Projects can range in scale from very small – on the order of a few hundred tonnes of carbon dioxide equivalent (CO2e) avoided per year – to very large – with millions of tonnes avoided per year. Carbon credits are also sometimes produced by large-scale “programs of activities,”1 which aggregate together many similar small projects or coordinated efforts across entire jurisdictions (such as in the case of avoided deforestation).2
In many cases, carbon crediting projects produce social and environmental benefits beyond just avoided greenhouse gas (GHG) emissions or enhanced removals. Depending on the project type, these “co-benefits” can include improvements to community employment opportunities; enhanced air or water quality; biodiversity and habitat conservation; improved energy access; and better access to community health and education services. Many carbon credit buyers seek projects that yield a broad range of benefits and contribute to impactful sustainable development rather than emissions mitigation alone. Carbon credits can thus be part of a comprehensive strategy for corporate social responsibility, combining efforts to address climate change with contributions to other public goods.
However, the types of projects that make for higher-quality carbon credits tend to be those with the fewest co-benefits – and vice versa (see How can I avoid lower-quality credits).
For carbon crediting project terminology view the Glossary.
Who is involved in crediting projects
Designing, implementing, and operating carbon crediting projects requires the involvement of a number of parties, stakeholders and authorities. Although the parties involved differ from project to project, some general categories and types of market players can be defined as follows.
Project Owner
The operator and owner of the physical project site where the crediting project takes place. An owner can be any private person, company or other organization.
Project Developer
A person or organization with the intention to develop a crediting project. This could be the project owner, a consultant or specialized services provider.
Project Funder
Banks, private equity firms, private investors, non-profit organizations and other organizations may lend or invest equity to fund a project.
Project Proponent
The entity responsible for submitting and registering a project with a carbon crediting program. A project proponent may be a project owner, project developer, or another party.
Stakeholders
Individuals and organizations that are directly or indirectly affected by the crediting project. Stakeholders include the parties interested in developing a specific project (e.g., owner, developer, funder), parties affected by the project (e.g., local population, host community, environmental and human rights advocates) and national and international authorities.
Third Party Auditors – Validators and Verifiers
Almost all crediting programs require a third-party auditor to validate and verify a project’s baseline and its projected and achieved avoided emissions and/or enhanced removals. Most crediting programs have processes for accrediting their third party auditors before they are approved to conduct validation and verification activities. Typically included in this process, most programs develop requirements that auditors must fulfill to reduce the risk of conflict of interest.
Standards Organizations
In the absence of national or international legislation, non-governmental standard organizations define a set of rules and criteria for voluntary carbon credits.
What is a crediting project cycle?
The crediting project development process involves numerous steps from project design to credit issuance, divided below into the registration phase, the implementation phase, and renewal. Although the project development process for projects implemented under crediting programs can differ slightly between programs, there are generally two models – the full or streamlined project cycle as shown in the graphic.3
Registration Phase
The below terms define in further detail the steps within the crediting project cycle’s registration phase.
Project Description
The Project Description or Project Design stage includes developing a project concept, choosing or developing a baseline and monitoring methodology, and stakeholder consultations. All of these elements are documented in the Project Description (or Design) Document.
Stakeholder Consultation(s)
Crediting projects under most crediting programs are required to provide evidence that the project’s activities will not adversely impact local populations and other relevant stakeholders. For example, to ensure that all relevant stakeholders have been provided an opportunity to comment on a proposed Clean Development Mechanism (CDM) project, the developer must inform the stakeholders about the project through appropriate forms of media. The developer must respond to all stakeholder comments and describe a course of action to minimize negative impacts. The outcomes of the stakeholder consultations must be documented in the Project Design Document.
Project Description Document (PDD)
The PDD describes the project activity in detail. It contains a description of the chosen technology and explains the methodology used to define the baseline scenario, to demonstrate additionality, and to calculate avoided or removed emissions. It also contains information on the monitoring of all relevant technical parameters (e.g., temperature, gas flow rates, electricity production, hours of operation, etc.) including how monitoring procedures will be established, measurements made, quality controlled, and records stored and accessed. It contains an estimate of the volume of avoided or removed emissions to be achieved by the project. Finally, it documents how the project contributes to sustainable development. The PDD is used throughout the implementation phase to ensure that the project performs according to the parameters outlined in the document.
Feasibility Assessment
A feasibility study of a potential crediting project is conducted to assess its technical feasibility, investment requirements, development, and operational costs, expected returns, administrative and legal hurdles, and project risks and pitfalls. Based on the results of the feasibility study, the project owner will decide whether or not to continue the development of the potential crediting project.
