What is carbon financing?
Carbon finance is a relatively new form of environmental finance. The general term is applied to investments in greenhouse gas emission reduction projects and the creation of financial instruments (carbon credits) that are tradable on the carbon market.
What is carbon offsetting?
Carbon offsetting offers a way to reduce greenhouse gas emissions. It involves a process by which companies in developed countries can earn rewards, in the form of carbon credits, for executing projects that reduce greenhouse gas emissions in developing countries. A portion of these rewards can then be reinvested to make a project sustainable over a 7-21 year period. The most common types of carbon offset projects focus on renewable energy, such as wind farms, biomass energy, or hydroelectric dams. Others include energy efficiency projects, destruction of industrial pollutants or agricultural byproducts, destruction of landfill methane and forestry projects.
How do carbon credits work?
Emission reductions are measured as carbon credits. One carbon credit is created when the equivalent of one metric ton of carbon dioxide, (or, in some markets, carbon dioxide equivalent gases), is prevented from entering the atmosphere. Each carbon credit has a monetary value depending on the type and origin of the emission reduction produced. Carbon credits earned through a carbon offset project can be traded in the marketplace. They are mainly sold to carbon credit buyers that want to reduce their carbon footprint or improve their environmental stewardship.
How are carbon projects validated?
There are two types of carbon offset markets, each issuing specific credits.
- Certified Emission Reductions (CERs) are predominantly for the mandatory compliance market. These are regulated largely under the Kyoto Protocol which exists within the United Nations Framework Convention on Climate Change (UNFCCC).
- Voluntary Emission Reductions (VERs) are generated for the voluntary market. To ensure project integrity, several voluntary offset standards have been developed. The Gold Standard is one of the leading international certification systems for VERs. It only validates renewable and end-use energy efficiency projects that actively promote sustainable development.
What criteria does the Gold Standard use?
The Gold Standard incorporates criteria used by the UNFCCC for Clean Development Mechanism (CDM) carbon offset projects in the compliance market. In CDM projects, a developed country receives carbon credits for sponsoring a greenhouse gas reduction project in a developing country. The project criteria include: emissions reductions compared to the ‘business-as usual;’ no adverse environmental impact; consistency with host country sustainable development strategy; emissions reduction benefits that are real and measurable; and no diversion of official development assistance to finance carbon offset projects.
What is the project process?
The six stages leading to issuance of Gold Standard carbon credits are:
- Planning: Draft a Project Design Document (PDD)
- Design: Revise PDD and detail monitoring methodologies, feasibility, additionality and sustainability
- Validation: Validate project by designated operation entity (DOE)
- Register documents
- Verification: Monitor and report on emissions reductions and sustainable development; receive verification and certification by DOE
- Certification: Review and certification; issuance of carbon credits; certification renewal
