How to Measure and Price Carbon Credits

Vijayalaxmi Kinhal
carbon credits

Carbon credits are a vital component of national and international emissions trading strategies to lessen carbon footprints and global warming. However, not everyone knows how to measure and price carbon credits, even those who are zealous about recycling and decreasing the amount of pollution that is emitted around the globe each day.

Measuring Carbon Credits

There are three steps involved in measuring emissions or carbon credits according to a DEFRA report. DERFA is the Department for Environment, Food and Rural Affairs in the UK. Steps are generally the same from country to country. The steps to calculate emissions are the same across countries, as shown by Shrink That Footprint.

Step 1: Identify Polluting Activities

Identify the activities that release GHGs instructs the DEFRA report (pg. 9, 10). There are three different ways of quantifying activities. These categories or scopes can be helpful in targeting the cause of pollution for later reduction (pg. 13, 14).

  • Scope 1 - Direct emissions are those released due to operating own vehicles, heating or boilers. In case of industries, any emissions from production should also be included in this category.
  • Scope 2 - Indirect emissions are produced when consumers buy and use energy for heating and cooling. Examples for these are centrally produced electricity.
  • Scope 3 - Other indirect emissions result due to individual actions, but where the sources of these energies are not owned by them. Examples are fuel for cooking, use of goods and services, business travel, and waste disposal and management. For companies, transport of raw materials, or distribution of finished goods comes under this head.

Step 2: Calculate Quantity of Resource Use

Use bills, receipts or invoices to calculate amount of electricity, fuels, goods or services purchased. Activity data can be collected in weights (for example of wood, or food) or volume (of gasoline or diesel consumed). Electricity is measured in total kilowatt hours (k Wh). For water consumed and treated, data is collected in cubic metres. Mileage is the data for transport, and car or air travel, points out the DEFRA report (pg. 18). Costs for each activity should be tracked and totalled for a year.

Step 3a: Calculate Emissions From Six Pollutants

car exhaust

There are many steps involved to get the total emissions from a family or business. The first step is to calculate emissions from all six pollutants. Business Dictionary explains that emission factor (EF) is the amount of emission of any greenhouse gases (GHGs) into the atmosphere due a particular activity. The DEFRA report ( pg. 17) notes that various activities or fuels have different EF, reflecting how polluting they are. There are six different GHGs. Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6). Different activities and fuel can release one or more of them, each with its EF.

Use the following formula as given in the DEFRA report (pg. 18) to calculate emissions:

  • "Activity data x Emission factor = GHG emission"

So to calculate emissions from the use of a resource or service, multiply its total use in a year by the emission factors of all pollutants produced by it.

EFs for coal, fossil fuels, biomass, natural gas, electricity, and petroleum products are provided by Environment Protection Agency (EPA) Greenhouse Emission Inventories published in 2015 (pg. 1, 3). This document also gives emissions from cars according to year of production and fuel, and for vehicles used in agriculture, construction, and aviation (pg. 2, 3, 4).

The AP-42 released and periodically updated by EPA also provides EFs for many industries. EFs for food and drinks is given by Intergovernmental Panel on Climate Change (IPCC) Guidelines for National Greenhouse Gas Inventories (pg. 1, 2).

Step 3b: Convert to Carbon Dioxide Equivalent (CO2e)

The six pollutants are not equal in the damage they cause to the environment. Their intensity of effect is called global warming potential (GWP). So one unit (eg. one pound) of nitrous oxide harms the environment 298 times more than the same amount (eg. one pound) of carbon dioxide. In other words one unit of nitrous oxide is equivalent to 298 units of carbon dioxide explains EPA (Understanding Global Warming Potential). So GWP for nitrous oxide is 298.

To express all the GHGs in terms of carbon dioxide equivalent (CO2e), multiply the emissions of each pollutant with its global warming potential (GWP).

Step 3c: Calculate Total Emissions

Total emissions is calculated by adding all emissions in carbon dioxide equivalent (CO2e) for a year. The Nature Conservancy has a ready carbon calculator powered by CoolClimateNetwork at the University of California at Berkeley where one can calculate and compare individual emissions.

Pricing Carbon Credits

The Earth Institute in Columbia University in 2016 noted that there were 40 countries and 26 cities that have carbon pricing covering 12% of global emissions. In the U.S. there is no central national Cap and Trade carbon pricing. Instead pricing takes place in the Northeast and mid-Atlantic States and California. Environmental XPRT lists carbon markets world-wide, like Environmental Credit Corp, Ctrade, Texas Climate and Carbon Exchange, and The Carbon Desk.

Pricing fluctuates based on region, market conditions, and the certification program.

  • So Carbon Emissions Futures Historical Data that monitors price of carbon emissions daily, in early Feb 2017, priced one ton of carbon dioxide equivalent (tCO2e) at 5.20 Euros or 5.53 USD. However, carbon credit prices were higher in 2015 when purchased through Gold Standard, a carbon certification program that also covers social costs for carbon offsetting.
  • Moreover, credits depend on the project they are purchased from. So in 2015, carbon credits purchased through Gold Standard certified projects for energy efficiency were 8.75$ or 8.20€/tCO2e, for renewable energy 8.63$ or 8.10€/tCO2e, and for forest management 13.86$ or 13€/tCO2e. Fairtrade premium costed 1€ or 1.06$ more per tCO2e.
eco wash setting

A Sample Calculation

To show how the process works, each step of measuring and pricing carbon are shown by considering an example of a family of two living in California based on the known 2015 data.

