How To Make the Carbon Credits Mechanism Work

The carbon credit market operates through a complex network of buyers, sellers, verifiers and regulators. Projects generating credits range from forest conservation to renewable energy installations.

Cleaner and Greener

Carbon credits operate as part of a cap-and-trade system designed to limit greenhouse gas emissions. Under this system, governments or regulatory bodies set a cap on the total amount of emissions allowed within a specific industry or region.

Each company within this framework is allocated a certain number of carbon credits, which represent the right to emit a specified amount of carbon dioxide or other greenhouse gases. If a company reduces its emissions below its allocated limit, it can sell the surplus credit to other companies that have exceeded their emissions cap.

This system encourages companies to adopt cleaner, more efficient technologies and practices, as reducing emissions becomes financially rewarding. It also offers flexibility, as companies can buy credits if they are unable to meet their emission reduction goals. Ultimately, carbon credits create an economic incentive for businesses to lower their carbon footprint.

Illustratively, this is akin to a carbon marketplace, where companies act as buyers and sellers of the right to emit carbon. The market creates a dynamic where emission reductions are rewarded, incentivising both large corporations and smaller businesses to play a role in mitigating climate change.

Growth of the Marketplace

The carbon credit market recognises two primary categories: first, compliance credits, which are mandatory credits used in regulated carbon markets.

The second category is voluntary credits, which are purchased by organisations that voluntarily choose to reduce their carbon footprint beyond regulatory requirements. This segment of the market is growing as more companies embrace CSR goals.

Microsoft’s Journey to Carbon-Negative

In 2020, Microsoft made an ambitious pledge: by 2030, the tech giant would become carbon negative. To achieve this, they invested heavily in carbon credit programmes. These credits came from projects like reforestation and soil carbon sequestration.

Second, Microsoft explored technologies, such as direct air capture. They didn’t buy credits; they became part of the solution, investing in technologies to remove carbon at scale.