Methodology
A crediting project methodology defines the rules that a project developer needs to follow to establish a project baseline and to determine project additionality, to calculate avoided or removed emissions, and to monitor the parameters used to estimate actual avoided or removed emissions. It is a generic recipe that can be applied to different projects of a given type (e.g., renewable energy production) and applicability conditions (e.g., grid-connected). Under several programs, if no approved methodology exists for a specific project type, a project developer can submit a new methodology for approval to the crediting program (e.g., CDM, Gold Standard, VCS).
Project Validation
In the full project cycle, after the project developer has written the PDD, an independent crediting program-approved third-party auditor conducts the project validation. These auditors may also be called Validation and Verification Bodies (VVBs), or Designated Operational Entities (DOEs). The process of project validation normally consists of five phases:
- A desk review of the PDD,
- On-site visits and interviews with project stakeholders,
- A public comment period after the PDD has been made available via the internet,
- Resolution of outstanding issues, and
- The issuance of the final validation report written by the auditor. After completion, the validation report and the PDD are submitted to the crediting program administrators for review and registration.
Crediting programs applying the streamlined project cycle may incorporate validation into the initial project verification event.
Host Country Approval
For some programs like the CDM or crediting projects through Article 6 of the Paris Agreement, host country approval may be required. The project documentation must be submitted to the relevant authority, which checks the project activity against national rules and regulations and confirms the project’s compliance with the host country’s sustainability and development criteria. This screening process and host country requirements vary from country to country. Voluntary crediting projects generally do not need host country approval.
Project Registration
A crediting program’s decision to register a project is based on their staff’s review of the PDD, the validation report, and public feedback. Once the crediting program approves a project, it is officially registered and the PDD document is generally made publicly available on the program’s registry tracking system.
Implementation Phase
The below terms define in further detail the steps within the crediting project cycle’s implementation phase.
Project Implementation
Project implementation may commence following successful registration, if it has not already begun. Some programs may allow a project to be implemented before it is registered but will identify requirements to ensure the integrity of these projects. Projects also must commence implementation within a short period following successful registration (e.g., six months) as a project’s circumstances and program eligibility can change over time.
Project Monitoring
Project developers are required to maintain records quantifying the avoided or removed emissions achieved during a project’s implementation phase. These records, maintained in a monitoring report, must be in accordance with the parameters and procedures laid out in the project’s methodology. Carbon credits are issued based on the monitoring reports. A project developer must make the trade-off between having more frequent carbon credit income (more frequent monitoring reports) and lower administrative costs (less frequent monitoring reports). The monitoring period length is typically defined in each project methodology and varies by project type. A forestry project, for instance, typically has a longer monitoring period than most other project types.
Project Verification
The monitoring that the project developer has done is then evaluated and approved by a third-party auditor. Because auditors are generally paid to provide their services by project developers, crediting programs seek to minimize conflict of interest by instituting limitations such as requiring separate auditors for validation and for verification. The project developer submits the monitoring report to the auditor along with relevant supporting documents. The auditor undertakes a desk review of the report to ensure that the monitoring has been carried out in accordance with the procedures in the original PDD. The auditor may also undertake a site visit, if appropriate. Following the desk review and site visit, the auditor prepares a draft verification report, highlighting any issues. Once the project developer resolves these issues, the auditor prepares the final verification report, which also quantifies the avoided or removed emissions achieved by the project. Verification occurs in line with the crediting program’s stated requirements.
Project Certification and Credit Issuance
The verification report is submitted to the crediting program for certification and issuance of carbon credits. If this final layer of review finds no errors, credits are issued to the registry account of the relevant project developer.
Commercialization
At the commercialization stage, a project developer sells the carbon credits from a project to a buyer. The credits can either be sold directly to a company that uses them to meet its legally binding or voluntary emission reduction obligations, or they can be sold to an intermediary that facilitates the transaction between the seller and the end-user of the credits. A contract to sell the carbon credits from a project can be signed at any stage during the project development cycle. Depending on the project developer’s tolerance for risk, some will sign contracts as early as the planning stage (i.e., forward contracts) prior to the registration phase, so as to lock in the price and other terms and insulate themselves from the risks of price volatility. Others will wait until the credits are generated, certified, and issued before buying them. The project developer usually receives payment for the credits only after they have been delivered, though an advance payment may occasionally be made. Such payments usually occur if the project developer wants to bridge an investment gap or needs to meet cash flow requirements during the project’s implementation. For more information see How to acquire carbon credits.
- Such “programs” were pioneered under the Kyoto Protocol’s Clean Development Mechanism. ↩︎
- See, for example, Verra’s framework for Jurisdictional and Nested REDD+ programs. (REDD stands for “reduced emissions from deforestation and forest degradation”.) ↩︎
- World Bank 2021. A Guide to Carbon Crediting: Designing and Implementing Domestic Carbon Crediting Mechanisms. Project for Market Readiness, World Bank. Washington DC. ↩︎