Have you Considered the Time Value of Carbon Credits?
The Cost of Carbon Credits – Understanding Their True Value
By: Ray Naughton, Founder & MD of NEG8 Carbon
Many people assume that purchasing a carbon credit immediately neutralises their emissions, but the reality is far more complex.
The truth is that the lifespan of a carbon credit is linked to the lifespan of carbon dioxide (CO₂) in the atmosphere.
We need to look deeper into the time value of carbon credits, exploring the differences between various types, their effectiveness, and the potential pitfalls in the current market. But first, what are carbon credits and how do they differ from carbon offsets?
What are Carbon Credits?
Carbon credits are a mechanism of tradable permits that allow companies to emit a specific amount of carbon dioxide or equivalent greenhouse gases. They work by assigning a monetary value to the reduction or removal of CO₂ from the atmosphere.
Who Issues Carbon Credits?
Carbon credits are issued by government regulatory bodies, international organisations, or carbon market schemes, such as the European Union Emissions Trading System (EU ETS), the United Nations’ Clean Development Mechanism (CDM), and national cap-and-trade programmes.
Carbon Credits vs Carbon Offsets: What’s the Difference?
| Feature | Carbon Credits | Carbon Offsets |
| Purpose | Compliance with regulations | Voluntary emission compensation |
| Market Type | Cap-and-trade (regulated) | Open market (voluntary) |
| Usage | Bought and sold between companies under emission limits | Purchased to offset own emissions |
| Mechanism | Allows a company to emit CO₂ within a set limit | Funds projects that reduce or remove CO₂ elsewhere |
The motivation behind giving carbon emissions a price-tag is to ‘force’ organisations and governments to lower emissions.
Understanding a Carbon Credit’s Lifespan
CO₂ remains in the atmosphere for approximately 1,000 years.
This means that a carbon credit, which is intended to offset emissions, should ideally represent a similar duration.
However, many carbon credits—especially those based on afforestation and reforestation projects—have a much shorter lifespan. A forest may only absorb and store carbon for 50 to 100 years before it is logged, destroyed, or succumbs to natural disasters such as wildfires.
This discrepancy raises an important question: if carbon dioxide persists in the atmosphere for a millennium, can a 100-year carbon credit truly offset an emission permanently? The answer is no.
To genuinely counteract one unit of CO₂ emissions, multiple short-term credits would be needed. This critical point is often overlooked in carbon markets, leading to an overestimation of their effectiveness.
The Carbon Credit Market
How do you Evaluate the Cost of Carbon Credits?
One of the most striking issues with carbon credits is the lack of clear differentiation in pricing between short-term and long-term solutions.
For example, Direct Air Capture (DAC) carbon credits—which involve extracting CO₂ directly from the atmosphere and storing it permanently underground—are far more durable than forestry credits. Despite this, the general market does not always reflect this difference in value.
Large corporations such as Microsoft have recognised the superior value of DAC credits and are actively purchasing them in advance. Their strategy acknowledges the reality that only permanent sequestration methods truly neutralise emissions in the long term.
The Issue with Forestry-Based Carbon Credits
Forestry-based carbon credits make up a large portion of the carbon market. While trees do absorb CO₂ as they grow, the actual long-term effectiveness of these projects is highly uncertain.
In recent years, wildfires have devastated vast tracts of forest, releasing enormous amounts of stored carbon back into the atmosphere. If a company has purchased credits based on those forests, their offset is effectively nullified.
Moreover, while bodies such as the UN’s REDD+ framework has facilitated the creation of carbon credits aimed at preserving existing forests, the actual impact of these credits is debatable.
Furthermore, the Intergovernmental Panel on Climate Change (IPCC) has discussed the role of existing forests in carbon credit schemes. In their Special Report on Land Use, Land-Use Change, and Forestry and the IPCC’s Third Assessment Report, the IPCC suggests that carbon credits are often associated with the management and conservation of existing forests, rather than planting new forests, for carbon sequestration. [1][2] This means carbon credit forestation projects they are simply monetising what was already there.
In an eye-opening article in The Guardian (Revealed: more than 90% of rainforest carbon offsets by biggest certifier are worthless, analysis shows) an investigation by The Guardian, Die Zeit and SourceMaterial found that their analysis of nearly 100 million forestation cardon credits revealed that only a fraction of them resulted in genuine emissions reduction.
Another concern is that trees and land aren’t working as effectively before as carbon sinks, mainly due to wildfires, droughts, tree diseases, rising temperatures and extreme weather. [The Guardian: Trees and land absorbed almost no CO₂ last year. Is nature’s carbon sink failing?] A case in point is the wildfires in California in January 2025, which are estimated to have emitted 3.67 million tonnes of CO₂ equivalent. [Down to Earth]
So, relying on forests and other natural ecosystems to mitigate climate change is not enough.
This raises ethical concerns about the legitimacy of many carbon offset projects. If a credit is not linked to genuine, additional CO₂ absorption, then it does not contribute meaningfully to climate mitigation efforts.
