A comprehensive Guide to

Carbon Credits

Understanding Carbon Markets

 Table of Content

Introduction 3

1. Carbon Credits and 4-8 Introduction

Carbon Offsets

2. Creating Carbon Credits
3. Pricing Carbon Credits
4. Trading Carbon Credits
5. Verification and Validation of
Carbon Credits
6. Methodologies for Creating
Carbon Credits
9-11 C arbon credits and carbon markets are part
of national and international efforts to slow the
12-19
growth of greenhouse gas (GHG) concentrations.
20-21 Carbon trading is an application of the emissions
trading method. GHG emissions are capped, then
22-23 markets are used to allocate emissions among
regulated source groups. The goal is to allow
market mechanisms to drive industrial and
24-26 commercial processes towards low-emission or
carbon-intensive development.

7. CDM Value Chain 27-29

Conclusion 30-32

Acknowledgements 34

About Investure 35
 1. Carbon Credits and
Carbon Offsets

A carbon credit (also known as carbon offset credit) is a

transferable instrument certified by governments or There are three basic types of carbon
independent certification bodies to represent an credits:*
emission reduction of one metric ton of CO₂ or an
equivalent amount of other GHGs. One carbon credit is
Reduced emissions
equal to one ton of carbon dioxide, or in some markets,
carbon dioxide equivalent gasses. The carbon credit (typically energy efficiency measures);
functions as a permit that allows the holder to emit one
ton of carbon dioxide which can be traded in the Removed emissions
international market at its current market price. The (carbon capture and planting forests);
credits are tracked so that a ton can be purchased or sold
only once.
Avoided emissions
(for example refraining from cutting
down rainforests).

*Teresa Hartmann and Douglas Broom, ‘What are carbon credits and how can they
help fight climate change?’ (News, 12 November 2020)
https://www.weforum.org/agenda/2020/11/carbon-credits-what-how-fight-climate-
change/ 5
 The use of the term offset to
refer to emissions compensated
for by decreases at another
facility has been used since the
late 1970s as part of the U.S.
Clean Air Act, in which new
emissions in high-pollution areas
were allowed only where other
reductions occurred to offset the
increases. Carbon offsets are a
mechanism for companies and
others to balance out the carbon
they are emitting by investing in
projects that either remove
carbon from the atmosphere or
avoid emitting it in the first
place. With carbon credits, the
company can offset its emission
to live up to national or
international environmental
requirements. Many
organizations buy carbon credits
to fund offset projects and, in
the process, keep their carbon
balance sheet aligned to achieve
net-zero emissions.

6 7
 2. Creating
Carbon Credits

If the carbon credits can be traded, who has

the authority to create them and how to
create them is of significance for economic
operators. To answer the above questions,
we can first classify the carbon market into
two categories, which are the mandatory
carbon market and the voluntary carbon
market. Many political entities like the EU,
the UK, and the state of California already
have mandatory carbon markets covering
specific industry sectors and gasses. These
form an important part of the effort to meet
the Paris Agreement target of limiting global
heating to 2°C above pre-industrial levels
(with a more ambitious ideal of remaining
within a 1.5°C increase), even though some
of these markets predate the Paris
commitments. Voluntary carbon markets
allow carbon emitters to offset their
unavoidable emissions by purchasing
carbon credits emitted by projects targeted
at removing or reducing GHG from the
8 atmosphere.
 Estimates of the size of the
carbon credit market vary
wildly, due to the different
regulations in each market and
other geographical distinctions.
The voluntary carbon market,
consisting largely of companies
that buy carbon offsets, had an
estimated value of $1 billion in
2021. The voluntary carbon
market will have to expand
substantially - 15-fold by 2030
and 100-fold for us to achieve
net zero by 2050 (even once all
other emissions are avoided,
reduced, and substituted).
Currently valued at $300
million, the market could reach
$50 billion soon.* The market
for compliance credits, related
to regulatory carbon caps, is
substantially larger, with
estimates ranging as high as
$272 billion for the year 2020.*

*‘Carbon offsetting’ <https://www2.deloitte.com/uk/en/focus/climate-change/zero-in-on-carbon-offsetting.html>

