Baseline and Credit Explained: All You Need to Know

Baseline and Credit Explained: All You Need to Know

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Grace Smoot

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Stay impactful,

Our environment pays the price every time we emit carbon, and mitigating climate change will require us to take action now to maintain a sustainable planet for future generations. One form of carbon regulation that could aid in the fight against climate change is known as baseline and credit. So, we had to ask: What is baseline and credit really, and how could it help us mitigate climate change?

Baseline and credit systems set a baseline for carbon emissions. Reducing emissions below this level generates credits that can be sold to others. The system uses financial incentives to mitigate climate change but is limited by accurate and uniform establishment of baselines.

Keep reading to find out all about what baseline and credit is, the impact you can have with it both individually and globally, its benefits and drawbacks, and why it may not be the most effective way to mitigate climate change.

The Big Picture of Baseline and Credit

Carbon emissions already have a price tag attached to them, but it is our environment that pays the price, not the emitters. Carbon pricing seeks to resolve this issue and make emitters pay for their carbon emissions. Baseline and credit systems are one type of carbon pricing.

Baseline and credit systems set a standard level for carbon emissions and generate carbon credits when emissions are reduced beyond the standard. 

Baseline and Credit: baseline emissions levels are defined for individual regulated entities and credits are issued to entities that have reduced their emissions below this level.”

The World Bank

The standard that is set refers to the level of greenhouse gas (GHG) emissions that have occurred in the past without the introduction of strategies aimed at reducing emissions. It is a reference against which we measure change. In this case, the change measured is the reduction in emissions.

Baseline and credit utilizes tradable allowances called carbon credits, certificates, or permits that give companies, industries, or countries the right to emit 1 tonne (1,000kg) of CO2 or the equivalent amount of a different GHG. Carbon credits are a form of climate currency, meaning they are subject to supply and demand. 

If an entity reduces their emissions below the established baseline, more than they are otherwise obliged to, they generate carbon credits which can be sold to others looking to stay below their baselines. Those emitting more than their baseline do not necessarily face penalties, but they also do not generate carbon credits.

For example, the Technology Innovation and Emissions Reduction (TIER) Regulation is Alberta, Canada’s baseline and credit system:

  • It was implemented in 2007 and applies to entities that emitted 100,000+ tonnes of carbon dioxide (CO2) in 2016 or in subsequent years.
  • Entities that reduce their emissions below the established benchmark generate carbon credits.
  • Those that do not meet the benchmark can either submit offsets or carbon credits or pay the price to purchase carbon credits to cover their emissions. 
What baseline and credit isBaseline and credit systems set a standard level for carbon emissions.
How baseline and credit worksCarbon credits are generated when entities reduce their carbon emissions below the set baseline. The monetary incentive prompts the emission reductions.
The impact of baseline and credit on your own emissionsBaseline and credit does not directly reduce your carbon footprint. 
The impact of baseline and credit on global emissionsBaseline and credit mitigates the problem, but it does not work at the core issue of reducing overall CO2 emissions.
The overall effectiveness of baseline and credit on reducing carbon emissionsEstablishing accurate baselines and monetary incentives limit baseline and credit system effectiveness on a global scale.
The main benefits of baseline and creditBaseline and credit systems aid in climate change mitigation, improve air quality, protect ecosystems, incentivize the switch to green energy, and promote energy independence.
The main drawbacks of baseline and creditEstablishing accurate baselines and desirable monetary incentives 

How Does Baseline and Credit Work

Baseline and credit systems work by establishing a standard for carbon emissions and generating carbon credits for those entities who reduce their emissions below the standard. It is one way to mitigate the amount of carbon entering our atmosphere. 

How Does Baseline and Credit Reduce Carbon Emissions

The goal of baseline and credit systems is to reduce carbon emissions in order to mitigate climate change.

  • Baseline and credit systems represent indirect emission reductions. Entities reducing their emissions below the set baseline generate carbon credits that can be sold to other entities. This monetary incentive prompts these emission reductions.

When you hear the term “baseline and credit” think about the term “standard”. Carbon credits in this system represent emission reductions below the established standard. The goal is to incentivize entities to emit less so that they generate more carbon credits. The more carbon credits generated, the more entities they can sell off, resulting in monetary gains. 

