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Carbon credits - what are they and how do they work?

Updated: Feb 5, 2023

My blog celebrated 1 year on February 5th, 2021. I want to thank everyone for their support, comments and feedback. It was a great trip so far and I hope it goes on for a long time !

  • Carbon credits - or negative emission technologies more broadly - are a key pillar to limit global warming to less than 1.5°C.

  • There are many projects already available today to compensate carbon emissions. These projects are accessible for private individuals but are also associated with limits.

  • Many projects are already profitable today. In the long run, however, carbon prices need to increase so that the more sophisticated technologies become viable.


It is undeniable that our planet is heating up. 2020 was the second hottest year on record. In fact, 9 of the 10 warmest years ever recorded occurred after 2010. Global temperatures are now 1.2°C above the pre-industrial average. If we remain on this trajectory, the 1.5°C target of the Paris Climate Agreement will probably be reached in 2028.

These temperature rises have fatal consequences: more extreme weather events, more heat waves, more stable weather conditions ... Even if isolated weather events, such as floods, heavy rains, tornados or heat waves, are difficult to link to climate change, these events will increase in frequency as temperatures continue to rise [put simply: climate is the “sum” of the weather over time].

Global consequences will be apocalyptic and that firstly hit less fortunate and vulnerable populations. There will be millions of climate refugees because their habitat becomes uninhabitable, or there will be supply shortages with essential resources.

But there is hope, because we still have time to solve the problem: with renewable energies, we have technology to enable the decarbonization of the economic system, at least for the electricity sector. With the current speed of transformation however, it will take decades before these energies are deployed in large enough capacity.

That is why we also need technologies to compensate for emitted carbon emissions. These are an integral part of the projections of the International Panel on Climate Change [IPCC] and they are essential (!) to reduce our emissions. Recently, this segment has received particular attention after the tweet from Elon Musk. The founder of Tesla would donate $ 100M to the best carbon-saving technology.

Everyone talks about carbon - but why is that a problem in the first place?

Let’s start with a short crash course on the principle of the greenhouse gas effect.

The planet is heated by solar radiation. The sun radiates to the earth in shortwave radiation. About 30% of this radiation is reflected directly by the clouds in the surface. Of the remaining 70%, 50% is absorbed by the surface and 20% by the atmosphere.

After the heat is absorbed by the surface, it is reflected back into the atmosphere in the form of long-wave radiation. The atmosphere contains greenhouse gases that "trap" this heat and thus keep the planet warm. This is called the greenhouse gas effect.

This effect is good in principle: without greenhouse gas effect it would be -15°C on our planet. However, since the industrial revolution, human activities are constantly emitting more greenhouse gases, mainly in the form of CO2 and methane. As there are more and more of those gases in the atmosphere, the planet is getting warmer. [Anecdote: to simplify, I use “carbon” emissions from now on for all greenhouse gas emissions. Each greenhouse gas can be converted into "CO2 equivalents" based on its "global warming potential". With 74% CO2 is the most dominant, man-made greenhouse gas.].

CO2 is a particularly aggressive greenhouse gas. While it is only a fraction of total greenhouse gases, it is extremely potent in terms of heat insulation. CO2 also has the property that - once emitted - it stays in the atmosphere for up to several hundreds of years and thus affects our temperature for a long period.

CO2 can also be imagined as a cycle, the “Carbon Cycle”. On the one hand there are sources of CO2, on the other hand there are CO2 stores. Today, this cycle is in imbalance: significantly more emissions are emitted than stored. More and more CO2 is entering the atmosphere, and that is why our planet is constantly heating up. And there is no end in sight.

Carbon credits - what is it and how does it work?

In a previous article I mentioned the most important individual actions to reduce the personal footprint, such as reducing meat consumption, buying consuming, and investing more consciously, making more political pressure, or just compensating the personal carbon footprint. We should try to emit less carbon directly or indirectly and compensate for the carbon that cannot be reduced.

The decarbonization of the economic system is mainly associated with green energy - wind turbines, water plants, solar cells and maybe even some nuclear energy [thorium]. As an individual, you can either support the climate-friendly parties through your vote in elections or buy climate-friendly products with your wallet and invest in climate-relevant companies. However, one has little in hand to solve these systemic problems beyond conscious personal decision-making.

While people grasp what renewable energy is, the subject of carbon compensation is less common, yet integral and complementary part to reduce global emissions. The private individual can already access a wide portfolio of solutions to support.

These solutions are sold in the form of "Carbon Credits". Here you can “buy” one ton of carbon emissions that have been absorbed/stored or avoided elsewhere on the planet. Absorbed means that carbon disappears from the atmosphere, while avoided means that carbon is not emitted at all.

There are different types of projects, (1.) avoided emissions through renewable energy or (2.) energy-efficient processes, (3.) avoided emissions through more environmentally friendly technologies, (4.) absorbed emissions through afforestation, reforestation or prevented deforestation, (5.) absorbed emissions through (accelerated) natural processes in the soil, algae, or rocks, and (6.) absorbed/stored emissions through specially developed technology.

In the first two categories, renewable energy replaces fossil energy or energy-efficient solutions reduce energy consumption, thus avoiding emissions in the first place. Examples are renewable energy infrastructure such as wind farms replacing a coal plant, or other applications where fossil fuels are being replaced by renewable energies or efficiencies.

