The voluntary carbon market (often shortened to VCM) is an important mechanism for driving money to projects creating a climate-positive impact by reducing or avoiding greenhouse gas (GHG) emissions. Carbon credits are issued by those who certify that climate impact has taken place. People and organizations can then buy them and retire them to claim positive environmental impact. Each carbon credit represents a measurable and verifiable removal, reduction, or avoidance of GHG emissions. These credits are denominated in tCO2e, which means tonne of CO2 equivalent.
Carbon standards govern the methodologies which define how climate impact is created and verified. Every carbon project needs to follow these methodologies to show it meets minimum quality criteria. Once a project’s impact has been verified, standards bodies issue carbon credits to the project. Carbon standards play a key role in ensuring carbon credit quality, and buyers and offsetters value the stamp of approval that standards bodies give to carbon credits.
Currently, Verra and Gold Standard are the two most trusted entities setting carbon standards. Smaller standards bodies issue less than a quarter of the voluntary market carbon credits each year.
To get carbon credits issued, each project needs to follow high-level requirements and processes, and use certain accounting methodologies that describe which data should be monitored. These methodologies vary depending on the carbon credit-generating activity. A project that is protecting forests from deforestation, for example, needs to collect different data than a wetland restoration project. The same applies to technology-based methodologies: projects that focus on capturing methane emitted from coal beds have different data requirements than ones that provide charging infrastructure for electric vehicles. Independent third parties — a list of validation/verification bodies authorized by each standard — assess projects according to set rules and requirements.
Once it’s been verified, a project can be issued carbon credits by the standards body.
Standard bodies maintain their own carbon registries. These hold a list of all the projects that have been issued carbon credits. When a carbon credit is retired, this is shown in the registry.
What are carbon credit retirements?
After a project has proven that it removed or reduced GHG emissions, it receives carbon credits. These credits are issued in an active state because they represent an environmental impact claim.
Most projects don't have connections to companies that want to buy carbon credits to be more sustainable. So they often sell their active credits to intermediaries — brokers, resellers, and retailers. Active carbon credits can pass from one hand to another without losing their active status. But when a buyer wants to use a credit to compensate (or offset) GHG emissions for carbon accounting purposes, their credits need to be retired. After being retired, the carbon credit has fulfilled its duty, and its environmental impact claim is consumed — no one else will be able to claim a carbon removal or reduction with that specific credit.
Important to know: you need to have a registry account to trade active carbon credits off-chain. These accounts can cost ~ $1000 a year.
The registries that standards bodies maintain typically run on centralized databases. These systems track carbon credit ownership and record which credits have been retired. Different registries have different functionalities available to users and project developers.
Even more potential for carbon credits
Our infrastructure isn’t just improving carbon registries, it’s creating a brand-new use case for carbon credits. On open blockchains, they can plug into the world of decentralized finance, or DeFi. We’re working with the best DeFi projects, like Uniswap and Sushiswap, to make sure carbon credits on Toucan can safely benefit from these new financial technologies. You can now buy carbon pool tokens 24/7 anywhere in the world, then redeem and retire them.
Retiring carbon credits
After projects have proven that they've removed or reduced GHG emissions they are issued carbon credits that are in an _active _ state. Because projects generally don't have direct contact with companies who will buy their credits to satisfy sustainability claims, they often sell them to intermediaries—brokers, resellers, and retailers. Active carbon credits can pass from one hand to another without changing their status. But when an end-buyer wants to use the credits to compensate their GHG emissions for carbon accounting purposes, the credits need to be retired. Now the carbon credit has fulfilled its "duty" and nobody else will be able to claim the carbon removal or reduction for their books. A registry account is needed to trade carbon credits in an active state. These accounts can cost $1000 a year in the case of Gold Standard.