Carbon Credit is permit that allows the holder to emit one ton of carbon dioxide or its equivalent. Credits are awarded to countries or groups that have reduced their green house gases below their emission quota. Carbon credits can be traded in the international market at their current market price.
The carbon credit system was ratified in conjunction with the Kyoto Protocol. Its goal is to stop the increase of carbon dioxide emissions.
For example, if an environmentalist group plants enough trees to reduce emissions by one ton, the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is expecting to produce 11 tons, it could purchase this carbon credit from the environmental group. The carbon credit system looks to reduce emissions by having countries honor their emission quotas and offer incentives for being below them.
Carbon credits are generated as the result of an additional carbon project. Carbon credits can be created in many ways but there are two broad types:
- Sequestration (capturing or retaining carbon dioxide from the atmosphere) such as afforestation and reforestation activities.
- Carbon Dioxide Saving Projects such as use of renewable energies
These credits need to be authentic, scientifically based and Verification is essential.
Carbon credit trading is an innovative method of controlling emissions using the free market.
Need for carbon credits
Over millions of years, our planet has managed to regulate concentrations of greenhouse gases through sources (emitters) and sinks (reservoirs). Carbon (in the form of CO2 and methane) is emitted by volcanoes, by rotting vegetation, by burning of fossil fuels and other organic matter. But CO2 is absorbed, by trees, forests or by some natural phenomenon like photosynthesis and also oceans to some extent.
In modern times the burning of fossil fuels like coal, oil and natural gas – in which carbon has been stored for millions of years – combined with accelerated land clearance has led to exceptional levels of greenhouse gas emissions. Vegetation, largely forest, is already absorbing about one-third of human-induced emissions, planting more forests could increase absorption. Carbon sinks can’t keep up, and concentrations of greenhouse gases in the atmosphere have risen dramatically leading to an enhanced greenhouse effect which will result in very rapid warming of the world’s climate.
If the Earth heats to the unsafe level it is expected to then our national security is at stake. It is now accepted worldwide that the globe is warming to such an extent that the livelihoods of large swathes of the world’s population are under serious threat. The results are likely to include intensified droughts and floods, changed weather patterns, agricultural breakdown, ecosystem disruption, rising sea levels, epidemics, and social breakdowns that ultimately threaten the lives or livelihoods of hundreds of millions of people.
As global economies grow, use more natural resources, and emit more Carbon Dioxide (CO2), more solutions will be needed to reduce global warming. People have become increasingly concerned about the possible effects of global warming. Global warming is a serious threat to humanity as a whole.
Since CO2 is the main contributor to the effects of Global Warming the Greenhouse Gases are known collectively as CO2 emissions. At some point the build-up of carbon dioxide and other greenhouse gases in the atmosphere will change the climate disastrously.
The financial markets provide one unique way of limiting CO2 emissions through the creation of a carbon credit market. The concept is that this would give companies, countries, and individuals a financial incentive to produce less CO2.
Existence of carbon credits
The concept of carbon credits came into existence as a result of increasing awareness of the need for pollution control.
Carbon credits were one of the outcomes of the Kyoto Protocol, an international agreement between 169 countries. The Kyoto Protocol created legally binding emission targets for developing nations. To meet these targets, nations must limit C02 emissions. It was enforced from Feb’05.
The very phase “Kyoto Protocol” has become synonymous with the idea of saving the planet from the global meltdown.
This can be accomplished by either reducing emissions or by absorbing emissions through processes such as tree-planting and sequestration.
Under the Kyoto Protocol, developed countries are required to limit their greenhouse gas emissions according to the following formula:
- Actual emissions must be less than or equal to the assigned amount +/- carbon sinks and Kyoto emissions.They are a measure devised by the Kyoto Protocol to reduce world Greenhouse Gas emissions, and hence fight climate change.
- Carbon credits are certificates awarded to countries that are successful in reducing emissions of greenhouse gases such as water vapor, carbon dioxide, methane, nitrous oxide, and ozone.
