A carbon credit is the product of collaborative efforts that begin long before it is listed for sale on our site. Every step is designed to ensure that a carbon credit represents a verifiable reduction of greenhouse gas emissions.
We’re going to review the life cycle of a carbon credit project from concept formation to final sale. Before we begin, check out our Carbon Credits 101 page and Carbon Credits Glossary to review the basics if you’re new to carbon credits.
Project Design Document
The first step to creating a carbon credit is compiling a Project Design Document (PDD) that includes the outlines the mission, calculations for the targeted emissions reduction, methodology, a business plan, and steps for implementation.
The first step to creating a carbon credit, after determining that the project is viable, is compiling a Project Design Document (PDD). The PDD describes how the project meets the protocol’s legal and the performance requirements. This document also serves as a business plan that includes the following details:
- Project mission
- Steps for implementation
- Project boundaries
- Baseline conditions before the project starts
- Project start date
- Processes for gathering data
- Personnel and required competencies
- Data management and quality control
- Calculated emission reductions for the allowed crediting period
The PDD is completed by the Project Developer that will operate the project, generally a private company, non-profit corporation, or other non-government organization (NGO). The development team will have the appropriate sector expertise and competencies. Carbon credit projects are located all over the world and range from small reforestation efforts to large industrial offset programs.
Once the project is ready to be implemented, the developer will submit the Project Design Document and any required supporting documentation to an accredited third-party validation and verification body (V/VB) that is registry approved. This expert organization will assess the PDD and report on this implementation plan. The V/VB will visit the project site, interview staff, and assess all aspects of the project implementation. The project developer will have to address any findings by the V/VB listed in the Validation report, which is a key part of the project approval process.
Following validation, the project will be active overtime, generating carbon credits. After a specified time (reporting period), the project developer will hire a third-party verification body (VB) that will verify the carbon reduction claim is accurate, assuring that all aspects of the project protocol and GHG registry requirements have been met. Verification establishes the legitimacy of the credits generated, so that credits can be issued and available for sale. Verification entails a range of tactics including audits, in-person field visits, data collection and analysis, and interviews. Verification happens at the end of a project reporting period, while there are several reporting periods during a project’s lifecycle (crediting period). GHG registries require that verification bodies be changed every few years and that there is no conflict of interest between the verification body and the project proponents.
Upon receiving initial verification, GHG registry will register and serialize the carbon credits. Each verified credit has a unique identifying serial number, providing traceability, uniqueness and transparency. Carbon credits are tracked, and can be retired (permanently) only once. When retired, the credit serial number is stored in an independent database, and cannot ever be placed back into the carbon offset market.
Multiple factors determine the price of a carbon credit on the market. The project type, location, associated co-benefits, vintage of when the credit was generated, and the supply and demand in the carbon credit marketplace.
Sometimes the project developer will find buyers for their credits, while brokers facilitate the majority of purchases. They bid on bulk quantities of offset credits from preselected and verified projects, maintaining an inventory of carbon credits to provide to a variety of clients. Brokers and other resellers also help clients build portfolios based on their goals and interests. The carbon credit market is transparent, where project documentation and carbon credit tracking is publicly available. Yet, the price of the carbon credits, themselves, is usually only known to the buyers and sellers.
Real carbon credits are always ex post. Meaning that the credits have to have happened, and are verified after a reporting period is completed. Some project types demand ongoing project assurance, such as land use projects. The GHG registry establishes a “buffer”, holding back a percentage of carbon credits for all land use project (forestation, for example), so that is any “living” project had unforeseen reversals, an equivalent number of carbon credits from the buffer will be retired, to ensure permanence of the carbon credits lost to fire or other unfortunate occurrence. Many other project types do not require a buffer, as the nature of the project itself assures permanence. Destruction of methane at a landfill or dairy farm are such examples.
Careful analysis of the carbon markets, project types, geographic locations, project documentation, and co-benefits of projects determine the value and worthiness of projects. Many projects provide for wonderful co-benefits such as protection of biodiversity, improved community health outcomes, jobs and other economic stimulus make carbon credits a value part of an organization’s overall carbon management and mitigation.