The emission of carbon credits puts value back in agriculture
Projects to reduce greenhouse gas emissions need financial support to carry out greenhouse gas sequestration projects, particularly in the agricultural sector. Indeed, the national Low Carbon Strategy (SNBC), ensures to encourage farmers to act in favor of the climate and thus limit the emissions of CO2 equivalents.
Thanks to France Agri Carbon Association having obtained the Low Carbon label, farmers can certify projects to reduce the “carbon impact” of their farm. Certification makes it possible to issue “carbon credits” that can be acquired, as part of the voluntary market, by companies that wish to reduce their carbon footprint.
This new regulatory framework, articulated around the “Low Carbon” label initiated by ADEME, should make it possible to sell “carbon credits” to companies, associations or local authorities and thus to obtain additional remuneration to the issuers of these credits.
To contribute to the transition to a low-carbon world and climate security, the challenge is to certify the quality of carbon credits, guarantee their origin and streamline teq CO2 exchanges.
However, the market for carbon credits lacks fluidity and presents a risk of double counting. It needs to be more accessible and transparent so that buyers can confidently finance projects based on sustainable development.
What is a carbon credit?
The carbon credit market is based on an international currency called “tonne ofCO2equivalent” (teqCO2). For a ton of CO2 reduced or sequestered, we can create (or emit) a carbon credit. To make it valuable and monetizable, teq CO2 are represented by a certificate, called Carbon Credit. The latter thus has a monetary price. This is the pillar of carbon finance: by assigning a price to emissions, we establish that the planet cannot absorb these greenhouse gas emissions endlessly and that they now have a cost. This credit is legally transferable and negotiable; it is entered in the emissions account of a company, an institution or a country, after a decrease or sequestration of its greenhouse gas emissions has been noted.
What is it used for?
Companies, which are committed to a carbon neutrality approach, must offset their carbon footprint through projects that either captureCO2 (tree planting, carbon sinks) or reduce CO2 emissions (energy efficiency, renewable energies instead of fossil fuels). Once the project is set up and the credits generated, comes the question of the redistribution of the rent and, more generally, the question of carbon ownership.
For a large number of projects, carbon credits are only a co-benefit. A project leader cannot be advised to encourage people to set up a project solely on the basis of a future carbon income. Transactions of carbon assets may have a compliance target within the framework of the reduction targets that States have set for themselves (via the Kyoto Protocol) or a target within the framework of the Voluntary Market.
The carbon credit market
Carbon markets refer to all markets on which carbon assets can be traded (carbon allowances or credits from projects). These exchanges are based on an international currency of exchange calibrated by the “tonne of CO2 equivalent”. Its price is therefore awarded to it according to supply and demand.
Allowance trading schemes are based on the setting of a greenhouse gas emission cap by a regulatory authority. This ceiling is converted into emission allowances, also known as permits. A quota represents one tonne of greenhouse gases expressed in CO2 equivalent. Allowances are distributed to issuers covered by the system:
- Enterprises (European system)
- Countries (Kyoto Protocol)
They can then be traded on organized markets (carbon exchanges) or directly between issuers, over-the-counter. At the end of a specified period, emitters must return to their regulatory authority the same quantity of allowances as their emissions.
There are two carbon markets
1- The regulated market
- The credits generated by the project must be used to achieve compliance with the objectives of the Kyoto Protocol. The methodologies are approved under the Kyoto Protocol and are regulated by the United Nations (UNFCCC).
- Clean development mechanism (or CDM) projects are registered with the EXECUTIVE BOARD of the CDM but follow the same validation and verification steps as a project on the voluntary market*.
- The actual reductions resulting from these projects result in credits called “Certified Emission Reductions” (CERs), also called “Certified Emission Reductions” (CER).
2- The voluntary market
- Buyers of the voluntary market are not forced to buy emission rights but they act voluntarily.
- Voluntary market projects are supervised by a Designated Operational Entity (EOD) or an Accredited Independent Entity (EIA) and international clearing standards guarantee the quality of the credits generated (Gold Standard, VCS, etc.). In 2019, France launched a Low Carbon Label that certifies and verifies the carbon credits generated by local project leaders.
- The voluntary market is more open to small project leaders. The administrative burden is indeed less important and restrictive than in the context of the CDM. There is more flexibility for pre-financing.
Legal nature of carbon credit and administrative procedures
The valuation of carbon credits is part of a contractual framework that reflects the legal regime of the CDM. This valuation requires being able to identify the owners of carbon credits before their contractualization. Before the legal nature of carbon credits can be analysed from the perspective of the concept of ownership, the legal regime of the CDM should be outlined.
The scope does not benefit from a specific VAT exemption. However, the person liable for VAT is the purchaser (and not the seller), in accordance with provisionI.s of Art. 283(2) OF THE GTC. In practice, this means that carbon credits are invoiced without VAT by the seller, with the buyer having to liquidate the VAT himself through his monthly turnover return.
At the end of the EOD’s visit to the field, the verification report is issued by the auditor and transmitted to the authorities concerned (CDM, Standards as appropriate). It confirms a number of credits generated and allows the project leader to credit them on his carbon register. It will then be a question of finding buyers, negotiating the sale price, formalizing the sale by a contract and ensuring the transfer or “retirement” of these credits when they have been sold.
The role of a carbon registry is to account for all the carbon asset transactions of each actor. The register thus ensures traceability of carbon credits and ensures that they are transferred only once. Credit transfer is the sale of credit from an entity to a third party. This is called a transfer because the sale is materialized by the transfer of the credits sold from the seller’s register to that of the buyer. After being registered in a register and then transferred, each carbon credit is retired, i.e. cancelled.
The low-carbon label
The low-carbon label is the first climate certification framework in France. Officially adopted in November 2018, it is aimed at all actors who wish to develop local projects to reduce greenhouse gas emissions or carbon sequestration, by proposing a certification of these reductions in order to attract new financiers.
The low-carbon label offers them guarantees and makes it possible to direct financing towards national projects that are virtuous for the climate and the environment.
Issuing carbon credits on a decentralised marketplace
To support the sectors and participate in the realization of impact projects, we provide issuers, financiers and investors with a marketplace: Re fundia.
We encourage autonomy in exchanges between actors. Thus, with our technology we make it possible to emit and exchange carbon-related financial flows by perfecting the monitoring and reporting of the reduction of GHG emissions. The smart contract belonging to blockchain technologies makes financial transactions more autonomous and faster, thanks to the automation of tasks.
The technology used by Re fundia makes it possible to promote exchange on the voluntary market, and to finance impact projects.
What to remember
The price of carbon credits is rising. The European Union market has benefited from a dynamic bull market in recent months,driven in part by the European Union’s programmes to accelerate emissions trading in order to reduce carbon production.
Gaslow COP26 decided to apply the rules of Article 6 of the Treaty of Paris. It plans to open up the international carbon market to the private sector, under the supervision of the UN, to trade emission reductions created by the private or public sector.
Nature-based solutions, and in particular on farms, have a vital role to play in mitigating the effects of GAS on the planet. However, these projects are often hampered by underfunding.
*EOD The Designated Operational Entity (EOD) is the independent auditor in charge of verifying the credits generated.