The purchase of high-quality carbon credits is a viable method of assisting in the transition to a carbon-free, low-carbon safe world. But it can be confusing when it comes to answering what appears to be an easy inquiry “How can I shell out for carbon credits?” What makes the price of one credit higher than the other? Aren’t all carbon credits one tonnes of carbon dioxide that has been that is prevented from entering the atmosphere? We’d like to offer some clarity on the way carbon credits will be valued considering the significant distinctions between projects which issue these credits.
First, let’s define value. This is because the Natural Capital Protocol provides a an excellent foundation for its various aspects:
Value (noun) Amount of, value, or utility of something.
Market value: The price that something is able to be purchased or sold in a particular market.
Price is the amount of money that is expected, needed or offered as payment for something (normally needing the presence of market).
Economic value is the importance and value of something or service to the public that includes all market-related as well as non-market-based values. More technical, it is the total of the individual’s preferences for a particular amount of the product or service. Values of economics are typically expressed as increments or marginal variations in the availability of the product or service, employing money as the measure (e.g. $/unit).
As markets for environmental protection, such as the voluntary carbon market develop they may include a variety of different methods of pricing their assets, such as carbon credits.
Pricing is based on market dynamic:
The current voluntary carbon market is driven by demand and supply regardless of the consequences for the project regarding its long-term viability.
Markets are extremely effective to increase competition and reduce costs of achieving an aim. But, what if the goal is security for our environment and the provision of access to human rights that are fundamental like food, water education, and good health? The cost of carbon credits at a price lower than the cost of maintaining the project could mean that projects could cease to operate in the communities they help. Additionally, failing to fully take into account the benefits they provide beyond carbon benefits to development could accelerate an effort to get towards the bottom, which means that the most reputable projects could end up being the first ones to be unable to succeed.
Gold Standard believes that organisations and individuals are able to think about the long-term social and environmental consequences of their investment choices and to consider both the financial costs and the true value of projects’ outcomes.
Pricing is based on the project cost:
A cost-based model considers the cost of implementation for the project. It is employed to aid in ensuring the continual sustainability of projects. This model, known as the Fairtrade minimal pricing system (Figure 1.) is an example of how this model works in the real world. It determines a minimum cost which ensures that the costs of projects are paid for, with another “Fairtrade Premium” in addition to which is paid direct to local community in order to finance activities that will assist them in adapting and becoming more resilient to a changing climate.
Fairtrade price minimums for projects with a fair trade status:
Energy Efficiency Energy Efficiency 8.20EUR/tCO2e + 1 EUR Fairtrade premium
Renewable Energy Renewable Energy 8.10EUR/tCO2e + 1 EUR Fairtrade premium
Forest Management- 13EUR/tCO2e + 1EUR Fairtrade premium
Cost-based models are a method to ensure sustainability for projects however, it doesn’t specifically reflect the added benefit these projects bring to sustainable development.
Pricing is based on the value of what was of the product:
Although every Gold Standard-certified project plays crucial roles in the transition towards an economy that is low carbon however, our projects exceed the carbon reduction. Utilizing a model based on value to determine the price of carbon credits, you can reflect the complete economic, social, and environmental impact of a project. That includes both emission reductions as well as the other advantages to development that can change lives.
The United States Environmental Protection Agency (EPA) issued the latest report the year 2015 to calculate the total cost of carbon for society. Figure 2 summarizes the costs over time based on different assumptions and risks in climate science. That means for every ton of carbon dioxide we release to the air, we pay between $11 and $212 for environmental damage as well as negative social consequences. According to theory, this impacts should be included as part of the price of carbon credits.
To go further and shine light on the value of our projects that is above and over carbon reduction, Gold Standard commissioned economists to perform a comprehensive assessment of the socioeconomic benefits generated through our projects. The result was that projects that adhere to safeguards, work with local stakeholders, and offer additional benefits to development beyond climate, generate shared value of millions of (US equivalent) dollars. The economic worth from Gold Standard project impacts per tonnes of CO2 can be observed in Figure 3.
The prices in the voluntary carbon market reflect certain “economic worth” principles. For instance, the prices on community clean cooking stoves that typically provide vital health benefits for children and women typically are more expensive than, for instance large-scale renewable energy initiatives. However, they eventually succumb to the market forces of supply and demand and are not protected by safeguards like the requirement for a minimum price. This is the reason why there’s a huge difference between the historical average prices of carbon credits in relation to the economic the benefits they bring as shown in Figure 3.
Gold Standard’s holistic standards, Gold Standard for the Global Goals, aims to resolve this gap by more precisely quantifying the non-carbon benefits in a uniform and comparable manner. However, in our meantime, we encourage that those who purchase carbon credits to better understand the full scope of value creation that is possible by these initiatives. Find out more at carbon.credit.
There is a growing awareness in the business community about the importance of natural capital such as a stable climate, healthy ecosystems, and also improvements in social indicators like increased quality of life and equality between women and men. Particularly in relation to climate change, Swiss retailer Coop has set their internal cost for carbon emissions at CHF 150 (roughly USD $150) to increase innovation and invest in the Gold Standard-certified emission reduction initiatives that also benefit communities that are part of their supply chain. Microsoft requires their departments to have an item in their budget that reflects the costs associated with their carbon emissions. This is then converted into the carbon cost which they pay to an investment fund for carbon that generates new capital to support sustainable initiatives. This includes internal emission reduction initiatives, as well as helping projects outside of their operations through the purchase of carbon credits.
Recommendations
The final decision of which investment to make and the much it’s worth is somewhat like managing the real estate market. There are many different factors to consider, ranging from the quality of the project, its size, type and place of the project. While “value” can be slightly subjective, based on the ideals of your company’s needs and goals, and is dependent on the dynamics of demand and supply, Gold Standard advocates for prices of carbon credits to better reflect the real social costs of carbon as well as the economic value it brings in other impacts, and rely on the potential of markets to achieve this efficiently and cost-effectively.
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