The purchase of high-quality carbon credits is a viable method of assisting in the transition to a carbon-free, low-carbon secure and sustainable world. It can be a bit complicated when it comes to answering what appears to be an easy inquiry “How do I shell out for carbon credits?” What makes an individual carbon credit less expensive the other? Aren’t all carbon credits one ton of carbon dioxide that is that is prevented from entering the atmosphere? We’d like to give some clarity on the way carbon credits will be valued with regard to the many distinctions between projects which issue carbon credits.
First, let’s define value. It is the Natural Capital Protocol provides a the basis for its many aspects:
Value (noun) is the importance or value of something.
Market value: The price of something that is able to be purchased or sold in a particular market.
Price Amount of money that is expected, needed or paid for something (normally needing the presence of market).
Economic value is the importance of, value, or utility of something for people that includes the entire range of market and non-market value. Technically speaking, it is the amount of preferences that individuals have in relation to a certain degree of service or product or service. Values of economics are typically expressed by comparing marginal or incremental changes in the demand for an item or service employing money as the measurement unit (e.g. $/unit).
As markets for environmental protection, such as the voluntary carbon market develop they may be a part of different methods of pricing their assets, such as carbon credits.
Pricing is based on market dynamic:
The market for carbon today is driven by demand and supply regardless of the consequences for the project regarding its long-term viability.
Markets can be extremely efficient in promoting competition and reducing costs of achieving an aim. But what happens if that goal is security for our environment and the provision of access to human rights that are fundamental like food, water education, and good health? In the event that carbon credits are purchased at prices that are lower than the amount needed to sustain the project can mean that projects may cease operation in the communities they help. Additionally, failing to fully consider the true benefit they bring in terms of beyond-carbon benefits for development can lead to an effort to get to the bottom, which means that the most reputable projects may end up being the first ones to be unable to succeed.
Gold Standard believes that organisations as well as individuals have the opportunity to look at the longer-term social and environmental impacts of their investment decisions and evaluate both the cost and the true value of projects’ outcomes.
Pricing is based upon project costs:
A cost-based model considers the cost of implementation for the project. It is employed to ensure the ongoing sustainability of projects. It is the Fairtrade Minimum Pricing Model (Figure 1.) is an illustration of how it works in real life. It calculates a minimum amount which ensures that the costs of projects are paid for, with another “Fairtrade Premium” in addition to which is paid direct to local population to finance activities that will assist them in adapting and becoming more resilient to a changing climate.
Fairtrade Minimum prices for all projects with a fair trade status:
Energy Efficiency Energy Efficiency 8.20EUR/tCO2e + 1 EUR Fairtrade premium
Renewable Energy Renewable Energy 8.10EUR/tCO2e + 1 EUR Fairtrade premium
Forest Management- 13EUR/tCO2e + 1EUR Fairtrade premium
A cost-based model is an important way to ensure sustainability of projects but it does not specifically consider the extra value these projects provide in sustainable development.
Pricing is based upon the value that was of the product:
Although every Gold Standard-certified project plays an important role in the transition to an economy that is low carbon Our projects also extend beyond the carbon reduction. Utilizing a model based on value to determine the price of carbon credits allows us to reflect the complete economic, social, and environmental impact of a project. That means both emission reductions as well as the other benefits to development that could transform lives.
The United States Environmental Protection Agency (EPA) published an update of its report the year 2015 to calculate the total carbon cost to society. Figure 2 summarizes the costs over time, based on different assumptions and risks in climate science. That means for every one tonne of carbon dioxide that released in the atmosphere, you pay between $11 to $212 in environmental damage as well as negative social consequences. According to theory, this impacts should be considered when calculating the cost of carbon credits.
To go further and shine light on the value that goes above carbon-related mitigation Gold Standard commissioned economists to perform a comprehensive assessment of the socio-economic benefits derived through our projects. The result was that projects that adhere to safeguards, involve local stakeholders, and offer the development benefits that go beyond climate change provide shared value in the millions of (US equivalent) dollars. The economic worth from Gold Standard project impacts per tonnes of CO2 can be observed in Figure 3.
Prices on the carbon market reflect certain of these “economic values” principles. For example, the costs of community-based cookstoves that are clean that often provide vital health benefits to children and women typically are more expensive than, for instance large-scale renewable energy projects. However, they eventually succumb to the market forces of supply and demand without any safeguards, such as the requirement for a minimum price. This is the reason why there’s a huge gap between historical average prices of carbon credits in relation to the economic the benefits they bring as shown in Figure 3.
Gold Standard’s holistic standards, Gold Standard for the Global Goals, aims to solve this issue by more precisely quantifying the non-carbon benefits in a uniform and comparable manner. However, in between, we encourage the purchasers of carbon credits to better understand the full scope of value creation facilitated through these initiatives.
There is a growing awareness in the business community about the worth of natural capital, such as a stable climate, healthy ecosystems, and also advancements in social measures such as better wellbeing and gender equity. Particularly in relation to climate change, Swiss retailer Coop has set their internal cost for carbon emission at CHF 150 (roughly USD $150) to increase innovation and invest in the Gold Standard-certified emission reduction initiatives that also benefit communities in their supply chain. Microsoft requires their departments to create the budget line item that represents the costs associated with their carbon emissions. This is then converted into an amount of carbon that they deposit into the carbon investment fund that generates new capital to support sustainable initiatives. This includes internal emission reduction initiatives in addition to funding projects outside of their operation by purchasing carbon credits.
When it comes to deciding which initiative to fund and in what much it’s worth is somewhat like managing the real estate market. There are several various factors to consider, including the quality of the project, its size, type and place of the project. While “value” can be somewhat subjective based on the ideals of your company’s needs and goals, and is dependent on the dynamics of supply and demand. Gold Standard advocates for prices of carbon credits that better reflect the real social costs of carbon as well as the economic value it brings in other impacts, and rely on the potential of markets to provide this service at the lowest cost.
Head on over to the carbon.credit website to learn more.