Carbon credit trading market is fragmented.

Carbon credits trading

The desire for a net-zero world has significantly expanded carbon credit trading. This trading could also be called emission trading and can be traded in a global carbon market. At the core, emission reduction activities will help cancel out greenhouse gases from the atmosphere.

Approaches to emission reduction

The climate conference in Kyoto, Japan, resulted in countries committing to reduce the emission of six gases contributing to global warming. The Kyoto Protocol to the UN Framework Convention on Climate Change was adopted in 1997. Multiple approaches to emission reduction were agreed upon at this conference.

These included

  1. Use natural processes, called carbon sinks, like planting trees to remove greenhouse gases from the atmosphere.
  2. Clean Development Mechanism (CDM) encouraged developed countries to invest in technology and infrastructure in less-developed countries to reduce emissions. Under this mechanism, the developed countries could claim credit for meeting their obligations under the protocol.
  3. Emission trading allowed participating countries to buy and sell emissions rights. Targets were expressed as allowed emissions in assigned amount units (AAUs) over the 2008-2012 commitment period.

It led to European countries initiating an emissions-trading market.  Countries with emission units to spare could sell this excess capacity to countries that had overshot their targets. Since carbon dioxide is the principal greenhouse gas, the trading was called carbon trading. It was the beginning of the carbon market.

The carbon market

One unit was equal to one ton of CO2. There are multiple approaches to carbon reduction. These have been discussed and elaborated upon in various climate change conferences. For instance

  1. A removal unit (RMU) was based on land use, land-use change, and forestry (LULUCF) activities such as reforestation.

Some examples of Removal Units (RMUs) gained by companies through Land Use, Land-Use Change, and Forestry (LULUCF) activities:

  1. Afforestation: A company can gain RMUs through afforestation activities. It involves planting trees on a parcel of previously not forested land. The new trees will absorb carbon dioxide from the atmosphere and store it in their biomass and the soil, resulting in a net removal of greenhouse gases (GHGs) from the atmosphere. The number of RMUs gained will depend on the amount of carbon sequestered by the trees over time.
  2. Reforestation:  Reforestation involves replanting trees on previously forested but cleared or degraded land. Trees and other biomass on such a site capture carbon from the atmosphere, reducing the carbon load in the atmosphere. The net removal of GHGs from the atmosphere will result in the gain of RMUs for a company.
  3. Forest conservation: Companies can also gain RMUs by preserving existing forests. Forests act as carbon sinks by absorbing and storing carbon dioxide. Carbon sequestration can also be achieved by reducing deforestation or forest degradation, implementing sustainable forest management practices, or restoring degraded forests.
  4. Agroforestry: Agroforestry is a land-use system that combines crops and trees on farmlands. An increase in carbon sequestered in the soil and the biomass of trees occurs. The activity leads to a gain of RMUs for the company.
  5. Soil carbon sequestration: Reducing tillage, using cover crops, or planting perennial crops, will also increase the amount of carbon stored in the soil. Companies can gain RMUs by implementing these practices on land and documenting the resulting increase in soil carbon.

It’s important to note that the number of RMUs gained through LULUCF activities will depend on various factors. These will vary with the type of activity, the land area size, the project duration, and the baseline emissions scenario used to calculate the net removal of GHGs. The requirements for gaining and using RMUs vary depending on the jurisdiction and carbon market involved.

RMUs (Removal Units) gained through LULUCF activities can be traded in the carbon emissions market. They represent a reduction in greenhouse gas (GHG) emissions that can be used to offset emissions from other sectors.

RMUs are one type of carbon credit that can be generated through projects that remove or avoid the emission of GHGs. These are afforestation, reforestation, and forest conservation activities. They represent a GHG reduction or removal unit, equivalent to one metric tonne of carbon dioxide equivalent (CO2e) sequestered or avoided through the project.

The ability to trade RMUs and other carbon credits in the market can incentivize your company and other entities to engage in LULUCF activities and other emissions reduction projects. You can sell the carbon credits generated to other entities that have emissions reduction obligations in regulated carbon markets. Carbon credits can also be sold to companies and organizations seeking to offset their emissions voluntarily.

