What is a Carbon Credit and How is it Created?

Today, important challenges like climate change and global warming are being tackled, with various solutions being developed in response. With increasing global environmental concerns and efforts to combat climate change, sustainability principles are being highlighted more than ever. In this context, financial tools such as carbon credits play a vital role in enhancing environmental responsibility among businesses and individuals. Carbon credits have emerged as a solution for businesses that exceed internationally agreed greenhouse gas emission quotas. Although carbon credits are more commonly used by companies, they are also suitable for individual use. Individuals can contribute to supporting projects that reduce greenhouse gas emissions and create environmental and social benefits by purchasing carbon credits to offset their own carbon emissions.

When looking at how carbon credits are formed in the market, they undergo various processes. The first step is identifying a project that will generate carbon credits. These projects typically involve activities such as renewable energy production, energy efficiency enhancement, forestry projects, or reducing carbon emissions in industrial processes. These projects focus on reducing greenhouse gas emissions or increasing absorption. Following project selection, the potential of the project to reduce carbon or enhance carbon absorption is assessed according to a set of standards and guidelines. International standards establish various criteria to ensure the project's sustainability and carbon benefits. The project's compliance with these standards is certified. Once implemented, the project will have the capacity to reduce or absorb greenhouse gas emissions. These reductions or absorptions form the basis of carbon credits. The organization implementing the project measures and certifies these reductions or absorptions.

Carbon credits are usually expressed in terms of CO2 equivalents. That is, the amount of greenhouse gas reduced or absorbed by the project is calculated as a CO2 equivalent. This represents the global warming potential of various greenhouse gases (methane, nitrogen oxides, etc.). After determining the carbon dioxide equivalent, carbon credits undergo a certification process and become tradable on international carbon markets. To make the carbon credit formation process more understandable, consider an example where a renewable energy power plant project generates 40 MW of electricity. If this electricity were produced from fossil fuels instead of a renewable energy plant, it would have resulted in a certain amount of greenhouse gas emissions. The amount of these theoretical emissions is calculated in terms of CO2 equivalents, and this calculated value is considered a negative emission. That is, it creates a positive impact by reducing the amount of carbon released into the atmosphere. This negative emission amount is certified as a carbon credit. As a result, the renewable energy plant project receives carbon credits for this negative emission amount, and these credits are tradable on international carbon markets.

Carbon Credit Markets and Certification Agencies

The concept of carbon credit came into prominence with the Kyoto Protocol, and carbon credit trading began. Countries that signed the protocol are subject to a mandatory market, while countries like Turkey, which did not sign but committed to reduction, are subject to a voluntary market. According to the working principle of the markets, if any manufacturing company or country exceeds its set quota, it can buy carbon quotas from a country or manufacturing company that produces less carbon emission. However, trading between the mandatory and voluntary markets is not possible, and each market conducts its own carbon trading. This situation can cause significant differences in the unit prices of the same type of credits in both markets. For example, a carbon credit in the mandatory market might trade at 80 Euros/ton, while the same credit in the voluntary market might trade at 4 Euros/ton. Carbon Credit prices are not fixed and are priced according to supply and demand in a free market. In addition to supply and demand, factors such as the production year of the carbon credit, the type of project, and the location of the project also affect carbon credit prices. Certification agencies for mandatory and voluntary markets differ as well. Certification agencies such as the Gold Standard, Verra, Greenhouse Gas Certification, and Carbon Reduction Institute provide services on a global scale. The programs offered and accepted by these agencies, the countries they serve, and the types of activities they cover can vary. Whether an activity can be subject to certification and the conditions for certification depend on the methodologies and project conditions published by the relevant agencies. For instance, not every forestry activity can be certified. The methodologies of the certification agencies and the restrictions in these methodologies should be reviewed. Factors such as the project's start year, the types of trees used, minimum area requirements, ownership status, the contribution of the carbon credit to the project, or conditions for realization are elements that determine the certification process. Voluntary Emission Reduction Certificates (VER) are used for the voluntary markets to which Turkey is also subject. Looking at the certification agencies valid for voluntary markets, institutions such as Gold Standard (GS), Verra (VCS), Greenhouse Gas Certification (GCC), Carbon Reduction Institute (ICR), and International Renewable Energy Certificate (IREC) are present. The price of carbon credits within these institutions can vary among them, and the price of carbon credits at the same institution can also vary from year to year. For example, the prices of solar energy credits could be GCC< ICR< VCS< GS, while the solar energy credit prices at GS for different years could be 2022< 2023. All these certification agencies are referred to as Non-Governmental Organization (NGO).