The third category aims to save emissions through more environmentally friendly technologies, often in processing industries. An example here is the recycling of plastics, which emits far less emissions than the production of new plastics. Another example can be low carbon cement, where innovative production processes bring down carbon emissions significantly.

The advantage of these first two categories is that they avoid emissions before they occur. This is also their disadvantage, as it does not promote the absorption of emissions, and this absorption remains a central part of the strategies for becoming climate neutral. Therefore, carbon removal technologies or negative emission technologies (NETs) are needed.

Source: G Svanberg via BBC

The category afforestation, reforestation and avoided deforestation is, as the name implies, about planting or protecting trees and forests. The forest mass is measured and analyzed over time – how much it has changed and how much carbon this corresponds to. Or how much carbon has been saved because forests were protected shortly before the deforestation. Trees are probably the simplest 'technology' to get carbon out of the atmosphere. However, they are not protected from external factors such as forest fires and there is no absolute guarantee that the forest will survive for decades. In the latter case, if the trees are felled, the carbon is bound in the timber, or pyrolysis can transform it to “biochar” to put it away.

The next category can be imagined as natural processes, “accelerated” by human hands. A few examples: let’s imagine a farmer who uses his field to grow seed. During the growth of the plant, carbon is stored in the soil. If the farmer now treats the soil specifically before seeding, the soil can absorb even more emissions in the form of solid carbon. Algae are another example of a great carbon store. Humans could cultivate algae (“ocean fertilization”), which absorb carbon and then store it on the bottom of the ocean when dying or elsewhere when harvested. Another example is rocks that can be crushed and treated with products that also absorb carbon (carbon mineralization). These solutions are still little researched and tested today, and therefore less accessible to the private person.

Source: Keleman and Matter, 2008 via NAP

The last category is arguably the most capital-intensive category: carbon storage through man-made technology. There are basically two solutions: filtering carbon directly from the air (“direct air capture”, as with Climeworks technology), or capturing carbon from an emission source. The filtered or captured carbon can then be stored underground (as Climeworks does with Carbfix in Iceland) or used as raw material to develop products (such as the bracelet from GoNegative). In any case, it is stored away permanently.

In addition, if biomass is burned and the carbon is stored, it will be possible to create negative emissions as trees are planted after harvest (“bioenergy with carbon capture and storage” – BECCS). During the growth of the trees, emissions are absorbed and there are no emissions after combustion: a continuous cycle of negative emissions. This whole segment is still in its infancy and is still very expensive for the private consumer today, with costs of up to several hundred euros per tonne of CO2.

Source: Climeworks

How can I offset my CO2 footprint?

First you should have an approximate idea about your carbon footprint. This can be calculated on platforms like South Pole or MyClimate. It is also possible to take the footprint of an average citizen (in Luxembourg +/- 15 tons, in the EU c. 10 tons per year) as orientation. An advanced concept also requires that a citizen from a developed country should compensate more than the own footprint as developed countries have historically emitted more than developing countries.

After, you can buy carbon credits via online marketplaces, like Wren, Puro Earth, Sustainable Carbon, Cool Effect, South Pole, MyClimate, Atmosfair or Gold. Some companies like Climeworks offer a direct offset on their website. There are plenty of possibilities!

The most important aspect probably is to check whether the projects are certified by independent institutes, such as Verified Carbon Standard (VCS) or Gold Standard, which certify the carbon savings of each project.

Limits of carbon credits

The carbon credits also have disadvantages. To give just two examples, the certificates cannot prevent natural events such as forest fires or pests, or technical breakdowns such as a "leak" in carbon storage. Therefore, the institutes adopt conservative hypotheses in their certification processes, which consider such adverse events, to guarantee at least a minimum level of assurance that the certified emissions are permanently stored.

This certification process also involves costs, which are included in the price of the carbon credit. For example, anyone who prefers to plant a tree to avoid the additional costs - in the garden or through organizations such as Reforestaction or MyTree - can do so. However, the planted tree also takes 20 years to absorb a tonne, where the offset through a carbon credit is almost immediate.

Some projects today are also economically unattractive. The price of a ton of carbon is still below 35 EUR, but many projects have significantly higher costs. Today, direct air capture costs around 500-600 EUR per ton, and in the long run it will probably only come down to around 75-100 EUR per ton. Some projects thus remain economically unattractive if carbon prices remain low.

The majority of climate scenarios rely on negative emission technologies

Carbon credits are a sometimes-controversial issue. In any case, the climate objectives remain unattainable without carbon credits (or: 'negative emission technologies'). The global remaining carbon budget (i.e. the carbon emissions that humanity can burn until the 1.5 ° C limit of Paris is reached), expires in 2028-32.

After that, we live on credit of future innovations. By 2050, many nations want to be CO2 neutral, and by 2050 more emissions will need to be absorbed than emitted globally. Thus, the majority of the IPCC's climate scenarios rely on a significant contribution of negative emission technologies to reach the temperature target, often with complex technologies that are still to be developed. The equation therefore only arises when these technologies are developed.

Source: UNEP via ChemistryWorld

The simplest thing would be to plant an area as large as the USA with trees, and the climate problem would be solved.

But it is, as so often, not that easy…


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