What Impact Does Baseline and Credit Have on Your Own Carbon Emissions

One of the best ways we can aid in the fight against global climate change is to reduce our carbon footprint. And to do this we first have to reduce our own carbon emissions. 

  • Baseline and credit systems do not directly reduce your carbon footprint.

Baseline and credit does not directly reduce your own carbon emissions. There is no pressure to buy permits for emissions in excess of the set baseline. Because entities can choose whether or not they emit below or above the baseline, reduction is not guaranteed. 

Coupled with direct measures of emission reductions, such as reducing individual energy usage and consumption, baseline and credit systems can become more effective. 

What Impact Does Baseline and Credit Have on Global Carbon Emissions

Every year we pump over 36 billion tons of CO2 into the atmosphere, fueling climate change. This causes temperature and sea-level rise, melting of sea ice, changing precipitation patterns, and ocean acidification. Baseline and credit systems aim to reduce global emissions and mitigate these negative environmental effects.

  • Baseline and credit systems indirectly work at the core issue of reducing overall CO2 emissions by providing companies a financial incentive to do so.

Baseline and credit systems do not have a significant impact on global carbon emissions yet. Although the potential is there with baseline and credit systems aligning the incentive for companies to reduce their CO2 emissions with their bottom line. In that way, the goal of carbon permits to reduce greenhouse emissions or support sustainable energy projects is aligned with companies’ economic goals to increase their profits.

The COVID-19 pandemic triggered the largest decrease in energy-related carbon emissions since World War II, a decrease of 2 billion tonnes. However, emissions rebounded quickly and rose by 6% in 2021 to 36.3 billion tonnes, their highest ever level. This indicates that the earth is still warming at an accelerated rate, and still not enough is being done to implement direct carbon reduction measures.

Illustration of annual CO2 emissions globally
Our World in Data: Annual total CO2 emissions

How Effective Is Baseline and Credit in Reducing Carbon Emissions

Baseline and credit systems can be effective at reducing carbon emissions if they are used correctly.

  • Baseline and credit systems face difficulties in terms of establishing accurate baselines and monetary incentives.

Baseline and credit is complex to implement because baselines for each emitting activity (emission intensities) must be established. These intensities are often not well documented or even known. 

Also, depending on the criteria, there can be no pressure to buy permits for emissions in excess of the baseline. In some instances, entities can choose whether or not they emit below or above the baseline without facing consequence. In that case, the only incentive is to generate carbon credits to sell. But that is not a guarantee.

What Are the Main Benefits and Drawbacks of Baseline and Credit

As with anything, baseline and credit systems come with benefits and drawbacks that must be understood before implementing the mechanism on a large scale. 

What Are the Main Benefits of Baseline and Credit 

Baseline and credit systems come with environmental benefits in addition to limiting global carbon emissions resulting from fossil fuels (i.e., coal, oil, and natural gas). 

  • Aids in climate change mitigation: baseline and credit systems aim to reduce the amount of carbon emissions that enter our atmosphere. Levels of carbon in our atmosphere that cause climate change have increased as a result of human emissions since the beginning of the Industrial Revolution in 1750. The global average concentration of CO2 in the atmosphere today registers at over 400 parts per million. Carbon avoidance can help prevent these levels from increasing even more.
Illustration of atmospheric carbon dioxide levels over 800,000 years
National Oceanic and Atmospheric Administration: Carbon Dioxide Over 800,000 Years
  • Improves air quality: Degradation of air quality as a result of carbon emissions is a serious issue. In 2009, the US government declared CO2, CH4, N2O, hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) threats to the public health and welfare of current and future generations. Reducing the amount of carbon entering our atmosphere would lead to improved public health in terms of asthma, respiratory allergies, airway diseases, and lung cancer
  • Incentivizes the switch to green energy: baseline and credit systems incentivize companies to switch to greener energy sources including solar, wind, hydro, and geothermal energy which emit lower levels of climate-change inducing CO2, nitrogen oxides, sulfur dioxides, and mercury. This in turn promotes energy independence. Being able to produce your electricity without the aid of foreign countries is an important step in becoming more self-sufficient. 

Baseline and credit systems can mitigate the effects of climate change, which has a positive cascade effect on public health and plant and animal diversity. In addition, this boosts the global economy and leads to innovative, more environmentally-friendly solutions in the years to come.

What Are the Main Drawbacks of Baseline and Credit 

The main drawbacks to baseline and credit systems involve the established standards and level of monetary incetive.

