it hard for end customers to know whether or not they are paying a fair price and which percentage of the money lands in the hands of the initial project developer.

Toucan Carbon Pools allow for some level of commoditization by pooling similar carbon tokens. This is necessary to produce a transparent price signal to the market for different categories of carbon credits. These standardized carbon tokens can be traded on DEXs (decentralized exchanges) with much deeper liquidity than a single project's credits ever could.