August 11, 2023

What are carbon credits?

Learn about Carbon Credits and how they are being used to combat climate change.
The Green Standard is written by our team of experts with the mission of simplifying carbon investing for everyone. Start investing with WealthGreen

Carbon Credits: The Golden Ticket? 

Imagine that the Earth is like a big bank, and the air around us is like a giant savings account full of clean air. Every time we drive a car, use electricity made by burning coal, or do things that create pollution, it's like taking some clean air out of that savings account. If we take too much out, we're going to be in trouble because we need clean air to live. Now, let's talk about carbon credits. Think of a carbon credit like a golden ticket that makes up for taking some clean air out of the savings account. This golden ticket represents a promise that someone, somewhere has done something good for the environment that puts clean air back in. For example, planting trees (because trees help clean the air) or making energy without pollution. 

Companies, big and small, use a lot of energy and create a lot of pollution, just like how a bunch of cars make traffic jams. People have realized that if we don't do something about all this pollution, we're going to have a big problem. That's why many countries have come together and made a promise to try and cut down on pollution to protect our Earth. This promise is like a goal to save our big savings account of clean air. 

One of these big promises is called "net-zero." This is like saying, "For every bit of clean air we take out, we're going to put the same amount back in." Companies do this by buying those golden tickets, the carbon credits. So, if a company knows it's going to take some clean air out of our savings account because it has to make things, it can buy a carbon credit that promises trees are being planted or clean energy is being made to put clean air back in. 

So, carbon credits are like a way for companies to help keep the balance in our big savings account of clean air, which is super important for keeping our Earth a nice place to live for everyone.

‍A Market for Environmental Good 

‍Carbon credits are part of a larger, market-based approach to combating climate change. Through various projects that reduce or avoid emissions – such as reforestation or renewable energy initiatives – carbon credits are generated. These credits can be purchased by businesses or individuals to offset their own carbon footprint. Essentially, it’s an exchange – you support environmental projects and in return, you earn the right to claim a reduction in your carbon emissions. 

The demand for carbon credits is being significantly driven by large corporations that are setting net-zero targets in response to consumer and investor pressures for sustainability. These corporations are purchasing carbon credits to offset their emissions as part of their corporate social responsibility and to contribute to global climate change mitigation efforts. We’re talking about the major brands you are most likely familiar with, from McDonalds to Microsoft, and Nike to Louis Vuitton. 

Corporations are recognizing that engaging in the carbon credit market is not only crucial for meeting their own sustainability goals but is also an important aspect of maintaining brand image and investor relations in an increasingly eco-conscious global market. 

Diversity in Carbon Credits 

‍Now, not all carbon credits are created equal. They’re like unique pieces of real estate property, each connected to a specific project with its own story and impact. Some projects not only reduce carbon emissions but also contribute to social development goals such as improving local communities or protecting biodiversity. 

At WealthGreen, we tend to favour those carbon credits that are generated by nature based carbon assets which are initiatives that harness natural ecosystems to absorb and store carbon dioxide from the atmosphere. These natural ecosystems, which we like to call “natural real estate” assets, are vital for biodiversity conservation and essentially all life on earth. These carbon assets range from reforesting trees to restoring mangroves to avoiding deforestation in rainforests and peatlands. 

Additionally, the time when a carbon credit is issued, known as its 'vintage', is an essential factor. Some organizations prefer to match their emissions with credits of the same year, ensuring a timely balance in their environmental account. 

Carbon investing: be part of the solution

For the discerning investor, carbon credits offer a unique opportunity to align financial growth with environmental responsibility. Carbon credits are emerging as an asset class that not only has the potential for financial returns but also the added benefit of supporting sustainability. 

When you invest in carbon credits, you're essentially funding projects that either reduce or remove greenhouse gas emissions from the atmosphere. These projects can range from reforestation (which helps the Earth breathe easier) to actively replacing dirty burning cookstoves (which helps fellow humans breathe easier). This is great for the Earth because it helps fight climate change, and it's great for you because there is a growing demand for carbon credits. The paradigm shift is here: planet and profits can go hand in hand. Investing in carbon credits is a clear example of how the goals of profit and environmental stewardship can be aligned. It’s not just about building wealth, it’s about being a part of the solution.