Trading of carbon credits
Buying carbon credits is not a charitable donation, but a retail action. Trade in carbon credits has the potential to make forestry more profitable and to sustain the environment at the same time.
One of the primary solutions for climate change being thought by global warming alarmists is the purchase and sale of carbon credits. For trading purposes, one credit is considered equivalent to one tonne of CO2 emissions. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price
Value of carbon credits
Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air such as carbon emitted by burning of fossil fuels. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor.
Carbon credits are measured in tonnes of carbon dioxide.
1 credit = 1 tonne of CO2.
Each carbon credit represents one metric ton of C02 either removed from the atmosphere or saved from being emitted. The carbon credit market creates a monetary value for carbon credits and allows the credits to be traded.
For each tonne of carbon dioxide that is saved or sequestered carbon credit producers may sell one carbon credit.
Generation of carbon credits
Many types of activities can generate carbon offsets. Renewable energy such as wind farms, or installations of solar, small hydro, geothermal, and biomass energy can all create carbon offsets by displacing fossil fuels. Other types of offsets available for sale on the market include those resulting from energy efficiency projects, methane capture from landfills or livestock, destruction of potent greenhouse gases such as halocarbons, and carbon sequestration projects (such as reforestation) that absorb carbon dioxide from the atmosphere.
Environmental restrictions and activities have been imposed on businesses through regulation. Many are uneasy with this approach to managing emissions.
The Kyoto mechanism is the only internationally agreed mechanism for regulating carbon credit activities, and, crucially, includes checks for additionality and overall effectiveness. Its supporting organisation, the UNFCCC, is the only organisation with a global mandate on the overall effectiveness of emission control systems, although enforcement of decisions relies on national co-operation. The Kyoto trading period only applies for five years between 2008 and 2012. The first phase of the EU ETS system started before then, and is expected to continue in a third phase afterwards, and may co-ordinate with whatever is internationally agreed at but there is general uncertainty as to what will be agreed in Post-Kyoto Protocol negotiations on greenhouse gas emissions. As business investment often operates over decades, this adds risk and uncertainty to their plans. As several countries responsible for a large proportion of global emissions (notably USA, Australia, China) have avoided mandatory caps, this also means that businesses in capped countries may perceive themselves to be working at a competitive disadvantage against those in uncapped countries as they are now paying for their carbon costs directly.
A key concept behind the cap and trade system is that national quotas should be chosen to represent genuine and meaningful reductions in national output of emissions. Not only does this ensure that overall emissions are reduced but also that the costs of emissions trading are carried fairly across all parties to the trading system. However, governments of capped countries may seek to unilaterally weaken their commitments, as evidenced by the 2006 and 2007 National Allocation Plans for several countries in the EU ETS, which were submitted late and then were initially rejected by the European Commission for being too lax.
A question has been raised over the grandfathering of allowances. Countries within the EU ETS have granted their incumbent businesses most or all of their allowances for free. This can sometimes be perceived as a protectionist obstacle to new entrants into their markets. There have also been accusations of power generators getting a ‘windfall’ profit by passing on these emissions ‘charges’ to their customers. As the EU ETS moves into its second phase and joins up with Kyoto, it seems likely that these problems will be reduced as more allowances will be auctioned.
Establishing a meaningful offset project is complex: voluntary offsetting activities outside the CDM mechanism are effectively unregulated and there have been criticisms of offsetting in these unregulated activities. This particularly applies to some voluntary corporate schemes in uncapped countries and for some personal carbon offsetting schemes.
There have also been concerns raised over the validation of CDM credits. One concern is related to the accurate assessment of additionality. Others relate to the effort and time taken to get a project approved. Questions may also be raised about the validation of the effectiveness of some projects; it appears that many projects do not achieve the expected benefit after they have been audited, and the CDM board can only approve a lower amount of CER credits. For example, it may take longer to roll out a project than originally planned, or an afforestation project may be reduced by disease or fire. For these reasons some countries place additional restrictions on their local implementations and will not allow credits for some types of carbon sink activity, such as forestry or land use projects.