OPINION: What classifies a carbon credit?

Quantum Commodity Intelligence - Benedikt von Butler is co-founder of Restoration Climate Capital

Here I share a classification of the use of carbon credits that we created and use in our company. Too often we experience that two people speak about carbon credits, but mean very different things. This table may help to define the type of credit and market that we actually mean when broadly speaking about "carbon credits".

At 'birth', carbon credits are simply a success certificate stating that by following a certain protocol (methodology), a project has reduced a certain amount of greenhouse gases. The methodology and all documentation are publicly available and the results will have been verified by a third party.

This level of transparency, by the way, is often beyond the level of accountability that most similar projects funded by governments, development aid, donations or philanthropy provide.

Regardless of the later use of carbon credits, I believe the framework of how to assess the successful use of funds for climate projects, and the process of issuing results-based "success certificates" is better than anything else I have come across to date. The methodologies used for carbon projects are continuously improving with experience, new technologies, stakeholder input and more sophisticated data analysis and modelling. It's a continuous work in progress.

'Downstream' there are many different use cases for carbon credits as laid out in the table. The prices that buyers are willing to pay for credits depend on the respective use cases. Conversely, if 'we' want to see higher carbon prices in order to unlock more expensive project types, one needs to assess the use case and the embedded value to a buyer.

For example, a buyer of carbon credits for marketing purposes might decide that $50 for a specific carbon credit is 'too high' and go for lower-cost options. A corporate, on the other hand, that could save a $80 a tonne carbon tax by submitting an eligible carbon credit that costs $50 would still see $30 dollar value in such a purchase.

What all carbon credits arguably have in common is that they certify 'success' in reducing or removing a tonne of CO2, and often entail many more benefits for local communities, environments and biodiversity. In my view we need as much 'success' as possible.

Carbon finance is one of many tools to battle climate change and to improve living conditions, and in my view a very powerful one. Literally everyone from private citizen to corporates and governments can participate in this framework, be it as 'donation' or for 'compliance'. All is necessary.