Verification process of carbon credits
As the global community faces mounting environmental instability, the demand for sustainable impact solutions has skyrocketed. Carbon credits (also known as carbon units), which represent the reduction of 1 ton of carbon dioxide emissions, are one such solution that enables both corporations and individuals to compensate for their emissions. These credits are created by carbon projects such as nature-based solutions that aim to reduce or capture carbon emissions. However, ensuring the legitimacy and impact of these carbon projects is critical, and this is where the verification process becomes indispensable.
For carbon credits to be effective and trustworthy, they must be verified by independent third-party institutions in line with accredited standards. Verification ensures that the projects behind these credits truly deliver the promised environmental benefits, such as reducing emissions or restoring ecosystems. Without this validation, companies and investors might unknowingly support projects that fail to deliver real, measurable results, potentially undermining the global push toward sustainability.
The demand for high-integrity verified carbon credits has surged in recent years. In 2024, the demand for nature-based carbon credits is set to skyrocket with more than 50% of the carbon credit demand in the financial services sector to be for nature-based credits. It’s also increasingly clear that buyers are willing to pay a premium for high-quality credits that deliver demonstrable co-benefits for biodiversity and community development. Companies are increasingly seeking high-quality, verified credits from nature-based projects to meet sustainability goals, driven by their ability to provide both carbon sequestration and additional co-benefits like biodiversity conservation and community resilience.
Illustrations of the emissions wheel.
This article delves into the carbon credit life cycle. It explains how these credits are created, issued, and eventually retired, ensuring real and measurable environmental benefits.
Understanding the role of carbon credits and carbon projects
Carbon credits are primarily used to reduce carbon footprints. A carbon footprint represents the total greenhouse gas emissions (GHG) caused directly or indirectly by a person, product, or organization. To achieve net-zero emissions, an equivalent amount of these emissions must be reduced or compensated.
The major sources of emissions stem from activities like energy production, industrial processes, deforestation, transportation, and agriculture. Understanding these sources helps identify areas where carbon compensation projects can make a meaningful difference.
Carbon projects aim to reduce or remove GHG emissions from the atmosphere. These initiatives include reforestation, renewable energy, and methane capture from landfills, all generating carbon credits from the emission reductions they achieve. These credits are then used to compensate for emissions.
Close-up of an African man planting a tree seedling in an African forest as part of a reforestation project. AI generated picture.
Beyond emissions reduction, some projects like nature-based solutions offer additional environmental and social benefits, such as biodiversity conservation and economic support for local communities. For instance, reforestation projects not only capture carbon but also promote wildlife habitats, support local livelihoods, and protect watersheds.
Discover more: Why carbon credits are the future of sustainable investing
The carbon credit life cycle
To understand how carbon credits are issued and retired, let’s explore their life cycle in the voluntary carbon market. This process begins with project development, moves through validation and verification, and ends with the sale and retirement of the credits.
Illustrations of the carbon credit life cycle.
Step 1: Project development
Establishing baseline emissions
Before a carbon project can be verified, it is crucial to establish an emissions baseline. This baseline is the scenario where the project does not exist, essentially providing a benchmark for measuring the project's actual emissions reductions. It outlines the expected emissions in the absence of the project, ensuring that any claimed reductions are attributable solely to the project itself.
Project Design Document (PDD)
Once the project design is finalized, a Project Design Document (PDD) is created. This document outlines the project details, including the established baseline, monitoring plans, and methodologies for calculating emissions reductions. The PDD is then submitted to a certifying body for approval, in charge of ensuring carbon credit projects meet specific standards and criteria, such as additionality, permanence, and double counting. These are some of the most known certification agencies:
- Verified Carbon Standard (VCS) by Verra: The most flexible and widely-used standard, covering a broad range of projects with scalability.
- Gold Standard: Focuses on social and environmental co-benefits alongside carbon reductions, with strong emphasis on sustainable development.
- American Carbon Registry (ACR): Emphasizes scientific rigor and is especially strong in the U.S. for sectors like agriculture and forestry.
- Climate Action Reserve (CAR): Primarily focused on U.S. and North American projects, known for regulatory-grade methodologies and transparent processes.
These leading international standards provide a framework for certifying carbon projects. This ensures that projects deliver both environmental and social benefits while generating top-tier carbon credits.
Project development
After the PDD is approved, the project enters the development phase. During this phase, developers implement the project activities as outlined in the PDD. For example, in reforestation projects, this includes planting trees, managing the site, and ensuring the trees' growth and health to meet the targeted emissions reductions.
