HKEX Insight

Carbon credits are generated from carbon projects, and these projects fall into two sets of broad categories: avoidance or removal, and nature-based or technology-based.

Avoidance initiatives prevent future emissions, taking the form of energy efficiency upgrades or destruction of ozone-depleting substances for example.

Removal projects, such as reforestation or direct air capture, scrub existing carbon dioxide from the atmosphere. Both are essential, as avoidance accelerates progress, while removal is indispensable for neutralising residual emissions.

Projects can also be nature-based, offering additional environmental benefits, or technology-driven, relying on engineered solutions.

Geography can align carbon credits with corporate priorities. With carbon projects located around the world, companies have the flexibility to pick ones that contribute to the development of specific regions.

For instance, companies may favour projects near their operations or supply chains, or target climate-vulnerable regions where investments deliver additional benefits like jobs and clean energy access.

The impact of carbon credits can extend across broader sustainability goals, bringing co-benefits like poverty reduction or improved community health to where the carbon project is located.

Co-benefits from carbon projects may allow companies to address multiple aspects of their corporate sustainability strategy. For instance, a carbon project that generates carbon credits by supplying clean cookstoves in developing areas does more than cut down on pollution – it also improves indoor air quality and health for the wider community.

A helpful framework for identifying and aligning these co-benefits is the UN Sustainable Development Goals (SDGs), which encompass 17 global priorities focused on people, planet, prosperity, peace and partnership.

CGP, an Australian-headquartered asset manager in the carbon markets, uses an investment screening process that, among other things, enables it to support the SDGs of developing countries. Learn more about this use case in HKEX’s Carbon Credits: A Buyer’s Guide.

Carbon credits are certified by carbon crediting standards, each with its own scope, rules and requirements, while global meta-standards like those assessed by the Integrity Council for the Voluntary Carbon Market offer a benchmark for quality.

These meta-standards have their own assessment criteria for considering carbon crediting standards and methodologies, and they publish lists of carbon crediting standards and methodologies that meet their requirements.

Corporates can vet credits against these frameworks, but to assess individual projects, companies should look to standards bodies and verification bodies that have received meta-standard accreditation.

Vintage refers to the year emissions were avoided or removed. The Science Based Targets initiative recommends selecting credits from 2021 onward to align with Paris Agreement rules.

Newer vintages typically reflect stricter methodologies, though some market participants argue older credits still hold value if they meet reputable standards.

Tencent, a world-leading internet and technology company, purchases carbon credits with vintages from 2021 as the baseline for its future vintage requirements to support its goal of achieving carbon neutrality in its own operations and supply chain by 2030. Read more about this use case in HKEX’s Carbon Credits: A Buyer’s Guide.

Carbon credits aren’t a substitute for cutting emissions, but they can help corporates take responsibility during the transition, support climate solutions and neutralise hard-to-abate residuals on the road to net zero.

And as more companies integrate carbon credits into their sustainability strategies, understanding the fundamentals of carbon credits is more important than ever.

Because when properly selected, carbon credits can be a lever for community impact, innovation and progress towards sustainability goals.