The Life Cycle of a Carbon Credit

How a project is born, blessed, grows, and generates credits that eventually retires on the voluntary carbon market

The voluntary carbon market allows money to flow in otherwise unlikely directions — from say, an equipment manufacturer in Peoria to a mangrove restoration project in the Caribbean, or from a high-tech company in Silicon Valley to buy clean cookstoves for households in Nepal. 

Why this market has emerged is to help individuals, businesses and governments who want to meet some part of their own emissions reduction commitments by paying for emissions reductions elsewhere. Ideally, buyers use the carbon credits only to offset their most difficult-to-eliminate emissions after doing everything else they can through efficiency measures, and shifting to clean energy sources and cleaner processes. 

How this market works — well, that’s a little more complicated so we’ll take it step-by-step through the lifecycle of a carbon credit (aka offsets). 

A carbon credit project is conceived

In the voluntary market it begins with an idea for a project that will avoid anticipated emissions or reduce planet-warming greenhouse gas from the atmosphere — as a basis for selling carbon credits. To date, the majority have focused on forests and their utility for absorbing CO2, but myriad other project types are emerging. A growing number now focus on agricultural methods that sequester CO2 in the soil. “Blue carbon credits” are generated by coastal conservation of seagrass, marshes and mangroves. Projects designed to destroy methane — another powerful greenhouse gas — at sources such as landfills and livestock operations are ticking up. There is hope for other innovative projects employing direct air capture and storage of CO2 as that technology advances. 

(Check out some of the carbon credits offered by EcoSoul Partners here.)

For each ton of CO2 (or its equivalent in other greenhouse gasses) removed or avoided through the project, its developers can sell one carbon credit.

But first, proof of life

Consider this the ultrasound phase. When the project gets underway, it goes through validation by an accredited independent third-party auditor (a validation/verification body or VVB) to be sure it is designed to meet standards set by the International Standards Organization (ISO) and by the registries themselves, such as Verra’s Verified Carbon Standard or the Gold Standard. These programs have sets of standards and project methodologies (or protocols) that are specific to different types of projects. 

In broad outlines, to be validated, developers need to demonstrate that the project is “additional,” meaning that it would not have taken place without the carbon credit funding, and that it provides “permanent” benefits to the climate (often defined as 100 years for nature-based solutions). For forestry projects, the project baseline accounts for the risk of “leakage,” which occurs when the existence of a project will just move deforestation to another area outside the protected area. Finally, the project must be designed to avoid harming the local community or violating human rights of residents. Ideally, it will also provide “co-benefits” — like creating jobs and bolstering the local economy, supporting biodiversity, empowering women, positive health outcomes for children, or resulting in cleaner water and increased shade coverage.

Validation up close: Where the orangs roam

For a closer look at how validation works, consider the Rimba Raya Biodiversity Reserve. The project, preserving a swath of tropical peat swamp forest adjacent to a Tanjung Puting National Park in the Indonesian portion of Borneo island, was established in 2008-2009. The project proponents, Hong Kong-based InfiniteEARTH,  envisioned not only protecting CO2 sequestration of the forest — it was slated for logging and palm oil plantation — but also preserving a richly biodiverse area, and habitat for the endangered orangutan.

The project was first validated in 2011 to ensure Rimba Raya conformed with a specific standards for “conservation projects that avoid planned use conversion in peat swamp forests.” Its revalidation in 2021, resulting 84-page revalidation report illustrates the process, starting with audits of documents, phone calls and email with InfiniteEARTH, followed by meetings to review the documentation and approach with stakeholders, and culminating with a five-day visit by SCS’s experts team to the project area and four villages. The report concludes that the project meets the Voluntary Carbon Standard, and establishes the “additionality” of the Rimba Raya project as delivering real, measurable and long-term GHG emissions avoidance that would not have occurred had the area been left to fate (i.e. converted to palm oil plantation.)

Project grows and matures

So, after initial validation, the project gets under way: That could be Rimba Raya, or a project that captures and destroys unregulated landfill gas, a dairy digester that destroys methane, the establishment of regenerative agricultural practices, the planting of mangroves in a denuded estuary, or the distribution of clean cookstoves to replace their fossil-fuel predecessors. Whatever the project, as it is implemented, its developer monitors and measures its progress, including the reductions or removal of CO2 and any “co-benefits” that it has included in its design. 

All of that, finally, must be audited by the independent, third-party (the VVB) to verify that the outcomes set out by the project design have been achieved and properly documented. 

In the case of Rimba Raya, the 2017 verification was conducted by US-based Environmental Services Inc. resulting in a 144-page report, covering their review of documentation, findings from on the ground and satellite imagery, and interviews by a team of specialists in biodiversity, soil science, forestry and natural resources. It details how well the project is conforming to the original project design and documents any deviation from it. 

In addition to documenting preservation of the project area during the monitoring period, the report describes co-benefits, including the completion of a new orangutan release center and reintroduction of 19 orangutans to the wild, new jobs and training, provision of lanterns and water filters, introduction of chicken and egg production, and fish drying facilities.

A carbon credit is blessed and registered

When the project’s emissions reductions or removals are verified and approved, carbon credits are issued and listed on a public registry. These registries — the biggest players include Verra, Gold Standard, Climate Action Reserve, and the American Carbon Registry (ACR) — create and serialize carbon credits, once they approve all the work that has been done to substantiate the carbon credits. Registries capture the information about carbon projects, and ensure that credits are not retired more than once, as double-counting is not allowed in the carbon markets. 

All credits are not created equal

One thing that is immediately apparent if you are in the market to buy carbon credits is that the price of different carbon credits varies widely — ranging from as little as a few dollars per ton of CO2e up to $50/ton CO2e. The price is partly a reflection of the cost of removing or reducing one ton of CO2 pollution by a given project, which will be affected by type and location.  

Price also depends on the perceived quality of the credit. Buyers in the voluntary market are not legally required to offset their emissions but choose to do so as they pursue climate goals and the halo effect that comes with it. Increasingly, companies are moving to projects that align with the Science Based Targets initiative (SBTi).

As the market strives to bolster confidence and integrity, stakeholders have established a new organization — a sort of “verifier of verifiers” called the Integrity Council for the Voluntary Carbon Market. ICVCM aims to set a global benchmark for quality in the voluntary carbon market, in the form of the Core Carbon Principles. They are also assessing whether organizations and methodologies meet the CCPs — providing buyers and sellers another data point for pricing. ICVCM just recently began to announce programs and methodologies that it has blessed as CCP-aligned, which include some of the project types and registries that came under the scrutiny of investigative press reports on the voluntary carbon market in 2023.

Whether a carbon credit is based on a project that offers robust co-benefits beyond greenhouse gas reduction also has an impact on price. According to an annual report by Ecosystem Marketplace, carbon credits that provide at least one co-benefit command a 78% premium over those that don’t. 

Finally, pricing depends on supply and demand, which is always changing, as on any market.

Carbon credit travels the world market — and finally goes to retire

Credits are listed to the market directly by the project developer or through a broker contracted by the developer. Credits may be traded between brokers before the final purchase. Only after purchase is the carbon credit recorded as retired with the registry, assigning the benefit to the purchaser. Once retired, it can not be sold again.

Meanwhile, somewhere, there is another carbon reduction project being conceived.