  • Establishing accurate baselines: In order to implement a baseline and credit system, the baselines for each emitting activity (emission intensities) must be known. But intensities are often not well documented or even known. Overestimation or underestimation of calculated baseline emissions could influence the overall success of the system.
  • Monetary incentive: The goal of baseline and credit systems is to incentivize entities to emit less so that they generate more carbon credits. The more carbon credits generated, the more entities they can sell off, resulting in monetary gains. However, when there are no penalties for emitting more than the baseline, entities can choose to simply keep emitting.

Why Is Baseline and Credit Important to Fight Climate Change

As outlined in the 2015 Paris Climate Agreement, we must cut current GHG emissions by 50% by 2030 and reach net zero by 2050. Baseline and credit systems are important to meet these targets because they can reduce global carbon emissions, carbon that if emitted can remain in our atmosphere for tens of thousands of years, fueling climate change.

However, baseline and credit systems should not be viewed or used as a panacea for climate change. Relying on them solely is impractical because the immediate effect of reducing emissions under the cap-and-trade system is to benefit a company’s bottom line. 

In the long term, direct methods of carbon footprint reduction are much more effective. Reducing your household, travel, and lifestyle carbon footprint can go a long way in the fight against climate change!

What are Better Alternatives to Baseline and Credit

If used correctly, baseline and credit systems can provide environmental, economic, and social benefits that go beyond reducing carbon emissions. They have the potential to instigate meaningful environmental change and begin to reverse some of the effects of climate change. 

However, we can’t let this method be a guilt-free way to reduce carbon emissions. Baseline and credit must be used in conjunction with direct carbon reduction measures until the industry has time to invest, develop, and refine more sustainable innovations. 

These reduction measures don’t have to involve drastic changes either. Actions that may seem small can have a big impact because those small changes add up! You can reduce your carbon footprint in three main areas of your life: household, travel, and lifestyle. 

Reduce your household footprint:

Reduce your travel footprint:

  • Walk or bike when possible: The most efficient ways of traveling are walking, bicycling, or taking the train. Using a bike instead of a car can reduce carbon emissions by 75%. These forms of transportation also provide lower levels of air pollution.

Reduce your lifestyle footprint:

  • Switch to Renewable Energy Sources: The six most common types of renewable energy are solar, wind, hydro, tidal, geothermal, and biomass energy. They are a substitute for fossil fuels that can reduce the effects of global warming by limiting global carbon emissions and other pollutants.
  • Recycle: Recycling uses less energy and deposits less waste in landfills. Less manufacturing and transportation energy costs means less carbon emissions generated. Less waste in landfills means less CH4 is generated.
  • Eat less meat and dairy: Meat and dairy account for 14.5% of global GHG emissions, with beef and lamb being the most carbon-intensive. Globally, we consume much more meat than is considered sustainable, and switching to a vegan or vegetarian diet could reduce emissions. 
  • Take shorter showers: Approximately 1.2 trillion gallons of water are used each year in the United States just for showering purposes, and showering takes up about 17% of residential water usage. The amount of water consumed and the energy cost of that consumption are directly related. The less water we use the less energy we use. And the less energy we use, the less of a negative impact we have on the environment.

Final Thoughts

Baseline and credit systems are a form of carbon pricing that established a baseline for emissions and rewards those who reduce beyond the baseline with carbon credits that can be sold to other entities in need. This does not work at the core issue of reducing global emissions, and setting an appropriate baseline and making the monetary incentive worth it can inhibit it’s success. But if implemented properly, Baseline and credit can aid in climate change mitigation, incentivize the switch to green energy, and promote energy independence.

Baseline and credit systems are a good place to start if you want to get into the carbon-emission reduction game, but to be effective in the long term, we must not rely on them solely. Cutting emissions from the source is the best way to reduce our carbon footprint and provide the highest environmental benefits.

Stay impactful,

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Grace Smoot

Grace loves to research and write about all things related to climate action and sustainability. She holds a Bachelor’s of Science degree in Environmental Biology and works as an Environmental Survey Technician. Outside of work, she loves to work out, play soccer, and take her dog for long walks.

Did you know that the internet is a huge polluter of the environment? But fortunately not this site. This site is powered by renewable energy and all hosting-related CO2 emissions are offset by three times as many renewable energy certificates. Find out all about it here.

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