Carbon Credits

What is a Carbon Credit?

Carbon credits

A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or carbon dioxide equivalent (CO2-e). Carbon credits are part of the market-based approach to globally controlling emissions – also known as ‘cap and trade’ or emissions trading.

Carbon Credits are one of the ways of reducing some of the huge impact man and technology has made on the planet. Carbon Credits, as well as sustainable development, clean technologies, renewable energy, technology transfer and personal and social responsibility are some of the powerful tactics environmentalists, economists, scientists and government officials have agreed to employ in the battle against climate change.

How do Carbon Credits work?

They are facilitated by a central authority setting a limit or cap on the amount of a pollutant that can be emitted. The limit or cap is allocated or sold to firms in the form of emissions permits which represent the right to emit or discharge a specific volume of the specified pollutant. Firms are required to hold a number of permits equivalent to their emissions. The total number of permits cannot exceed the cap, limiting total emissions to that level. Firms that need to increase their emission permits must buy permits from those who require fewer permits.

How are they beneficial?

One carbon credit is equal to one tonne of carbon dioxide, or in some markets, carbon dioxide equivalent gases. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources. The goal is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere. Since GHG mitigation projects generate credits, this approach can be used to finance carbon reduction schemes between trading partners and around the world.

Who Buys Carbon Credits?

The compliance market, comprising of companies, governments or other entities can buy carbon offsets in order to work within carbon emission regulations. In the voluntary market, individuals, companies, or governments can purchase carbon offsets to moderate their own greenhouse gas emissions from transportation, electricity use and other sources.

Voluntary credits not only offset emissions, but also have significant weighting in public relations/branding and for corporate social responsibility.

Purchasing credits earned from a verified emission reduction project can help to offset emissions while the revenue earned helps to fund that particular emission reduction project – thus generating more credits for purchase.

How are Carbon Credits relevant to me?

Unchecked, energy use and their resulting emission levels are predicted to keep rising over time. Thus the number of companies needing to buy credits will increase and inevitably the rules of supply and demand will push up the market price, encouraging more groups to undertake environmentally friendly activities that create carbon credits to sell.

There is also the long-term investment angle: Buying into the carbon market boom now suggests significant dividends later on. Carbon credits are relatively cheap now, but their value is set to rise, giving companies and individual investors another reason to participate.

(Source – Wikipedia – http://en.wikipedia.org/wiki/Carbon_credit )

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