Understanding the Worth of Carbon Credits and how they're priced.

Purchasing carbon credits is an effective way to contribute to the transition towards a low-carbon, climate-secure world. However, determining the appropriate price for a carbon credit can be a complex task. In this article, we aim to provide clarity on how carbon credits are valued, considering the significant differences among the projects that issue them.

Defining Value:

To comprehend the valuation of carbon credits, it is essential to understand the concept of value. According to the Natural Capital Protocol, value refers to the importance, worth, or usefulness of something. In the context of the market, value represents the amount for which something can be bought or sold. Price, on the other hand, signifies the monetary amount expected, required, or given in exchange for a product or service. Economic value encompasses both market and non-market values, considering the importance and worth of something to individuals. It quantifies individual preferences and is usually expressed in terms of monetary metrics, such as dollars per unit.

‍

Market Dynamics and Pricing:

The voluntary carbon market predominantly operates based on supply and demand, with limited consideration for the long-term viability of projects. While markets can drive competition and reduce costs, it becomes problematic when the objective is securing our climate and ensuring basic human rights. Paying prices for carbon credits below the operational costs of projects can lead to the discontinuation of vital projects in vulnerable communities. Moreover, overlooking the comprehensive value delivered by projects in terms of beyond-carbon development benefits can create a race to the bottom, potentially causing the highest quality projects to fail.

‍

Pricing Models:

There are different approaches to pricing carbon credits. The cost-based model considers the implementation costs of a project, ensuring its ongoing viability. A notable example is the Fairtrade minimum pricing model, which calculates a minimum price to cover average project costs and provides an additional "Fairtrade Premium" to support local communities in adapting to climate change.

However, while cost-based models ensure project sustainability, they do not fully account for the additional value generated by projects in terms of sustainable development. To address this discrepancy, a value-driven model is proposed, which considers the full environmental, social, and economic impacts of a project, including emissions reductions and the transformational benefits that improve lives.

Understanding Economic Value:

The economic value of carbon credits can be ascertained by assessing the costs society incurs due to carbon emissions. The United States Environmental Protection Agency estimates that for every tonne of carbon dioxide emitted, there is an associated cost of environmental degradation and negative social impacts, ranging from $11 to $212. By valuing carbon credits based on these social costs, the true economic value can be more accurately reflected.

Gold Standard's Comprehensive Valuation:

To further emphasize the value beyond carbon mitigation, Gold Standard commissioned economists to conduct a comprehensive valuation of the socio-economic benefits delivered by their projects. The findings revealed that projects adhering to safeguards, engaging local stakeholders, and providing development benefits beyond climate mitigation create shared value amounting to billions of dollars. These economic values of Gold Standard project impacts per tonne of CO2 are depicted in Figure 3.

Innovative Approaches:

Internal Carbon Pricing and Carbon Fees:Several companies are adopting innovative approaches to address the true value of natural capital. For instance, Coop, a Swiss retailer, sets an internal carbon price to drive innovation and investment in emissions reduction activities that support communities within their supply chains. Microsoft requires internal departments to include a budget reflecting the cost of carbon emissions, leading to a carbon fee that contributes to a carbon investment fund, generating capital for sustainability initiatives. These initiatives encompass internal emissions reduction efforts as well as supporting projects outside their operations through carbon credit purchases.

Recommendations:

In conclusion, determining the worth of carbon credits involves various considerations, including quality, type, size, and geographical location of projects. While the concept of "value" can be subjective and influenced by an organization's ideals and objectives, Gold Standard advocates for carbon credit prices to more accurately reflect the true social cost of carbon and the economic value derived from additional impacts. By utilizing the power of markets in a cost-effective manner, stakeholders can contribute to a sustainable and climate-resilient future.

By understanding the complexities of carbon pricing and valuing the comprehensive benefits of projects, we can make informed investment decisions that support the transition to a low-carbon economy while driving positive environmental, social, and economic change.

‍

‍