What Are Carbon Credits and How do They Work?

What Are Carbon Credits and How do They Work?

Carbon Credits Explained

Carbon credits, also known as carbon offsets or carbon offset credits,  are measurable, verifiable emission reductions from certified climate action projects that reduce, remove or avoid greenhouse gas (GHG) emissions. A carbon credit represents the right to emit one metric ton of carbon dioxide. Carbon credits can either be exchanged in a carbon market voluntarily or as part of a regulatory framework. Essentially, a company purchasing carbon credits is funding projects that remove carbon dioxide from the atmosphere, therefore offsetting the company’s emissions. Many companies are setting net-zero targets, meaning they are offsetting 100% of the carbon they are emitting. An individual can also purchase carbon credits as an investment, selling them later to these companies or other investors to make a profit. LandGate is helping landowners and carbon investors buy and sell carbon offsets on our secure marketplace.

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Selling Carbon Credits

Can farmers sell carbon credits? Absolutely! Farmers and any landowners can sell carbon credits because ALL land can store carbon. Landowners are eligible to receive carbon credits at the rate of one per every ton of CO2 their land sequesters. LandGate helps landowners understand how much carbon their land can sequesters every year. Then LandGate helps landowners sell their carbon credit at the highest price through a simple process. When a landowner decides to provide land for carbon credits, they agree to certain practices such as not chopping down trees that store carbon for timber and practicing regenerative agriculture to maximize carbon storage.

Landowners can sell carbon offsets on what are called voluntary carbon markets. These carbon credit buyers are purchasing carbon credits as an investment or are businesses trying to meet internal standards for carbon footprint reduction. In contrast, a cap-and-trade market consists of companies trading allowances. Caps, or limits on pollution, are set by the government and generally apply to an entire industry. The government regulates adherence to these caps and hands out penalties for failure to comply. Companies that cut pollution at a faster rate can trade their allowances with companies that emit more carbon and therefore need additional allowances to meet the mandated caps.

How Much is a Carbon Credit Worth?

Carbon credit value or price fluctuates in voluntary markets, as it depends on the supply and demand of the economy. Current trading rules allow for the international transfer of carbon credits, but differences in the supply and demand of various countries will cause price differences. As of September 2021, a carbon credit trades for around $16 per metric ton of carbon dioxide stored.  It’s important to note that as more businesses adopt net-zero goals, the price of carbon offsets is expected to surge in the coming years. In fact, several recent studies predict that carbon credit prices will increase by ten-fold by in the next decade, and likely more.1,2  To put things into perspective: A landowner’s farm or ranch land can absorb between 0.5 and >5 ton/ac/yr depending on location, soil type, and the tree canopy. This means the possibility to make as much as $1,000,000 per year on one thousand acres of land by 2030!

Verified Carbon Credits

When it comes to how to get paid for carbon credits, there is a large difference in appeal to buyers of verified carbon credits and unverified carbon credits. Would you let a surgeon operate on you if they had never been to medical school? Probably not. You can think of carbon credit verification the same way. Rather than purchasing carbon credits a seller simply claims will offset emissions, a verified carbon credit means the carbon offsets will have the environmental impact they claim to have. Carbon credits are verified using careful data and analysis. How carefully verified a carbon credit is determines its quality, and the higher quality a carbon credit is the more a buyer will trust it and be likely to invest.

You may also hear the term certified carbon credit. Carbon offsets that are certified are generated under the Clean Development Mechanism (CDM) and are called Certified Emissions Reductions (CERs). The CDM assists emissions reduction projects which generate CERs. CERs can be bought and traded by participants in mandatory compliance schemes around the world to meet their emissions targets. So, the main difference is that carbon credit certification takes place through a regulatory framework with the purpose of offsetting a project’s emissions to meet government mandates on carbon emissions.

LandGate assists landowners in selling their carbon credits and buyers by ensuring they are buying quality carbon credits and we make the process fast and easy. It is on the carbon credit investor rather than the buyer to have carbon credits verified when trading on LandGate’s carbon marketplace.  Whereas due diligence can often take months, we have calculated the carbon storage potential of every land parcel in the US based on tree canopy, soil type, climate, and more. To find out what your land is worth for carbon offsets, you can find your parcel on our map. If you are an energy investor looking to access this carbon data, learn more about our Carbon Data Solutions.

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  1. https://www.sciencedaily.com/releases/2021/06/210604122439.htm
  2. https://www.greenbiz.com/article/carbon-offset-prices-set-increase-tenfold-2030
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