When we hear the word ‘retirement’, most might imagine a pension, large quantities of free time and perhaps a new-found love of gardening. Given these connotations, it is perhaps unsurprising that used in the context of the voluntary carbon market, the concept of retirement can create confusion.
In the carbon markets, retirement has a different meaning. In its essence, a retired carbon credit means its buyer has ‘redeemed’ the one tonne of carbon reduction it represents and claimed it against their own emissions which they have not yet been able to cut.
When a buyer retires a credit they have purchased, the credit is removed from the market. This means no one else is able to counterbalance their emissions based on the carbon reduction the credit represents.
To put this in context, 196 million carbon credits were retired overall in 2022. If these retirements had been evenly distributed throughout the year, more than 500,000 credits would have been retired every, single day. Although this represents a 1.3 percent decline on the previous year, the most recent market sentiment survey from the IETA found optimism among its respondents. Based on the responses from market participants the survey predicts that the market will soon return to a positive upward trajectory.
Wait, how are credits generated?
To truly understand the concept of a retired carbon credit, let us first refresh ourselves on the basics of credits.
What? A carbon credit represents one tonne of carbon dioxide or an equivalent volume of another greenhouse gas (CO2e) that has been either removed from, or prevented from entering, the atmosphere.
However, historically not all credits have been created equally. Learn more about the criteria for a ‘good’ credit with this article from our archives.
How? A credit can be generated from nature-based projects, technological climate solutions or even renewable energy generation. The volume of CO2e avoided or removed from the atmosphere is calculated and a corresponding number of carbon credits is conservatively calculated.
The calculation process involves following established methodologies, baseline allocation and verification. Find out more about this process here.
Why? Carbon credits are sold to individuals and businesses to support their decarbonisation strategies. The carbon finance generated from these sales funds further climate mitigation activities and can even support the delivery of impactful, non-carbon benefits for people and nature.
For an example of carbon credits in action, please see this case study of the Gola Rainforest Conservation Project. And to learn more about the responsible purchase of credits, see this flyer on the mitigation hierarchy.
But why do you need to retire credits at all?
In this section we will cover why carbon credits need to be retired, including:
- Confirming impact
When a buyer purchases carbon credits in line with the mitigation hierarchy, the positive benefits of those credits are not automatically attributed to that individual or company. Rather, the buyer ‘holds’ these credits until they wish to retire them. However, once a retirement has been executed, the buyer is free to claim the positive impacts the credits represent. This effectively ends the credit’s ‘life’ for it cannot be reused or reclaimed.
In this way, retirement stops the benefits of credit from being claimed multiple times. In the industry, this is known as preventing double-counting. Only the stakeholder who retires the credit can claim the emission reduction it represents towards its climate targets and they can only do so once. Retirement is extremely important for driving credibility and traceability when using carbon credits to achieve net zero.
What’s the process for retired carbon credits?
Before a carbon project can issue credits, it will complete a process of verification which happens within a framework set up by a programme, such as VCS by Verra or Gold Standard. Only after verification are credits issued in a dedicated registry. Credits are always marked with a unique serial number which allows them to be tracked and accounted for.
Carbon credits can be owned by a number of market participants – the project developer, financing institution, intermediary or a company wishing to use them to counterbalance their own emissions. They can be traded, sometimes several times, among the market participants. This means that carbon credits can exist, unretired, for some time. However, at the point of retirement carbon credits are permanently removed from circulation and cannot be resold. This prevents any double-counting of emission reductions. Information on historic retirements is stored in publicly accessible emission registries, driving transparency for the market.
The future of retired carbon credits
As technology advances, stakeholders across the voluntary carbon market are working to better the carbon markets including the retirement process itself. Blockchain, Tokenization and Distributed Ledger Technology (DLT) all hold great potential for scaling of the voluntary carbon markets. These technologies can boost the overall transparency of credit retirements and support the overall integrity of the markets. We look forward to engaging with new innovations as the world of credit retirements develops and interacts with these emerging technologies.