Step 1: Identify Polluting Activities

The polluting activties would fall under Scope 1 emissions due to electricity use are considered for the family in California.

Step 2: Calculate Quantity of Resource Use

The average electricity use by a person in the US is 4517 k Wh per year (kilowatts per hour) according to Shrinkyourfootprint.com. So a household of two uses around 10,000 kWh or 10 MWh of electricity (One Megawatt or MWh = 1000 kWh).

Next calculate the emissions for the activity by using emission factors (EFs).

Step 3a: Calculate Emissions From Six Pollutants

From the EPA Greenhouse Emission Inventories (pg. 3), read the EFs for electricity purchased from CAMX, California which are:

  • 650.31 lbs of CO2/MWh
  • 0.03112 lbs of CH4/MWh
  • 0.00567 lbs of N2O/MWh

So using the three emission factors above, and multiplying by 10 MWh of electricity, calculate all GHG emissions for a year, with the formula:

Activity data x Emission factor = GHG emission

  • 10 x 650.31 lbs of CO2/MWh = 6503.1 lbs of CO2
  • 10 x 0.03112 lbs of CH4/MWh = 0.3112 lbs of CH4
  • 10 x 0.00567 lbs of N2O/MWh = 0.0567 lbs of N2O

Step 3b: Convert to Carbon Dioxide Equivalent (CO2e)

To express all the GHGs in terms of carbon dioxide equivalent (CO2e), multiply global warming potential (GWP) supplied by EPA Greenhouse Emission Inventories for methane and nitrous oxide (pg. 1). Nitrous oxide's GWP is 298, and methane's GWP is 25. GWP is one for CO2, as explained by EPA (Understanding Global Warming Potential).

  • 0.3112 lbs of CH4 x 25 = 7.78 lbs of CO2e
  • 0.0567 lbs of N2O x 298 = 16.896 lbs of CO2e
  • 6503.1 lbs of CO2 x 1 = 6503.1 lbs of CO2e

Step 3c: Total Emissions

Finally, add the three CO2e from step (3b), 7.78 + 16.896 + 6503, to get 6527.77 lbs of CO2e.

So the total carbon dioxide equivalent emitted in a year is 6527.77 lbs of CO2e for electricity use by two people. In terms of tonnes that is 3.263 tonnes of CO2e (tCO2e).

Step 4: Pricing Carbon Credits

To calculate the amount needed to buy carbon credit from an reforestation project from Gold Standard at the 2015 price, one must multiply total emissions with $13.86 or 13€/tCO2e.

3.263 tCO2e x $13.86$ = $45.225

So the couple wishing to offset their emission (of 3.263 tCO2e) due to electricity use, could buy carbon credits worth $45.225 in a carbon market that is then spent to plant trees for carbon sequestration. They can also find ways to decrease electricity use and emissions.

Carbon Credits and Marketing

Carbon credits puts a price on air pollution. It is also a means whereby entities pay for the emissions they produce. These credits are bought from companies or even other countries in the carbon market, explains Investopedia. A credit is a measure representing one megatonne (a mass equal to 1,000 kilograms) of greenhouse gas emissions (GHGs) either saved from being emitted or removed from the Earth's atmosphere explains the Gold Standard.

Kyoto Protocol

An international carbon credit system was first ratified by the the Kyoto Protocol of 1997. At the Kyoto Protocol, emission quotas were agreed by each participating country, where developed countries had higher quotas. In addition, the International Emission trading scheme where countries with high emissions levels could purchase carbon credits from those with emissions below their allocated quota was mooted. This scheme works through the certified Clean Development Mechanism (CDM).

Voluntary Carbon Market

Parallel to the mandatory carbon market regulated by the CDM, a voluntary maket has grown. This market is not regulated, but is monitored by recognised international quality standards such as the Verified Carbon Standards (VSCs), which is adopted by 40 verification organisations around the world, notes the International Institute for Environment and Development.

The U.S. did not ratify the Kyoto Protocol, as pointed out by CNN, so it has no binding caps on its emissions. Nevertheless, the U.S. has been active in reducing emissions, and trades through the voluntary carbon credit markets driven by states, companies and individuals interested in lowering emissions, elaborates Ecosystem Marketplace. By 2013, the U.S. had become the second largest carbon market in the world, according to The Guardian.

How Carbon Credits Save the Planet

The Guardian report notes that the current rates of emissions will melt the Arctic ice in twenty years by 2036. So individuals, communities and countries need to increase efforts to decrease their carbon footprint. Measuring carbon credits can help by guiding consumer choice and policy making in saving our planet from damaging emissions. Children and adults alike can join in teaching those around them the importance of finding ways to decrease pollutants to air and land.

How to Measure and Price Carbon Credits