Carbon credit

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This article deals with carbon credits for international trading. For carbon credits for individuals, see Personal carbon trading.

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Carbon credits are a tradable permit scheme. They provide a way to reduce greenhouse gas emissions by giving them a monetary value. A credit gives the owner the right to emit one tonne of carbon dioxide.

International treaties such as the Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce. Countries, in turn, set quotas on the emissions of businesses. Businesses that are over their quotas must buy carbon credits for their excess emissions, while businesses that are below their quotas can sell their remaining credits. By allowing credits to be bought and sold, a business for which reducing its emissions would be expensive or prohibitive can pay another business to make the reduction for it. This minimizes the quota's impact on the business, while still reaching the quota.

Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. There are currently two exchanges for carbon credits: the Chicago Climate Exchange and the European Climate Exchange.

1 Background
- 1.1 How buying carbon credits attempts to reduce emissions
2 See also
3 External links

[edit] Background

Major industry sources of greenhouse gas emissions are cement, steel, textile, and fertilizer manufacturers. The main gases emitted by these industries are methane, nitrous oxide, hydroflurocarbons, etc which increase the atmosphere's ability to trap infrared energy.

The concept of carbon credits came into existence as a result of increasing awareness of the need for pollution control. It was formalized in the Kyoto Protocol, an international agreement between 141 countries. Carbon credits are certificates awarded to countries that are successful in reducing the emissions that cause global warming.

For trading purposes, one credit is considered equivalent to one tonne of CO2 emissions. Such a credit can be sold in the international market at the prevailing market price. There are two exchanges for carbon credits: the Chicago Climate Exchange and the European Climate Exchange.

The Kyoto Protocol was signed by 141 countries in 1999, with the US staying out of the agreement. Some developing countries, such as India and China, have ratified the protocol but are not required to reduce carbon emissions under the present agreement, despite their large populations. The Kyoto protocol aims to reduce greenhouse gas emissions 5.2% below 1990 levels by 2012. The first phase of the protocol begins in 2007 and the second phase in 2008. In each phase, non-compliance will invite a monetary penalty.

The Kyoto Protocol provides for three mechanisms that enable developed countries with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET).

Under JI, a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country that has a relatively low cost. Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of greenhouse gas reduction project activities is usually much lower. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project. Under IET, countries can trade in the international carbon credit market. Countries with surplus credits can sell them to countries with quantified emission limitation and reduction commitments under the Kyoto Protocol.

[edit] How buying carbon credits attempts to reduce emissions

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor.

By way of example, assume a factory produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.

A business would buy the carbon credits on an open market from organisations that have been approved as being able to sell legitimate carbon credits. One seller might be a company that will plant so many trees for every carbon credit you buy from them. So, for this factory it might pollute a tonne, but is essentially now paying another group to go out and plant trees which will, say, draw a tonne of carbon dioxide from the atmosphere.

As emission levels are predicted to keep rising over time, it is envisaged that the number of companies wanting/needing to buy more credits will increase hence pushing the market price up, and hence encouraging more groups to undertake environmentally friendly activities which create for them carbon credits to sell. Another model is that companies which use below their quota can sell their excess as 'carbon credits' also, the possibilities are endless hence making it an open market.

It is suggested that initially the quotas should be liberal, which would make the demand for carbon credits, and their resulting price, low so that business find it easy to transition towards paying for credits. Then over time, the quota of emissions a government sets (based on, say, international agreements) will gradually be reduced until the target level of emissions is reached.