What are carbon markets?
Carbon markets are trading systems that buy and sell carbon in the form of carbon credits. A carbon credit refers to one tonne of carbon dioxide or equivalent greenhouse gas sequestered or avoided. The transfer of carbon credits has arisen due to the demand from private companies to meet NetZero. Where companies find there is no further way they can reduce their own greenhouse gas emissions (called insetting), they can purchase carbon credits to offset remaining emissions.
Carbon credits have allowed private investment in land-based projects that focus on sequestering carbon (e.g. woodland creation), or preventing further greenhouse gas emissions (e.g. peatland restoration). There are two broad carbon markets: compliance and voluntary. Compliance carbon markets are created when policy or regulation is implemented at a regional, national or international level targeted to regulate and reduce greenhouse gas emissions. Voluntary markets can again be at a regional, national or international level, but these exist on a voluntary opt in basis. Demand comes from private investors who want to compensate their carbon footprint to meet internal sustainability targets, improve public relations, or for accreditation purposes.
A range of carbon markets exist globally which have different levels of guidelines, standards and validation to produce a carbon credit. Standards that are underpinned by robust measurement, reporting and verification procedures provide greater confidence in the carbon credits being sold, meaning these credits fetch a higher price. Markets governed by reputable bodies such as the Woodland Trust and IUNC give further confidence to buyers that carbon credits are legitimate.
Landowners can choose which market they want to enter, based upon what suits their business aspirations. Within Scotland, the two most established and verified markets include the Woodland Carbon Code, and the Peatland Code.
The future of carbon markets
The buying and selling of carbon in a voluntary market has grown significantly in the UK in recent years. With continuing pressure for both the private and public sectors to reduce emissions, carbon markets in one form or another are likely to keep growing. The Woodland Code and the Peatland Code offer standardised, reputable carbon markets that landowners can enter to have their carbon sequestration or carbon emission reductions quantified and translated into carbon units. Whether land managers want to sell these units to individuals looking to offset emissions or keep the credits themselves to inset their own emissions, is a decision for them to make.
Many companies are moving towards insetting emissions within their supply chain rather than paying to offset them. Not all sectors are able to reduce their total emissions to zero, and offsetting is likely to continue. By directly tackling emissions, insetting is definitely preferred and the movement to inset will always be required. The push for food producers to inset via their supply chains is likely to impact on landowners, and having validated carbon units at your disposal may become useful.
When selling carbon units, a carbon sales contract will be required. Therefore, a robust legal agreement is needed to protect the seller and the buyer. Legal advice should be sought out to ensure this is achieved. Furthermore, the rights to carbon remain with the buyer, so if the property is sold it passes to the new owner. The new owner will then be responsible for the carbon contract with all of its binding restrictions.
For landowners wishing to tap into carbon markets it is important to ensure that the project, be it woodland creation, or peatland restoration, adheres to the Woodland Carbon Code or Peatland Code. To validate carbon credits there is typically a need to demonstrate that the carbon captured is legal, permanent, and additional. Additionality means that the project would not have gone ahead without carbon finance. This could be due to legal requirements (e.g. requirement to replace woodland lost due to development) or financial reasons (e.g. creation of a Sitka spruce plantation for commercial purposes).
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