The Hidden Costs of Carbon Capture
Mineralization of CO₂ (converting it to stable carbonate minerals) requires the least amount of post-sequestration maintenance/monitoring making it an attractive option.
Other sequestration methods require infrastructure maintenance and monitoring (For more, see: What is CO₂ Sequestration?), while sustainable forestry projects need dedicated management to ensure that trees remain in place and are not used for biomass energy or other emissions-producing activities.
These shed light on the importance of distinguishing between different types of carbon credits. A credit tied to a well-managed, long-term sequestration project is inherently more valuable than one linked to a short-term initiative.
How Much do Carbon Credits Cost?
You can view the latest carbon prices here: Carbon Credits.com
Valuing a Tonne of CO₂ Captured
[This article by Carbon Credits.com sums it up well: Carbon Pricing Explained]
Permanence
Credits from methods ensuring long-term sequestration, such as DAC, should be valued higher due to their enduring impact.
Measurability and Verification Reliability
Technological methods that allow for precise quantification of CO₂ removal should command higher prices in the carbon market.
Additional Benefits
Natural methods may offer additional environmental benefits, such as biodiversity enhancement and ecosystem restoration, while technological solutions capture CO₂ for industrial usage.
Market Demand
The demand for specific types of carbon credits can affect their market value, with technological solutions gaining attention for their permanence and measurability.
The Case for Time-Based Carbon Credit Valuation
Given these challenges, the carbon credit market needs greater transparency and accountability. One way to achieve this is to adopt a time-based valuation system.
Under such a system, every carbon credit would clearly state its effective lifespan. A forestry-based credit, for example, might have a designation of 100 years, whereas a DAC-based credit could be classified as permanent. Buyers would then be able to make informed decisions based on the true offsetting potential of their credits.
Furthermore, if the carbon credit does not last as long as the CO₂ in the atmosphere, the buyer should be required to purchase multiple credits to make up the difference. For example:
If a carbon credit is valid for 100 years but CO₂ lasts for 1000 years, then ten such credits should be purchased to fully offset one unit of emissions.
If a credit involves permanent mineralisation of CO₂ into rock, then one credit would be sufficient to counterbalance an emission permanently.
Such an approach would prevent companies from relying on misleading carbon neutrality claims based on short-lived offset projects.
Overview
The cost of short-term and long-term carbon credits compared.
1. Nature-Based Solutions (e.g., Afforestation, Peatland Restoration)
While these methods are cost-effective, often priced below $50 per tonne of CO₂ removed, they present challenges in terms of permanence and measurement.
Cost: Low upfront cost (<€100/tCO₂) but limited permanence (10–200 years).
Challenges:
- High lifetime cost (€1,750–€35,000/tCO₂) due to ongoing maintenance and risks (e.g., deforestation).
- Measurement and verification (MRV) are less robust compared to technology-based solutions.
2.Technology-Based Solutions (e.g., Direct Air Capture & Storage)
Once captured, the CO₂ can be stored underground or mineralised, ensuring sequestration for thousands of years.
Cost: Higher initial cost (€500–€1,000/tCO₂) but significantly longer permanence (>10,000 years).
Advantages:
- Robust MRV ensures reliable credit issuance.
- Low lifetime cost (€500–€1,000/tCO₂) makes it a sustainable long-term solution.
| Technology | Afforestation / Peatland, Coastal Wetland And Ocean Restoration |
Direct Air Capture (DAC) And Storage |
| Capture Mechanism | Nature Based | Technology / Geochemical |
| Cost (€/tCO₂) | <100 | 500<1,000 |
| Measurability (MRV) | 🔴 | 🟢 |
| Storage Medium | Buildings, vegetation, soils and sediments | Geological Sequestration / Mineralisation in Rocks or Concrete |
| Permanence | 10 – 200 years | >10,000 years |
| Lifetime Cost (€/tCO₂) | 1,750 < 35,000 | 500 < 1,000 |
The Role of Governments and Regulation
At present, the carbon credit market is largely unregulated, leading to price discrepancies and quality concerns.
Governments and international bodies must step in to ensure that carbon credits are accurately priced based on their effectiveness. This includes:
- Setting minimum lifespan requirements for credits to be classified as genuine offsets.
- Creating stricter verification processes to prevent misleading claims.
- Establishing standardised pricing mechanisms that reflect the true cost of long-term sequestration.
Conclusion
The time value of carbon credits is often ignored in discussions about carbon offsetting. If carbon remains in the atmosphere for 1000 years, then any offsetting measure should ideally have an equivalent duration. Many existing credits fail to meet this standard, leading to an overestimation of their benefits.
A shift towards a time-based valuation system would create a more transparent and effective carbon credit market. By recognising the true lifespan of emissions and the offset measures used to counteract them, we can ensure that carbon credits contribute meaningfully to climate action. Until then, buyers must exercise caution, ensuring that their offsets genuinely reflect the impact they intend to mitigate.
For more:
- NEG8 Carbon’s Direct Air Capture Technology: Capturing CO2 to Reach Net-Zero
- Two IPs in a Pod Podcast: Revolutionizing Carbon Capture with Ray Naughton