What are carbon credits?

Carbon credits are an important tool for financing climate protection projects. They are generated by projects that actively remove CO₂ from the atmosphere or reduce greenhouse gas emissions, with each credit representing one ton of CO₂ or an equivalent amount of other greenhouse gases. As a company, you can acquire these credits through the voluntary carbon market (VCM), either directly from project developers or via marketplaces, thereby supporting your sustainability goals.

It’s important to distinguish between the VCM and the compliance market. The VCM allows companies to voluntarily invest in climate projects, offset unavoidable emissions, and support sustainability goals. The compliance market, in contrast, is governed by legal requirements that mandate the acquisition of emission allowances to meet specified 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, which are aimed at regenerating and building 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 allows them to generate carbon credits. The two types of carbon credits are generated as follows:

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

‍Reductions are the result of reducing greenhouse gas emissions when cultivating agricultural fields. This is achieved by reducing the use of nitrogen fertilisers, minimising 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 choosing climate protection projects, you should pay attention to important quality criteria of the voluntary carbon market in order to evaluate the effectiveness of the projects. These include:

• Additionality: The climate protection projects would not be implemented without financial support from the credits.
• Transparency: The credits are recorded, described, and retired in a public registry.
• Permanence: The reduction or removal of greenhouse gases is long-term and the risk of a new release is minimal.
• No double counting: The carbon credit is only issued once and closed.
• No double use: Only the one-time use of a carbon credit is allowed, and no combination of country and company requirements is possible.
• Carbon leakage prevention: Risk management prevents the reduction or removal of greenhouse gases in the project from leading to increased emissions elsewhere.
• Third party verification: The credits are verified by an external certification authority.

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The benefits of nature-based climate protection projects

We want you to understand that nature-based projects are a sensible and effective investment. Nature-based solutions could provide one-third of the necessary greenhouse gas reductions by 2030 to keep global warming below 2°C, while also protecting our ecosystems. The majority of companies choose to invest in nature-based climate protection projects, which make up more than 80% of the announced investments in climate protection projects from 2021 to 2025.

Nature-based solutions already provide scalable approaches to removing CO₂ from the atmosphere, which are significantly more cost-effective than technological solutions for CO₂ storage that are still under development. While the permanence of carbon sequestration in nature-based solutions may not be on par with technological approaches, these projects offer valuable co-benefits: they protect and restore natural ecosystems, enhance air and water quality, and support biodiversity. A study by BCG and the Environmental Defense Fund reveals that more experienced buyers of carbon credits particularly favor nature-based projects. In addition to their greenhouse gas impact, survey respondents highlighted the co-benefits for nature and society as an important quality feature of climate protection projects.

CO₂ compensation: Between criticism and change

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

However, the CO₂ compensation resulting from the purchase of carbon credits in 2023 faced increasing criticism. Research from The Times and The Guardian revealed the inefficiency of numerous VERRA-verified forest protection projects, raising concerns about whether the additionality criterion was met. These reports stirred controversy within the voluntary carbon market (VCM) and sparked a push for greater transparency and quality.

The practice of companies using CO₂ credits to offset their emissions and advertising climate neutrality has been criticised even before these publications. Particularly when climate neutrality claims are made using compensatory measures without clear labeling, they can mislead consumers. In response, the EU is tightening guidelines for terms like "climate-neutral" in relation to CO₂ compensation. As a result, more companies are moving away from compensation claims and instead referring to financial contributions to climate protection projects, known as contribution claims.

Some critics accuse companies of evading responsibility for reducing their own emissions by buying carbon credits. Some credits are still very cheap, so there is a risk that it is more attractive to offset emissions than to change your own climate-damaging economy. However, the criticism appears less justified. A recent study shows that companies that invest in carbon credits, on average reduce emissions 1.8 times faster as companies that don't.

Outlook: Scaling the voluntary carbon market

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

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

Industry initiatives such as the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI) help achieve the necessary transparency and quality on the VCM that we need. We are particularly hopeful that the various initiatives that play a role in the various phases of corporate decarbonisation will work together more closely and want to reconcile their requirements, including the Greenhouse Gas Protocol and the Science-Based Target Initiative, on the basis of which many companies calculate their climate balances and define climate goals. Some standards are still being drafted and we are monitoring their development.

Investing in climate protection and soil health in the region

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

If you're interested in a regional project that you can visit in person, Klim's regenerative agriculture projects might be just the right fit for you. We help farmers implement regenerative practices on their farms to protect one of humanity’s most important resources: our soil. These projects not only reduce and remove CO₂ but also improve soil health, enhance resilience, and promote biodiversity. You can purchase verified carbon credits directly from us: Feel free to ask for more information here.