Carbon Credits

The term “carbon credits” is used to describe any tradable certificate or permit which allows the right to emit one ton of carbon or carbon dioxide equivalent.  Carbon credits and carbon markets were created as part of a national and international attempt to mitigate the concentrations of greenhouse gases in the atmosphere.  Greenhouse gases absorb and emit radiation in the atmosphere and are the fundamental cause of the greenhouse effect.  Primarily greenhouse gases in the Earth’s atmosphere are water vapor, carbon dioxide, methane, nitrous oxide and ozone. Since the beginning of the Industrial Revolution, burning fossil fuels has contributed to the increase in carbon dioxide in Earth’s atmosphere.  Carbon dioxide is emitted by the combustion of carbon caused by the proportional increase of energy consumption by industrialized nations worldwide.

Carbon credits are traded on the international market as an application of emission trading.  Greenhouse gas emissions are capped and then markets are used to distribute the emissions among the group of regulated sources.  The goal of trading carbon credits is to allow market mechanisms and procedures to encourage low emission practices and less carbon intensive approaches in commercial processes as an alternative to no-cost practices that emit carbon dioxide and other greenhouse gases into the atmosphere.  Carbon credits are generated by greenhouse gas mitigation projects the accrued carbon credits can be used to finance carbon reduction practices between trading partners.

Carbon credits can be purchased by commercial and individual customers who voluntarily take action to reduce their carbon footprint.  Investment funds and carbon development companies collect carbon credits from individual projects and make it available to businesses and individuals who want to actively offset carbon emissions.  The quality of carbon credit is determined through a sophisticated validation process performed by the investment fund or development company that sponsors the carbon project.  Carbon credits quality is reflected in price.  Carbon credits sold through the meticulously validated Clean Development Mechanism has greater value than carbon credits sold voluntarily.

The carbon credits market creates an incentive to reduce greenhouse emissions by assigning a cost to polluting the atmosphere.  Businesses are allowed a quota of how many tons of carbon dioxide or other greenhouse gases it can produce annually.  Once that quota is reached the business is required to purchase carbon credit for the excess.  The expense associated with the mandated purchase of carbon credits is intended to act as an incentive for businesses to take steps to reduce emissions.  Furthermore, companies and individuals who use less than their quota can profit by trading their available carbon credits. 

By treating emissions as a market commodity, proponents of carbon credits maintain that businesses that contribute greenhouse gases are better equipped and more inclined to understand and manage their carbon emission activities.  The availability of carbon credits creates a program that rewards individuals and companies who take action to reduce greenhouse gas emissions.