-By Bhavishya Bade
INTRODUCTION:
WHAT IS CARBON CREDIT?
The ability to emit one ton of carbon dioxide or the equivalent of another greenhouse gas is granted to the holder of a carbon credit, which is a tradable permit or certificate. One tonne of carbon dioxide is equivalent to one carbon credit. The carbon credits issued by the European Union fluctuated from $7.78 and $25.19 in 2018, averaging $16.21 per tonne. Reducing carbon dioxide and other greenhouse gas emissions from industrial processes is the primary objective of the carbon credit system, which aims to mitigate the impacts of global warming. View the following image to understand the concept of carbon credits.
TYPES OF CARBON CREDITS:
1. Carbon Offset Credits (COC's)
2. Carbon Reduction Credits (CRCs)
Carbon offset Credits (COCs): Clean energy generation methods such as wind, solar, hydropower, and biofuels are included in carbon offset credits.
Carbon Reduction Credits (CRCs): The process of removing carbon from the atmosphere using soil, ocean, and biosequestration (reforestation, forestation). It is acknowledged that both strategies work well to lessen the "crisis" caused by global carbon emissions.
The Shortcomings of Carbon Credit Markets:
Limited Impact on Emissions Reduction:
Despite the existence of carbon credit markets, many businesses continue to emit significant amounts of carbon dioxide. Critics argue that the current structure of these markets lacks the teeth needed to drive substantial changes in behavior.
Concerns About Accountability and Transparency:
The credibility of carbon credits has been called into question due to concerns about the legitimacy of emission reduction projects and the lack of transparency in the verification process. This lack of accountability undermines the effectiveness of carbon credit markets in achieving their intended environmental outcomes.
Market Volatility and Speculation:
Carbon credit markets are susceptible to volatility and speculation, often leading to unpredictable pricing. This unpredictability can discourage long-term investments in sustainable practices as businesses may be uncertain about the future value of carbon credits.
Exclusivity and Complexity:
The complexity of participating in carbon credit markets can make it challenging for smaller businesses to engage. This exclusivity may inadvertently limit the positive impact of carbon credit initiatives to larger corporations, leaving many smaller players out of the equation.
A Better Alternative: Environmental Impact Bonds (EIBs)
As an alternative to carbon credit markets, Environmental Impact Bonds (EIBs) present a promising solution. An Environmental Impact Bond (EIB) is a type of municipal bond label that lets investors know that the issuer has market ESG transparency and accountability in its bond. The EIB undertakes to foresee, evaluate, and publicize the environmental results of the financed projects. It is compatible with the ICMA Green Bond Principles and the UN Sustainable Development Goals. EIBs operate on a different principle, focusing on direct funding and supporting projects that lead to measurable environmental improvements.
Some key features and advantages include :
Outcome-Based Funding:
EIBs tie financial returns to specific, measurable outcomes, such as reduced carbon emissions or improved air and water quality. This ensures that investors see a direct impact from their contributions, fostering a more tangible connection between investment and environmental progress.
Transparent and Accountable:
Unlike carbon credit markets, EIBs prioritize transparency and accountability. Investors can track the progress of funded projects, and the outcomes are rigorously assessed, providing a clear picture of the environmental impact achieved.
Inclusivity and Accessibility:
EIBs can be structured to accommodate a wide range of investors, including individuals, businesses, and institutions. This inclusivity ensures that a broader spectrum of stakeholders can actively participate in and contribute to environmental initiatives.
Stability and Predictability:
By focusing on the direct funding of projects, EIBs can offer more stability and predictability than the often volatile carbon credit markets. This stability can encourage long-term investments in sustainable practices.
Conclusion:
While carbon credit markets were conceived as a mechanism to address climate change, their current limitations raise questions about their efficacy. Exploring alternatives like Environmental Impact Bonds offers a fresh perspective on how financial instruments can be designed to more directly and effectively drive positive environmental outcomes. As the world grapples with the urgent need to combat climate change, it's crucial to reconsider and innovate in the realm of environmental finance to create more impactful and sustainable solutions.
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