Carbon Credits Explained
Emissions of greenhouse gases (GHGs) have been a worldwide concern for several years. Based on models from the Intergovernmental Panel on Climate Change (IPCC) and other reported data, GHG emission reductions are needed to limit global warming to less than 2.0 degrees Celsius (preferably less than 1.5°C) compared to pre-industrial levels. The goal is to achieve a climate neutral/net zero CO2 emissions world by 2050.
The Paris Agreement entered into force in 2016 legally binds the country signees to reduce GHG emissions in support of the goal to limit the maximum global temperature to less than or equal to 2.0°C. At this time, the U.S. is not a part of the Paris Agreement, but it is expected that the Biden administration will re-enter the agreement in the near future.
For the GHG gas, methane, the IPCC estimates a decrease of approximately 35% below 2010 levels by 2050 to meet the 1.5°C temperature target.
In the coming years, the U.S. is expected to implement requirements to reduce GHGs. Also, capital markets and shareholders of publicly traded companies are already requiring reports on how companies will reduce GHG emissions in the future. These actions will affect every part of the U.S. economy.
Two ways that government entities (national, regional, states, local) can cause reductions include:
- Cap and Trade System – includes compliance and voluntary systems
- Carbon Price/Tax
A carbon price/tax can take the form of a tax on fossil fuels at the source of generation (e.g., wellhead). In a simplified form, this might be a dollar amount per ton of carbon dioxide released from burning of the fossil fuel (e.g., $ per kilogram carbon dioxide generated by the specific fossil fuel burned). Reference: EPA Greenhouse Gases Equivalencies Calculator. Other tax options include a tax on GHGs emitted by individual facilities.
This blog topic considers a Cap and Trade System and specifically discusses Carbon Credits.
In a Cap and Trade System, a limit, known as an “cap” is placed on GHG emissions. Then, with time, the cap is reduced. Companies or sectors of the economy may have an annual cap or GHG allowance imposed on their emissions. The company would then only emit the amount allocated by the allowance. If the company cannot meet the allowance, then it must reduce its GHG emissions or can buy GHG emission offsets also referred to as Carbon Credits.
The trade part is the market that allows companies to buy and sell carbon credits. Companies that can reduce their GHG emissions more economically can trade allowances or carbon credits to companies that emit more, or “bank” them for future use.
Compliance markets would be used to comply with regulatory requirements.
Voluntary markets give companies the opportunity to reduce GHG emissions to demonstrate they improve their Environmental, Social, Governance (ESG) metrics/disclosures.
Using a Cap and Trade system gives companies flexibility in how to cost-effectively reduce GHG emissions. This can increase the amount of available capital to make reductions and can encourage companies to reduce GHG emissions sooner. Innovation is rewarded in such systems. Also, as the Cap is reduced, more reductions and innovations will be needed.
Carbon credits are trade-able commodities that represent the prevention of one metric ton of carbon dioxide equivalent (CO2e) of GHG such as carbon dioxide and/or methane.
Types of Carbon Credits
Two types of credits include:
- Voluntary emissions reduction (VER): carbon credits that are traded in the over-the-counter or voluntary market for credits.
- Certified emissions reduction (CER): carbon credits generated through a regulatory system to offset a project’s GHG emissions.
A difference between the two is that a third-party certifying body will regulate the CER.
Carbon Credit Development
Steps in the development of a carbon credit project include:
- GHG Reduction Plan approval – process description, GHG emissions reduced, GHG reduction method, additionality test
- Baseline GHG emissions measurement and determination
- Project verification/certification
- Continuous monitoring plan to maintain credits
- Annual performance data submittal
Many carbon credit developers aim to have projects approved that can be replicated across many facilities. This reduces the cost for verification of the initial and ongoing carbon credits.
Most carbon markets require the GHG reduction project for carbon credits to meet the additionality test.
GHG reductions are additional if they would not have been generated in the absence of a carbon credit offset market. A project would be additional if it results in lower GHG emissions than would have otherwise occurred under normal business practices. If the reductions would have happened anyway, that is without any potential for the owners to sell the carbon credits, then they are not additional.
For example, the following would not meet additionality:
- Required by a law, rule or regulation – such as NSPS OOOO/OOOOa requiring control of storage tank venting.
- Part of normal operations – oil and gas operator cannot take credit for recovering separator gas for injection into sales pipeline.
Carbon Credit Standards
Carbon credit project developers use Standards to develop/certify carbon credits for the voluntary and compliance markets. Each Standard sets the procedure on how carbon credits will be allocated to project to reduce GHGs.
Some private Standards include:
Carbon Credits Markets
Carbon credit sellers include:
Mandatory Markets include:
- The Regional Greenhouse Gas Initiative (RGGI) is a mandatory market-based program in the US to reduce GHG emissions from the power sector. RGGI includes the states of CT, DE, ME, MD, MA, NH, NJ, NY, RI, VT, VA
- California Cap-and-Trade Program
- EU Emissions Trading System (EU ETS)
Cap and Trade Systems are viable ways that countries may implement in the near future to reduce GHG emissions. Cap and Trade Systems differ from a carbon tax. A carbon tax on fossil fuels seeks to reduce burning fossil fuels by making the increased cost a disincentive.
A Cap and Trade System uses market forces, associated cost benefits and a shrinking “Cap” to reduce GHG emissions. Market forces include reducing emissions at lowest cost per unit of GHG reduced, trading of credits by end users and encouraging ingenuity. In addition, it must be noted that Cap and Trade Systems only include GHG reductions that meet the additionality test (i.e., reductions that rely on the carbon credit market for development).
Cimarron – Who We Are
Cimarron’s vision is to work with our clients to create a cleaner environment.
The company engineers and manufactures environmental, production and process equipment for the upstream, midstream and downstream energy industries, as well as environmental control solutions for biogas at wastewater facilities, digester tanks and landfills.
Cimarron offers our customers the know-how and environmental expertise to meet the environmental standards of today and tomorrow. Cimarron is committed to bring value to the Energy industry and their shareholders based on our financial strength, experienced personnel, and engineering capabilities.
As a company, we thrive every day to make a difference through innovation (e.g. ESG), customer focus, and operational efficiency. In addition to being present in all major regions in the US, Cimarron serves more than 45 countries around the world, ranging from offshore to desert. From key operational centers in the United States, Italy and the United Arab Emirates, Cimarron offers ongoing service and support through its own field service personnel and strategic third-party partners, creating a cleaner environment for our customers and their shareholders.
Since its founding in the mid-1970’s in Oklahoma, the company’s product offering has expanded from production equipment to include the largest line of environmental solutions that capture or incinerate fugitive vapors. With the acquisitions of HY-BON/EDI in 2019 and AEREON (including Jordan Technologies) in 2020, Cimarron has added strong brands, products, and services to its portfolio.
By Brian Boyer, Environmental Advisor for Cimarron