Unlocking opportunities: vital role of carbon credits in net-zero ambition

Carbon credits are licences that permit the holder to release a specific amount of carbon dioxide or other greenhouse gases, with one credit equivalent to 1,000kg of CO2 or other greenhouse gases such as methane, nitrous oxide or other fluorinated gases converted into the equivalent warming impact of carbon dioxide.

The market operates to allow industries with lower emissions to sell their surplus allowances to those who emit more. The result is a system that creates financial penalties for many companies that fail to minimise their carbon footprint, and subsidies through the sale of carbon credits for those that invest in cleaner, more sustainable technologies or natural carbon projects.

There are two types of market for trading carbon credits – compliance and voluntary. The main compliance market in the UK is the UK Emissions Trading Scheme (UK ETS), which includes fossil fuel-based power plants, energy-intensive industries such as cement and lime and steel and iron production, glass and ceramics, paper and pulp, chemicals, oil refining, and domestic airlines emitting 10,000 tonnes of CO2 a year.

Under the UK ETS, relevant industries are required to adhere to emission limits, and if they exceed these caps, they have to purchase credits to offset their surplus.

Voluntary markets offer businesses and organisations the chance to proactively reduce their environmental impact by buying credits to balance out their own emissions.

The UK’s natural carbon market has seen significant growth in recent years, not least in Scotland. Last November, the Scottish Government launched the Natural Capital Market Framework to stimulate investment from the private sector in woodland, peatland and natural restoration projects. Scottish Forestry, in partnership with the International Union for Conservation of Nature, has launched voluntary template agreements to facilitate the buying and selling of Pending Insurance Units and Carbon Units.

Carbon credits drive environmentally positive behaviours. The sale of credits can fund reforestation to sequester carbon via woodland and peatland restoration.

Business in general is encouraged to make capital investment to reduce their reliance on credits through investment in carbon capture, utilisation and storage facilities, or cleaner methods of production to offset or reduce emissions. They can also implement energy efficiency building upgrades, and adopt sustainable farming techniques that lower emissions and nurture soil health.

My firm, Womble Bond Dickinson, has long championed sustainable finance, both within the firm and through its client partnerships. In 2023, we advised Triodos Bank on the banking, real estate, and energy aspects of two term loan facilities that funded Oxygen Conservation’s acquisition of properties from Buccleuch Estates for major rewilding projects. These landmark loans were the largest conservation-focused commercial debt package in the UK at the time, and helped Oxygen Conservation scale up its commitment to ecological restoration across the UK, expanding its impressive portfolio of conservation projects.

As Scotland’s drive towards net-zero gathers pace, the significance of carbon credits within its environmental strategy cannot be underestimated. Carbon credits offer a flexible, market-led approach to cutting emissions, encouraging innovation and investment in sustainable practices. By continuing to back projects that generate positive environmental and social outcomes, Scotland is well placed to demonstrate that carbon credits can be harnessed to combat climate change and deliver sustainable development.

Chris McLauchlan is a partner at Womble Bond Dickinson in Edinburgh