Carbon credits explainer: Valuation models, environmental impact, and significance in achieving sustainability goals

  • 26 Jan 2024
  • 3 Mins Read
  • 〜 by John Roy

Carbon credits, also known as carbon offsets, have become a significant tool in the fight against climate change. They represent a metric ton of CO2e (carbon dioxide equivalent) emissions avoided from emission reduction projects and are used to offset carbon emissions generated by governments, organisations, or individuals. However, understanding the intricacies of carbon credits, including their generation and valuation, is essential for effectively utilising them in sustainability efforts.

Generating carbon credits

A crucial concept in carbon credit generation is additionality, which addresses whether a project would have been commercially viable without revenue support from the sale of carbon credits. Projects demonstrating strong financial returns, compelled by regulations, or representing common industry practices are generally not considered additional. Therefore, the project must prove that its emissions reductions are incremental and not business as usual.

Valuation of carbon credits

The value of carbon credits can vary based on different valuation techniques and models. One approach is a value-driven model, which accounts for the full environmental, social, and economic impacts of a project. This method considers both emissions reductions and additional development benefits, such as improvements in local communities’ livelihoods.

In contrast, the voluntary carbon market primarily relies on supply and demand to determine carbon credit prices. This market-driven approach may not fully consider the long-term viability of projects and can lead to fluctuations in prices. Currently, carbon credits are traded at approximately $7.60 per short ton of carbon dioxide (CO2) in this market.

Another valuation approach involves calculating a minimum price that covers the average costs of projects, along with an additional “Fairtrade Premium” directed towards local communities. This ensures that communities benefit directly from carbon credit sales and can invest in climate adaptation and resilience initiatives.

Economic value is another aspect of carbon credit valuation, reflecting individual preferences for the provision of environmental goods and services. This value is typically expressed in terms of marginal changes in supply using monetary metrics. 

The importance of carbon credits in sustainability

Carbon credits play a crucial role in achieving sustainability goals by incentivising emission reduction projects and supporting climate mitigation efforts. They enable organisations to offset their carbon footprint and contribute to global emissions reduction targets.

For businesses and institutions committed to environmental stewardship, integrating carbon credits into sustainability strategies can demonstrate a proactive approach to addressing climate change. By investing in emission reduction projects and purchasing carbon credits, companies can reduce their environmental impact while supporting communities and fostering sustainable development.

Carbon credits in the local context

Let’s get down to the carbon credits symposium

A single carbon credit is defined as equivalent to the sequestration or offsetting of 1,000 kilograms of carbon dioxide (CO2).

EcoMatcher employs an average sequestration rate of 250 kilograms of CO2 per tree.

The relationship between trees and carbon credits is established, indicating that four trees can yield one carbon credit over a 10-year period.

Each carbon credit is assigned a monetary value ranging from $40 to $80 in both compliance and voluntary carbon markets.

Having that in mind, let’s go back to the just concluded National Tree Growing Day

In response to the national tree-growing initiative in Kenya, aiming to plant 100 million trees, the calculation is made that, on such a special holiday, the country could generate 25,000,000 carbon credits (100,000,000 trees divided by 4).

The potential monetary value of this carbon credit generation is estimated, indicating a possible financial impact of USD 1 billion (or over Ksh. 150 billion), based on a conservative value of $40 per carbon credit.

Food for thought

A comparative analysis is provided, illustrating that the carbon credit generation from planting 100 acres of industrial hemp for three seasons a year surpasses the carbon offset achieved by planting 12,000 trees over a 10-year period.