Carbon Credit Projects and Their Effects

Carbon credits can be obtained through various projects, including energy efficiency projects, biodiversity and sustainable development projects, forestry and forest conservation projects, and renewable energy projects. These projects and their effects are described below: Energy Efficiency Projects: Projects aimed at increasing energy efficiency in industrial facilities or buildings can generate carbon credits. These projects reduce greenhouse gas emissions by reducing energy consumption and increasing energy efficiency. They also lower operational costs, enhance energy security, and promote green job opportunities. Biodiversity and Sustainable Development Projects: Activities such as biodiversity conservation, ecosystem restoration, and sustainable agriculture can have the potential to generate carbon credits. These projects protect biodiversity, restore ecosystems, and promote sustainable development, thus providing long-term solutions based on local communities and ecosystems. Forestry and Forest Conservation Projects: Forest conservation projects aim to reduce greenhouse gas emissions by preventing deforestation or creating new forest areas. In doing so, they reduce the amount of carbon in the atmosphere and generate carbon credits. Renewable Energy Projects: Renewable energy projects such as wind, solar, and hydroelectric power are commonly used examples that generate carbon credits. Renewable energy projects emit less greenhouse gas compared to fossil fuels, thus reducing the amount of carbon in the atmosphere. They also reduce air pollution, creating positive health effects and contributing to local economies. Carbon Credit and Turkey In Turkey, since 2005, practices based on voluntary "Voluntary Carbon Markets" aimed at reducing carbon emissions have been ongoing, and "Voluntary Emission Reduction" (VER) certificates are issued for emissions traded in the market. Companies wanting to balance their greenhouse gas emissions calculate the amount of emissions resulting from their activities and purchase carbon certificates produced by emission reduction projects to reduce and balance these emissions within the framework of the principle of social responsibility. The "Notification on Registry Procedures for Projects Reducing Greenhouse Gas Emissions," published on April 25, 2012, in the Official Gazette, has regulated the operations of the Voluntary Carbon Markets. This notification aims to record greenhouse gas emission reduction projects, especially those initiated by private enterprises. The main purpose of the regulation is to monitor, verify, and report greenhouse gas emissions from various activities listed in Annex I of the Kyoto Protocol (which constitute a significant part of emissions, such as cement, ceramics, paper production, electricity and steam production, iron-steel, lime, and glass production). In Turkey, many renewable energy facilities have been certified under GCC, GS, Verra, Irec platforms. One such project is the Forests from the Sun project. The Forests from the Sun project focuses on clean energy production and reducing carbon emissions in Turkey. Under this project, the Solar Energy System (Photovoltaic Power Plant) established in 2014 uses the energy resources obtained to reduce carbon emissions and minimize environmental impacts. The 500 kWp solar energy system generates electrical energy from sunlight through photovoltaic panels. The electricity produced is used as an alternative to fossil fuel-based energy production, contributing to the prevention of carbon emissions. The project's carbon-reducing effect is certified as carbon credit by GS in national and international carbon markets. These certificates recognize and support the environmental and social benefits of the Forests from the Sun project. As seen in the example, although carbon credit applications are active in Turkey, it is thought that the country's rich renewable energy potential is not being sufficiently utilized. Turkey has various renewable energy resources such as solar, wind, hydroelectric, and biomass. These resources indicate significant potential to support Turkey's efforts to reduce greenhouse gas emissions and transition to sustainable energy. Therefore, it is believed that the volume of carbon credits that can be developed with renewable energy projects in Turkey is high. References Casem. (December 4, 2023). What is a Carbon Credit. Casem: https://www.casem.com.tr/what-is-a-carbon-credit/ Ege Forest Foundation. (2014). Carbon- Carbon Credit Project. Ege Forest: https://www.egeforest.org.tr/projects/8/carbon__carbon_credit_project.aspx Gupta, Y. (2011). Carbon Credit: A Step Towards Green Environment. Global Journal of Management and Business Research. Kırtman, B. (2023). Carbon Trading Training. Environmental Engineering: https://www.environmentalengineering.org/download/carbon-trading-training/carbon-trading-training.pdf Özcan, M. (2022). Increasing Voluntary Carbon Credits Potential via Renewable Energy Projects in Turkey. Pamukkale University Journal of Engineering Sciences, 710-719.