*Reuters. "Global Carbon Markets Value Surged to Record $277 Billion Last Year-Refinitiv."
 3. Pricing
Carbon Credits
There are five types of carbon pricing,
including an emission trading system,
carbon tax, offset mechanism, Results-
Based Climate Finance, and internal
carbon pricing.*
An emissions trading system (ETS) is a
system where emitters can trade emission
units to meet their emission targets.
To comply with their emission targets at
least cost, regulated entities can either
implement internal abatement measures or
acquire emission units in the carbon market,
depending on the relative costs of these
options. By creating supply and demand for
emissions units, an ETS establishes a market
price for GHG emissions. The two main
types of ETSs are cap-and-trade and
baseline-and-credit:
*https://carbonpricingdashboard.worldbank.org/what-carbon-
pricing
12
Cap-and-trade systems, which apply a
cap or absolute limit on the emissions
within the ETS and emissions allowances
are distributed, usually for free or
through auctions, for the amount of
emissions equivalent to the cap.
Baseline-and-credit systems, where
baseline emissions levels are defined for
individual regulated entities and credits
are issued to entities that have reduced
their emissions below this level. These
credits can be sold to other entities
exceeding their baseline emission levels.
A carbon tax directly sets a price on carbon
by defining an explicit tax rate on GHG
emissions or - more commonly - on the
carbon content of fossil fuels, i.e. a price per
tCO₂e - ton (t) of carbon dioxide (CO₂)
equivalent (e).
A carbon tax is different from an ETS in that
the emission reduction outcome of a carbon
tax is not predefined but the carbon price is.
An offset mechanism designates the GHG
emission reductions from project- or
program-based activities, which can be sold
either domestically or in other countries.
13
RBCF (Results-Based
Climate Finance) is a
funding approach where
payments are made after
pre-defined outputs or
outcomes related to
managing climate change,
such as emission
reductions, are delivered
and verified.
Many RBCF programs aim
to purchase verified
reductions in GHG
emissions while at the
same time reduce
poverty, improve access
to clean energy and offer
health and community
benefits.

Internal carbon pricing

is a tool an organization
uses internally to guide its
decision-making process
in relation to climate
change impacts, risks and
opportunities.

14 15
Like other market goods,
the price of carbon
credits is deeply
influenced by demand
and supply. The price is
more often an indicator
of disparity instead of
quality.* Carbon offsets
typically cost from $10 to
$20 per tCO₂e.*
McKinsey estimates that
annual global demand
for carbon credits could
reach up to 1.5 to 2.0
gigatons of carbon
dioxide (GtCO₂) by 2030
and up to 7 to 13 GtCO₂
by 2050. Depending on
different price scenarios
and their underlying
drivers, the market size
in 2030 could be
between $5 billion and
$30 billion at the low end
and more than $50
billion at the high end.*

*‘Carbon offsetting’ <https://www2.deloitte.com/uk/en/focus/climate-change/zero-in-on-carbon-offsetting.html>

*Peter Miller, ‘Carbon Offsets 101’ (Expert blog, 30 September 2019) <https://www.nrdc.org/experts/peter-miller/carbon-offsets-101>
*Christopher Blaufelder, Cindy Levy, Peter Mannion, and Dickon Pinner, ‘A blueprint for scaling voluntary carbon markets to meet the climate challenge’ (Report, 29 January
2021) <https://www.mckinsey.com/business-functions/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge>
BloombergNEF (BNEF) estimates that prices for carbon offsets - verified emissions reductions
equivalent to one ton of carbon each - could be as high as $120/ton or as low as $47/ton in 2050. The
outcome will mostly depend on what types of supply are eligible to meet the rapidly expanding
universe of sustainability goals, as well as who the primary customers are in the market. Offset prices
range from $11 to $215/ton in 2030, up from just $2.50 on average in 2020, before narrowing to $47
to $120/ton in 2050.*

