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Jun 28, 2024

The carbon credit lifecycle explained

Blog

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Jun 28, 2024

The carbon credit lifecycle explained

Blog

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Jun 28, 2024

The carbon credit lifecycle explained

Carbon removal credits play a critical role in helping companies address residual emissions and contribute impact alongside emissions reductions. But when a credit is purchased and when you can claim a climate contribution are different. Because of this, it’s important to track your credits, claim them only when they’re eligible, and ensure that they can’t be counted again.

But how do you know where your credits stand? Here, we’ll explain how carbon credits are generated and when you can count those credits toward your emissions. 

The carbon credit lifecycle:

Carbon removal credits are the tonnes of CO2 and CO2 equivalent that are sequestered by projects that remove and store CO2 from the air and oceans. Removal credits come from projects that sequester emissions that are outside any other value chain. Projects are designed by project developers, then validated and verified by independent auditors, and certified and tracked by credit registries, such as the American Carbon Registry (ACR); Climate Action Reserve (CAR); Verra; Puro.earth; and the Gold Standard. 

Credits undergo three phases: 

  1. The Design/Project Development Phase, when a project developer plans and builds the project;

  2. The Issuance Phase, when a credit is officially generated; and

  3. The Retirement Phase, when a credit is taken out of circulation and is counted toward a climate goal. 

Along the way, assessments should be made for quality, and credits should be monitored and tracked to ensure that they uphold their climate benefits. 

Step 1: Design 

In the design/project development phase, a project developer decides how the project will be executed, assesses the potential impact, and builds the approaches and technologies to capture and sequester carbon. This includes an estimate of the net emissions by comparing the expected rate of greenhouse gas removal (minus any emissions created in the construction process) from baseline levels. These initial estimates are used to create a life cycle assessment that determines how many credits the project is likely to generate. 

Determining and documenting quality standards 

In addition to the life cycle assessment, the project developer is responsible for documenting quality standards. This includes describing how they will calculate net impact, a plan for monitoring progress, and an assessment of community impacts. The project and methodology are described and formalized in a project design document which will be used to qualify for the project for credit certification. 

Project Validation

Once the project design document is completed, the project is developed and sequestration is underway, it’s validated by an independent validation and verification body. This third-party auditor checks the accuracy of the data, confirms the emission reduction calculations, and determines that the project design meets the standards of the approved methodology. 

Get the report: Criteria for high-quality carbon dioxide removal >

Step 2: Issuance

Once the project is fully developed and has begun to remove carbon, it can start issuing carbon credits. To achieve this, the validation and verification body generates a report to the registry confirming that the project meets certification standards. When the credit registry approves the project, credits are issued and put into the developer’s account. To continue to generate credits over time, the audit and issuance process happens regularly (often annually) over the lifetime of the project.

Purchasing credits

When buyers purchase issued credits, they’re transferred from the developer’s account to the buyer’s. The transfer is tracked and recorded by the credit registry, but don’t assume that purchased credits automatically count toward your net emissions. They still have one final step: retirement. The credit must be issued and retired before it can be counted toward your net emissions.

Note: Credits can be sold before they’re issued as a pre-purchase agreement. When this happens, credits are considered in development (sometimes called ex-ante credits). If you buy credits at this stage, it means that carbon removal is upcoming or in progress. 

Step 3: Retirement 

Carbon credits must be marked as retired once they’re counted toward net emissions. This ensures that the credit is permanently taken out of circulation so it will not be traded or claimed by another company.

Retiring a carbon credit is simple—you transfer it from an active account to a retirement account, both maintained by the registry. Once transferred, the credit is there permanently; it can never be unretired and cannot be claimed by anyone else. At this point, the registry issues a certificate of retirement and a retirement serial number, an important record that the credit has been removed from the marketplace. At this point, you can count the carbon credit toward your climate goals. 

Monitoring, Reporting, and Verification

To ensure that credits accurately represent the impact described in project documents, projects must be tracked and monitored after credits are retired. Developers put monitoring, reporting, and verification systems in place to track the actual carbon removal over the lifetime of the project. Auditors review technological specifications, consult with stakeholders, and may ask for changes to be made. At the same time, the registry also continues to maintain this system of checks and balances to make sure the project continues to meet its standards and methodology. 

The Bottom Line

Carbon removal credits play an important role for organizations looking to meet global climate targets. You might purchase credits that are ready to be retired for your climate goals or you might secure carbon removal credits that are still in development to plan for future emissions and advance the market. Both are viable approaches, as long as you are prepared to wait for projects to be issued as credits before they’re claimed against your emissions. 

By supporting carbon removal projects—especially those in the design/project development stage—you’ll be able to secure credit supply and help build demand for future buyers. By knowing how carbon credits originate and are taken out of circulation, you’ll be able to form a long-term carbon removal strategy and accurately report the impact of your purchases.

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Carbon Removal