Crude & refined trading
- September 3, 2024
- Posted by: Anand SEO
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Understanding Carbon Credits in Oil Trading
Carbon credits are becoming essential for oil and gas companies that aim to reduce their carbon footprint. As the world makes strides toward sustainability, these companies are exploring ways to offset their carbon emissions. With climate change presenting significant risks, companies are under pressure to innovate and adopt sustainable practices. And carbon credits provide a flexible and economically viable solution for reducing emissions while continuing operations. Notably, by using these credits, oil and gas companies can meet global climate goals, meet the demands of environmentally conscious investors, and comply with stricter regulations.
Let’s dive into how carbon credits work and their impact on oil trading.
What Are Carbon Credits?
You can think of carbon credits as permits or tradable certificates allowing a company to emit a certain amount of carbon dioxide or other greenhouse gases (GHG). Each credit typically represents one ton of CO2 (represented as CO2e or carbon dioxide equivalent). Companies that reduce their emissions can sell their excess credits to other companies that need them. This system, thus, incentivizes companies to invest in cleaner technologies and practices.
Carbon credits are part of the jurisdiction and are governed by “cap and trade” system. This means the governing organization will create and allocate carbon credits to individual companies that fall within that jurisdiction.
Carbon Offsets
Carbon offsets are different than carbon credits. Here’s how.
Any organization, whether public, private, or governmental, can engage in carbon reduction projects to generate offsets—reforestation, wetland rejuvenation projects, direct carbon capture technologies, and others. Usually, these projects are driven by a commitment to sustainability or to monetize the offsets on the carbon markets.
Carbon offsets are not governed by a specific regulatory body and are not confined to a single jurisdiction. They are traded freely on voluntary markets worldwide.
Carbon Marketplace: How Emissions Trading Works
Emissions trading involves the buying and selling of carbon credits in a carbon marketplace. There are two main markets for trading these credits: the regulated market and the voluntary market.
Regulated Market (Cap-and-Trade System)
In the regulated market, also known as the cap-and-trade system, government bodies set a cap on the total amount of carbon emissions allowed for companies within a specific region or state. Here’s how it works.
- Allocation: Each company receives a certain number of carbon credits, representing the amount of CO2 they are allowed to emit.
- Surplus: Companies that emit less than their allotted credits will have a surplus of credits.
- Deficit: Companies that emit more than their allotted credits need to purchase additional credits to cover their excess emissions.
This system incentivizes companies to reduce their emissions because they can sell any surplus credits for profit. Conversely, companies that are not able to reduce their emissions must buy credits, adding a cost for higher emissions.
Voluntary Market
The voluntary market operates separately from government regulations. In this market, businesses and individuals choose to buy carbon credits to offset their emissions voluntarily. Here’s how it works.
- Choice: Participation is optional, allowing companies to demonstrate their commitment to sustainability.
- Offset projects: Credits in this market are often generated by projects that reduce or remove carbon from the atmosphere, such as reforestation or renewable energy projects.
- Trading: These credits can be bought and sold freely on the voluntary market.
Carbon Credits in the Oil Industry
Several major companies are making advancements in this area. For instance, in 2020, BP and Shell both acquired Nature-Based Solutions (NBS) firms. Furthermore, Shell, BP, Eni, TotalEnergies, and Chevron have teamed up with project developers to produce carbon offsets via forestry projects. However, the journey is far from over as many companies still encounter challenges in reducing their carbon footprints.
Inatech’s advanced offerings in the realm of carbon credits present a crucial tool for companies navigating the modern energy market. Their solution integrates seamlessly with existing trading platforms, allowing users to efficiently manage their carbon credit portfolio.
This is particularly beneficial for companies dealing with both fossil fuels and biofuels. When selling biofuels, companies earn carbon credits, while selling fossil fuels depletes these credits. Inatech’s system automates the tracking and trading of these credits, ensuring companies maintain compliance and avoid penalties.
By providing real-time visibility into the status of carbon credits, Inatech empowers businesses to balance their portfolios effectively.
This user-friendly, compliance-focused tool not only simplifies complex regulatory requirements but also enhances operational efficiency, making it an invaluable asset in today’s environmentally-conscious market.
Final Words
Carbon credits are essential in the global movement against climate change, offering a practical solution for the oil and gas industry to reduce emissions and move toward sustainability. By effectively utilizing carbon credits, companies can meet regulatory standards and support broader environmental objectives. To know more about how Inatech can support you in this journey, get in touch with us today.