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6 things to know about carbon credits

Why are they saying that carbon credits are the market of the future? How important is it? How does Brazil stand out in this regard? If you still have doubts about the subject, we've put together a quick guide with answers to common questions about it!

  1. What are carbon credits?

The concept of carbon credits emerged with the Kyoto Protocol (1997), which was an important milestone in the debate between countries on climate change. Each credit represents one ton of CO2 that is no longer emitted, generating a kind of credit as the term itself indicates.

As part of the global targets to reduce carbon emissions, which do so much damage to the planet and accelerate global warming, generating credits is a necessary attitude to contain the damage. In addition, companies and countries that fail to meet their targets could buy credits generated by other agents, creating a mechanism that facilitates everyone's commitment to sustainable development.

  1. What do voluntary and regulated markets mean?

The voluntary market and the regulated market are two types of structures that refer to the way in which commercial and economic transactions take place.

In the voluntary market: transactions take place freely and without direct intervention by the government or regulatory agencies. Buyers and sellers are free to negotiate terms and conditions according to their individual preferences and interests. The forces of supply and demand, together with competition, play an important role in determining prices and allocating resources.

In a regulated market: the environment is controlled by government or regulatory agencies. There are rules, laws and regulations established by the government to guarantee the safety, fairness, transparency and smooth running of transactions. These regulations can cover areas such as consumer protection, product safety, environmental standards, price controls, among others. This is the case, for example, in the energy, telecommunications, health and transportation sectors.

  1. What is the difference between preservation and restoration credit?

Yes, there are two types of carbon credit. In common, they are equivalent to one ton of CO2 not emitted into the atmosphere, which helps to contain global warming. However, they can be credits linked to forest preservation or reforestation. This is the basic difference between REDD+ and ARR credits.

In the case of REDD+, the effort made is to keep native forests standing and curb deforestation. ARR or restoration carbon credits, on the other hand, are linked to the initiative to recover green areas with new plantings.

  1. What do carbon credits have to do with ESG?

ESG is an approach used to evaluate the performance of companies in terms of environmental, social and corporate governance issues. In this context, carbon credits are directly related to environmental and sustainability criteria. They represent a way of mitigating greenhouse gas (GHG) emissions and contribute to reducing the carbon footprint of a company or organization.

By purchasing carbon credits, a company demonstrates its commitment to offsetting its own GHG emissions and reducing its environmental impact. This is considered an important aspect, as it demonstrates concern for the responsible management of natural resources and the fight against climate change.

In addition, by investing in carbon credit projects, companies can also contribute to the ESG social criteria. Many carbon credit projects benefit local communities by creating jobs, improving quality of life and sustainable development. So this kind of initiative has a positive impact on the perception of the company by investors, customers and other stakeholders, who increasingly value those who demonstrate corporate responsibility.

  1. How to buy or sell carbon credits?

Buying or selling carbon credits involves participating in carbon markets, where these credits are traded. Carbon credits are financial instruments that represent a reduction or removal of greenhouse gas (GHG) emissions from a specific activity.

Basically: if you are a person or company looking to offset your emissions, you can buy carbon credits. If you are involved in projects that generate emission reductions, you can sell the carbon credits generated.

It's important to find out about the regulations in each country and where the carbon credits come from. The price can also vary greatly depending on supply and demand, as well as quality criteria. These transactions usually take place on stock exchanges, online platforms or through bilateral contracts. After trading, carbon credits must be registered and tracked in appropriate systems to ensure transparency and avoid double counting.

6. Why is there a trend towards valuing carbon credits?

There are several reasons for this expectation that carbon credits will increase in value, which has to do directly with climate change. Understand some of the movements influencing this scenario:

  1. Regulation and international agreements to reduce greenhouse gas emissions, with targets that increase the demand for carbon credits to compensate for emissions that exceed the established limits.
  2. The fact that demand for carbon credits is increasing, but supply is still limited because generating them requires investment and time.
  3. The corporate commitment of companies around the world that are pursuing emission neutrality or reduction targets as part of their social responsibility and sustainability strategies.
  4. The carbon market is becoming increasingly integrated into the global financial market, strengthening the existence of carbon credits as financial assets.
  5. Awareness of the importance of mitigating climate change is driving the adoption of measures that encourage the reduction of emissions even without any imposition.

To give you an idea, the value of a carbon credit was approximately €16.06 in 2018, while in April 2021 it rose to €46.00. The trend is set to increase even further, with the outlook in Brazil being for a turnover of US$ 347 billion by 2050.

Indeed, the carbon credit market is a business of the future. If you're interested in learning more about the subject and want to invest in Brazilian environmental restoration, come and meet Abundance.

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