What Are Carbon Credits?

by mbryce2012 on October 26, 2012

We’re all familiar with our carbon footprint, and trying to reduce it.  We are well aware of the impact carbon dioxide emissions have on the environment.  But what are carbon credits?

In simplest terms, a carbon credit is a unit of allowable carbon dioxide emissions.

Over the last decade, we have seen an incredible rise in the number of CO2 emissions being pumped into our atmosphere. In an effort to curb the detrimental environmental impact of this pollution, many governments across the globe have set a limit on the quantity of allowable emissions.

In fact, 192 countries have signed the Kyoto Protocol, a 1997 global initiative to reduce greenhouse gas emissions. While the United States of America is one of only a handful of nations that have not yet signed, individual U.S. corporations have chosen to participate in carbon credit trading as part of various emissions schemes, like the Chicago Climate Exchange.

President Obama proposed an incredibly ambitious cap-and-trade system that would target 85 percent of polluters in the first wave, but it was immediately shot down by a massive lobbying effort.

How Does Carbon Credit Trading Work?

If a company produces fewer carbon emissions than their set allowance, they can sell the difference (credits) to other companies who need more than their limit.

This provides a great monetary incentive for companies to reduce their carbon footprint. Conversely, it gives other companies an opportunity to purchase credits at a given dollar amount per metric ton as they work on making positive environmental changes in their production processes.

This cap-and-trade scheme is part of a theory called Free Market Environmentalism. Contrary to commonly held beliefs that the environment must be regulated by the government, this theory contends that the best way to address global warming is through economic incentive.


Is Carbon Emissions Trading Accomplishing it’s Goals?

Whether the goal was to make a profit or reduce greenhouse gasses, the system seems to be working. One of its key players, British Petroleum (BP), reported reducing its carbon emissions to ten percent below 1990 levels nine years before their target goal after implementing a cap-and-trade system.

But there are some problems with the system, largely related to the lack of carbon credit regulation. Companies or organizations can sell their carbon emissions “offset” as carbon credit on the exchange.

For example, if you can show that your group preserved an area of rainforest that contributed carbon dioxide reduction worth “x” amount of credits, you can sell those credits on the exchange. You didn’t really help the environment so much, did you?  Because now the company that buys those credits can produce a lot more carbon dioxide.

This is where the governments must step in and regulate, or we may end up with a bigger problem than the one we started with.


Cap or Trade: Which is the Key Factor?

While the programs post-Kyoto are still evolving within each market system, and emissions-reduction goals are being met, the guy responsible for Europe is skeptical about carbon credits playing a key role.

Chief Executive of the European Climate Exchange, Patrick Birley, claims that “The cap is what delivers the environmental result. Trading does not reduce emissions one ounce.”

In an interview with Allianz, Birley claims that Europe will stay committed to strong carbon emissions caps and will stick with the Kyoto Protocol at least until 2020. He hopes that the rest of the world will follow suit.








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