It’s important to note that the rules and requirements for trading RMUs and other carbon credits vary depending on the carbon market or regulatory regime. The transactions may also involve verifying the emissions reductions. This help ensures that the traded credits are not double-counted or used to meet other regulatory requirements.

Here are some examples of industries trading RMUs in various jurisdictions around the world:

  1. Europe: The European Union Emissions Trading System (EU ETS) allows companies in the EU to trade carbon credits, including RMUs generated through LULUCF activities. For example, the Spanish energy company Endesa has purchased RMUs generated through afforestation projects in Portugal to help offset its emissions under the EU ETS.
  2. Australia: The Australian government has established the Emissions Reduction Fund (ERF) to encourage emissions reductions in various sectors, including LULUCF. Companies and other entities can generate Australian Carbon Credit Units (ACCUs) through LULUCF activities. These include reforestation and soil carbon sequestration, which can be traded in the Australian carbon market. For example, BHP, an Australian mining company, has purchased ACCUs generated through a forest conservation project in New South Wales to help offset its emissions.
  3. Canada: The Canadian government has implemented the Carbon Offset Program to encourage emissions reductions in various sectors, including LULUCF. The program allows companies and other entities to generate carbon offsets. It includes RMUs, through afforestation, reforestation, and soil carbon sequestration. For example, the Canadian airline Air Canada has purchased carbon offsets generated through a forest conservation project in British Columbia to help offset its emissions.
  4. Brazil: Brazil has established several programs to encourage LULUCF activities, including the Amazon Fund, which supports forest conservation and reforestation projects in the Amazon region. Companies can purchase Verified Carbon Units (VCUs) generated through these projects, which can be traded in voluntary carbon markets. For example, Natura, a Brazilian cosmetics company, has purchased VCUs generated through a forest conservation project in the Amazon to help offset its emissions.

It’s worth noting that the specific requirements for generating and trading RMUs and other carbon credits will vary with jurisdiction and the carbon market in which a corporation operates. The transactions may involve verifying the emissions reductions and ensuring that the traded credits are not double-counted or used to meet other regulatory requirements.

Calculating RMUs

Several models can be used to calculate the number of RMUs (Removal Units) generated through LULUCF (Land Use, Land-Use Change, and Forestry) activities. The most commonly used models are:

  1. IPCC Good Practice Guidance: The Intergovernmental Panel on Climate Change (IPCC) has developed a set of Good Practice Guidance for LULUCF. It includes guidelines for calculating emissions and removals from various LULUCF activities. The guidance provides a standardized approach to estimate carbon sequestration and emissions reduction. The activities can be forest management, afforestation, reforestation, etc.
  2. Forest Carbon Inventory Methods: Various methods have been developed for conducting forest carbon inventories, which involve measuring the amount of carbon stored in different parts of a forest, such as the trees, understory vegetation, and soil. These methods can estimate the amount of carbon sequestered. The activities could be forestry activities like afforestation, reforestation, and forest conservation. These methods can be used to calculate the resulting RMUs.
  3. Carbon Stock Change Models: Carbon stock change models are computer models that simulate the growth and development of forests over time. These can be used to estimate the amount of carbon sequestered. Carbon could be sequestered through afforestation, reforestation, and other forest management activities. These models consider various factors, such as the species and age of the trees, the climate and soil conditions, and the management practices being used.
  4. Soil Carbon Inventory Methods: Soil carbon inventory methods involve measuring the amount of carbon stored in the soil and can be used to estimate the amount of carbon sequestered through soil carbon sequestration activities, such as reducing tillage, using cover crops, or planting perennial crops. These methods can consider soil type, texture, and moisture content.

It’s worth noting that the specific models and methods used to calculate RMUs can vary depending on the jurisdiction. The models will also vary with the carbon market involved. The methodologies and assumptions used can significantly impact the number of RMUs generated. As a result, it’s important to carefully consider the scientific basis and accuracy of any model or methodology used to calculate RMUs specific to an area. It will also be important to understand which carbon sequestration model will be acceptable to a particular regulator.

It is also important to closely examine the site where you want to afforest or manage existing vegetation. As the objective is to sequester as much carbon as possible from a site, maximizing biomass generation is the objective. An option could be to convert the generated biomass into a green energy fuel, calculate carbon units from the end product and sell the carbon units gained in the carbon market.

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