Monitoring
Continuous monitoring of the project’s progress is vital. Developers must regularly assess the health of the newly planted trees and track their growth to ensure they meet the predicted carbon sequestration levels. This monitoring data is critical for the verification process.
African forester monitoring a newly planted forest. AI generated picture.
Step 2: Project validation and verification
After the project is underway, it enters the validation and verification phase, a crucial step in ensuring the legitimacy of the carbon credits issued. Two key parties are involved: independent auditors and rating agencies.
Independent third-party auditor
An independent third-party auditor, also known as the Validation/Verification Body (VVB), assesses the project’s claims by comparing the emissions reductions to the baseline. This step includes reviewing project documentation and visiting the project site to confirm compliance with the carbon certification program, such as Verra’s Verified Carbon Standard.
Two men validating a reforestation project in Africa. AI generated picture.
Once validated, the auditor issues a report confirming that the project adheres to the necessary standards. For example, a carbon project from VanderStyn's portfolio undergoes this rigorous validation process, ensuring the trees planted are capturing carbon effectively and making a measurable sustainable impact on the environment.
Discover more: Strategic investment: profiting from investing in carbon credits
Rating agencies
Besides certification agencies, there are rating agencies, in charge of approval and quality evaluation of the carbon projects. Carbon rating agencies evaluate the overall reliability, risk, and environmental impact of carbon credits using established frameworks like BeZero's alphabetic scale (AAA, AA, A) or Sylvera's A to D scale. These ratings measure the likelihood that the carbon credits will meet their emissions reduction targets.
Projects must meet stringent criteria, including additionality, permanence, and double-counting prevention:
- Additionality refers to the concept that the emissions reductions from a project would not have occurred without its implementation. This ensures that each carbon credit represents an additional and real impact on reducing emissions.
- Permanence is another key consideration, requiring long-term assurance that the emissions reductions will endure over time. For instance, a reforestation project must ensure that the planted trees will remain intact and continue sequestering carbon for decades to come.
- Double counting prevention is crucial to avoid multiple parties claiming the same carbon credit, ensuring the integrity and effectiveness of the carbon credit system.
Step 3: Carbon credit registration and issuance
Once a project passes the validation and verification stages, it is registered with an approved carbon registry. Carbon credits are issued based on the verified emissions reductions, with each credit representing 1 metric ton of carbon dioxide equivalent emissions (CO2e). These credits are assigned unique serial numbers to track them throughout their life cycle.
Registries, such as Verra’s VCS, ensure that carbon credits are recorded, keeping a transparent history of ownership. VanderStyn's portfolio of carbon credits, for example, is tracked through these platforms, ensuring full accountability from project development to sale.
Step 4: Sale and purchase of carbon credits
After carbon credits are issued, they enter the carbon market. Here, they are sold to buyers, including individuals, investors, and companies looking to compensate for their emissions or meet sustainability commitments. Carbon credits can be traded on exchanges like the Carbon Trade Exchange (CTX) or Xpansive, providing a transparent and accessible marketplace for transactions.
If you want to go a step further, you can find carbon project funds, like the Green Carbon Fund, where you will be investing in pre-selected and verified nature-based projects that provide attractive returns. VanderStyn offers access to this exclusive high-value market, allowing investors to capitalize on the growing demand for verified carbon credits while supporting sustainable development initiatives across the globe.
Discover more: Green Impact Fund: a strategic approach to sustainable investing
Step 5: Retirement of carbon credits
Once carbon credits are purchased and used to offset emissions, they are "retired". Retirement ensures that the credit cannot be traded or used again, maintaining the integrity of the carbon market. The registry marks the carbon credit as retired, ensuring that the emissions reduction is only claimed once by one party, preventing double counting.
VanderStyn ensures that all credits sold through their portfolio of projects are transparently traded and retired, ensuring full accountability and contribution toward emissions reduction goals.
Carbon credits: a pathway to a greener future
These green investments are a powerful tool in reducing emissions and driving environmental sustainability. By understanding the life cycle of carbon credits — from project development to retirement — businesses, individuals, and investors can make informed decisions that support meaningful emissions reductions.
Landscape of a lush African forest at sunrise. AI generated picture.
Investing in verified carbon credits is an opportunity to support projects that not only reduce emissions but also deliver co-benefits to local communities and ecosystems. With VanderStyn’s Green Carbon Fund, investors can access and earn returns from top-tier carbon credits that are meticulously verified and contribute to a sustainable future.
By participating in the carbon market and supporting high-quality projects, individuals and organizations can play an active role in fostering a greener planet while achieving their own financial goals.
