What are carbon credits?

carbon credits are an important lever for financing climate protection projects. They are generated in projects that actively remove CO₂ from the atmosphere or reduce greenhouse gas emissions, with each certificate corresponding to one tonne of CO₂ or the equivalent of other greenhouse gases. As a company, you can buy these certificates directly from project developers or via marketplaces as part of the Voluntary Carbon Market (VCM) and thus contribute to your sustainability goals.

It is important to distinguish between the VCM and the compliance market. The VCM enables companies to voluntarily invest in climate projects, offset their unavoidable emissions and support sustainability goals. The compliance market, on the other hand, is characterized by legal requirements that prescribe the purchase of emission rights to comply with fixed emission limits.

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How are carbon credits generated in agriculture?

Agriculture has considerable potential to combat climate change. Central to this are regenerative agricultural practices that aim to regenerate and build soil health. By using regenerative methods, farmers contribute to the removal of CO₂ from the atmosphere (removals) and reduce emissions on their farms (reductions), which enables them to generate carbon credits. The two types of carbon credits are generated as follows:

‍Removals are generated through the sequestration of carbon in the soil, which is achieved by farmers through the implementation of improved crop rotations and the use of organic fertilizers. In addition, the avoidance of the natural decomposition of organic carbon in the soil is taken into account compared to the baseline scenario.

‍Reductions are the result of the reduction of greenhouse gas emissions in the cultivation of agricultural fields. This is achieved by reducing the use of nitrogen fertilizers, minimizing the use of pesticides and using less intensive soil cultivation.more about carbon credits from regenerative agriculture here.

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Quality criteria for voluntary carbon credits

When selecting climate protection projects, you should pay attention to important quality criteria of the voluntary carbon market in order to assess the effectiveness of the projects. These include

• Additionality: The climate protection projects would not be implemented without the financial support.
• Transparency: The certificates are recorded, described and retired in a public register.
• Permanence: Greenhouse gas reduction or removal is long-term and the risk of re-release is minimal.
• No double counting: The certificate is only issued and retired once.
• No double claiming: Only a single claiming of a certificate is permitted, whereby no combination of country and company claims is possible.
• Carbon leakage prevention: Risk management prevents the reduction or removal of greenhouse gases in the project from leading to increased emissions elsewhere.
• Verification by a third party: The certificates are verified by an external certification authority.

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The advantages of nature-based climate protection projects

We want you to know that nature-based projects are a sensible and effective investment. Nature-based solutions can deliver a third of the greenhouse gas reductions needed to keep global warming below 2°C by 2030, while protecting our ecosystems. The majority of companies are choosing to invest in nature-based climate protection projects, which is why they account for more than 80% of announced investments in climate protection projects in 2021-2025:

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Nature-based solutions already offer scalable approaches to removing CO₂ from the atmosphere that are much more cost-effective to implement than technological solutions for storing CO₂, which are still in the development stage. While the permanence of carbon sequestration is not at the same level as with technological approaches, nature-based solutions provide important co-benefits: they protect and restore natural ecosystems, promote air and water quality and biodiversity. A study by BCG and the Environmental Defense Fund shows that more experienced buyers of carbon credits in particular prefer nature-based projects. In addition to the greenhouse gas effect, respondents to the study emphasized the co-benefits for nature and society as an important quality feature of climate protection projects.

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Carbon offsetting: between criticism and change

An integrated voluntary carbon market can play a key role in channeling financial flows from the private sector into climate protection. Currently, financing for climate protection projects falls well short of the required level. The responsible use of carbon credits can significantly advance the global transition to net zero emissions and make a major contribution to achieving the goals of the Paris Agreement.

However, carbon credits offsetting through the purchase of carbon credits in 2023 was increasingly criticized. Research by DIE ZEIT and The Guardian at the beginning of the year brought to light the inefficiency of numerous Verra-verified forest protection projects and raised the question of whether forest protection projects meet the criterion of additionality. The reports have shaken up the VCM - and set it in motion towards more transparency and quality.

The practice of companies using carbon credits to offset their emissions and thus advertise climate neutrality had already been criticized before these publications. In particular, if climate neutrality claims using offsetting measures are not clearly labeled as such, they can mislead consumers. In response, the EU is tightening the guidelines for the use of terms such as "climate neutral" in connection with carbon offsetting. More and more companies are moving away from offsetting claims altogether and are instead referring to a financial contribution to climate protection projects: so-called contribution claims.

Some critics accuse companies of shirking their responsibility for reducing their own emissions by buying carbon credits. Some certificates are still very cheap, so there is a risk that it is more attractive to offset emissions than to change your own climate-damaging business practices. However, the criticism seems less justified. A recent study shows that companies that invest in carbon credits are on average reduce their emissions 1.8 times faster than companies that do not.

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Outlook: Scaling the voluntary carbon market

It can be said that 2023 marked a year of rethinking in the voluntary carbon market. Public criticism caused demand for carbon credits to fall by 15-20% - less than many expected - and triggered a clear trend towards greater quality and transparency. Companies are increasingly willing to to pay a higher price for the quality of certificates. In addition, buyers are increasingly deciding to invest in a diversified portfolio of projects in order to balance the various advantages and disadvantages - of nature-based or technology-based approaches, reduction or removal projects, regional projects or projects located in the global South.

Despite all the justified criticism, market participants agree that, in addition to reducing their own emissions, there is a need to invest in climate protection projects outside their own supply chain. The current investment volume in carbon credits on the VCM is only a third of the volume required to achieve the climate targets agreed by 2030. According to Trove's research, a further 90 billion dollars in capital is needed to achieve the required volume of certificates.

Industry initiatives such as the Integrity Council for the Voluntary Carbon Market(ICVCM) and the Voluntary Carbon Markets Integrity Initiative(VCMI) are helping to achieve the necessary transparency and quality in the VCM that we need. We are particularly hopeful that the various initiatives that play a role in the various phases of corporate decarbonization are increasingly working together and want to harmonize their requirements, including the Greenhouse Gas Protocol and the Science Based Target Initiative, on the basis of which many companies calculate their carbon footprints and define climate targets. Some standards are still in draft form and we are monitoring their development.

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Investing in climate protection and soil health in the region

Wait until all standards are finalized? Not a good solution, we think. The need for financing for climate protection projects is high and time is running out. By investing in high-quality climate protection projects, your company can set a positive example to increase customer loyalty, gain a strong competitive advantage and create a positive impact on society.

If you are interested in a regional project that you can see on site, Klim's regenerative agriculture projects might be just the thing for you. We support farmers in integrating regenerative measures on their farms to protect humanity's most important resource: our soil. Regenerative agriculture projects go beyond reducing and removing CO₂ by making soils healthier and more resilient and promoting biodiversity. You can purchase verified carbon credits directly from us: Ask for more information here.