*BNEF’s inaugural Long-Term Carbon Offset Outlook 2022

18 19
 4. Trading Carbon Credits
Credits are traceable, tradable, and finite. Carbon offsets
can be bought and sold as part of compliance schemes,
such as the United Nations Framework Convention on
Climate Change (UNFCCC) Kyoto Protocol or the European
Union Emission Trading Scheme (EU ETS; a regional carbon
market where European countries can trade carbon
allowances to meet regional emission-reduction goals).
Under the Kyoto Protocol, emissions trading in a so-called
carbon market may help them meet their targeted limit: a
party can sell an unused emissions allowance to a party
above its limit. The protocol also allows carbon offsets to
be traded. However, until now, there has been no
standardized way to trade carbon credits and no way to
verify the compensating activity behind them.
Carbon trading is an application of an emissions trading
approach in the national or international carbon market.
GHG emissions are capped and then markets are used to
allocate the emissions among the group of regulated
sources. An individual or company can pay a broker to
remove a portion of carbon from the atmosphere, often
in another part of the world. The customer calculates
20
their emissions level, and the broker then charges a fee
based on that level. The broker will then invest a portion
of that money in a project that reduces carbon emissions.
The individual or organization receives a certificate or
some other proof that they have purchased a carbon
offset. The invested projects can then continue to reduce
global carbon emissions by improving technologies and
changing awareness and behaviours in a community.
Usually, these carbon credits shall be certified by third
parties and go through a rigorous system of checks and
balances to prove they are real, measurable, permanent,
additional, independently verified, and unique.
Many companies sell carbon credits to commercial and
individual customers. These carbon offsetters purchase
the credits from an investment fund or a carbon
development company that has aggregated the credits
from individual projects. Buyers and sellers can also use
an exchange platform to trade, which is like a stock
exchange for carbon credits. Each international transfer is
validated by the UNFCCC. Each transfer of ownership
within the European Union is additionally validated by the
European Commission. Currently, there are five exchanges
trading in carbon allowances: the European Climate
Exchange, NASDAQ OMX Commodities Europe, PowerNext,
Commodity Exchange Bratislava, and the European Energy
Exchange.
21
5. Verification and Validation of project manager must
monitor the emission
Carbon Credits reductions made over the
course of time. Some
standards allow inclusion
of emission reductions that
occurred before the
Validation is a third-party audit to assess the project was certified. In this
conformance of the project design and documentation to case it is extremely
the certification body’s standards. The validator performs important to have a
a document review and site visit and completes a report verified baseline of
including an assessment of whether the project conforms emissions at the time the
to the standards. For example, the Clean Development project began. Both the
Mechanism (CDM) is the market-based mechanism, an CDM (since 2000) and the
initiative under the UNFCCC, that has involved the largest VCS - the Verified Carbon
number of countries - both developed and developing - in Standard program, the
efforts to reduce GHG emissions. world’s most widely used
CDM certification has two separate steps: first the voluntary GHG program -
methodology used to calculate and monitor the carbon allow this, if it can be
credits produced needs to be approved by an proven that the generation
independent auditor. A different independent auditor will of carbon credits was
then need to verify whether the project is implemented considered in the original
according to the approved methodology. Only if there is project design.
already an approved methodology that can be followed
literally, the first step can be skipped. Many voluntary
market standards accept CDM methodologies. Once
certified, your project can start producing credits. The

22 23
 6. Methodologies for Creating
Carbon Credits

Methodologies set out detailed

Definitions that are required to apply the methodology;
procedures for quantifying the real
GHG benefits of a project and
provide guidance to help project Description of the applicability of the methodology;
developers determine project
boundaries, set baselines, assess Description of the project boundary;
additionality, and ultimately
quantify the GHG emissions that
Procedure to establish the baseline scenario;
were reduced or removed. In CDM,
methodologies provide the
information that is required to Procedure to demonstrate and assess additionality;
determine the amount of Certified
Emission Reductions (CERs) Procedure to calculate emission reductions;
generated by a mitigation project
activity. The following main sections
can be found in a methodology:* Description of the monitoring procedure.

*“CDM Methodologies Booklet” https://cdm.unfccc.int/methodologies/documentation/index.html.

6 25
Methodologies for large-scale project
activities can be used for project activities of
any size, whereas small-scale methodologies
can only be applied if the project activity is
within certain limits. Moreover, the CDM
applies different methodologies to different
industries, such as renewable electricity,
renewable energy (thermal or mechanical
energy), biofuel, gasses, waste management,
and transport.*
*“CDM Methodologies Booklet”
https://cdm.unfccc.int/methodologies/documentation/index.html.
26
7. CDM Value Chain
Once project participants have selected an applicable
approved methodology, they apply it to their project
activity and prepare a Project Design Document (PDD);
this is the first step in the Clean Development Mechanism
(CDM) project cycle. The CDM is defined in Article 12 of
the Kyoto Protocol - an international treaty to reduce
greenhouse gas emissions - and allows countries that
have committed to reduce or limit emissions to
implement a reduction project in developing countries.*
The methodology provides provisions for the core
elements of a PDD:
the demonstration of additionality;
the establishment of the baseline
scenario and the estimation of emission
reductions or net removals; and
the monitoring plan.
*UNFCCC 'The Clean Development Mechanism' https://unfccc.int/process-and-
meetings/the-kyoto-protocol/mechanisms-under-the-kyoto-protocol/the-clean-
development-mechanism
 The main steps of the CDM project cycle and their actors are the following:

Project design (Project Participants); Registration (CDM Executive Board);

National approval (Designated National Authority); Monitoring (Project Participant);

Validation (Designated Operational Entity); Verification (Designated Operational Entity);

Issuance (CDM Executive Board).

To sum up, the whole value chain of CDM is like*:

*Malte Schneider, HolgerHendrichs, VolkerH.Hoffmann, ‘Navigating the global carbon market: An analysis of the CDM’s value chain and prevalent business models’ (2010) 38 Energy Policy
277, 281.

28 29

Conclusion
T he Paris Climate Agreement's goal of limiting
global warming to between 1.5°C and 2°C above
pre-industrial levels has called for action from all
parties involved – governments, companies, as
well as conscious individuals. However, as it can
be difficult to reduce carbondioxide emissions
fast enough to achieve this goal through changes
in the emitting process.
One alternative is to offset or compensate one’s
footprint by purchasing carbon credits, where
one carbon credit is equivalent to one ton of
carbon dioxide. This allows the respective buyer
to emit one ton of carbon dioxid.
30
This approach will become increasingly important
in the future when it comes to achieving the goal
of the Paris Agreement and offsetting carbon
dioxide emissions in general. Due to the growing
importance and demand, supply must and will
therefore also grow.
The voluntary carbon market, consisting largely
of companies that buy carbon offsets, had an
estimated value of $1 billion in 2021. The
voluntary carbon market will have to expand
substantially - 15-fold by 2030 and 100-fold for us
to achieve net zero by 2050 (even once all other
emissions are avoided, reduced, and
substituted). Currently valued at $300 million, the
market could reach $50 billion soon.
Investure is working on creating a liquid market
for validated impact (environmental as well as
social) from projects on the Investure platform,
as well as from other sources (such as other
platforms, organizations, and sovereigns). Our
goal is to make it easy for everyone - individuals
31
and companies - to achieve their sustainability
goals by tokenizing carbon credits and other
types of impact (making it accessible and
affordable) which can be used for compensation
and offset projects, as well as tradeable on
exchanges for liquidity.

If you would like to know more or to partner with

us, please contact us at info@investure.co
 About Investure
Investure is a Stockholm based fintech that is digitalizing,
aggregating and platforming the SDG investment eco-
system in order to bridge a devastating $2.5 trillion SDG
funding gap in developing markets. While 90% of the
SDGs are funded in developed markets, only 60% are
funded in developing markets and just 10% are funded in
Africa. Investure mobilizes and channels funding through
our global market and asset servicing platform. This is the
smartest way to raise funds or invest in climate action
and developing markets.

Investure Global AB
Birger Jarlsgatan 58
Stockholm, SE

Acknowledgements info@investure.co
www.investure.co

Author Tongle Si
Review Michael Akampa
Emily Sasse
Conclusion Emily Sasse
Design Emily Sasse

34