What Are Carbon Credits?
As greenhouse gas emissions increase, policymakers continuously seek new ways to mitigate the problem. Carbon credit trading is one approach. By capping greenhouse emissions, industries are allocating emission allowances, which causes market forces to reduce overall emissions.
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Greenhouse Gas
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A major source of greenhouse gases are industrial emissions. Gases include carbon dioxide, nitrous oxide, methane and hydrofluorocarbons. When these gases enter the atmosphere, they hold in reflected energy from the sun and emit that radiation back down to Earth. This greenhouse effect can create climatic changes.
Carbon Credits
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Each carbon credit equals a ton of carbon. Companies are allocated a certain number of credits that they may use over a period of time. If their carbon emissions are below their allowance, then they may sell the remaining credits. If a company exceeds their limit, they may purchase credits from other companies. This method of allocation and buying/selling is called carbon trading.
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Emissions Trading
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When companies use their credits in a trade, they are actually being charged to pollute or being paid not to pollute. As a result of the emissions cap placed on each company, the effect of the trade is an overall reduction in emissions. The cap-and-trade program has proven successful when the U.S. developed the Acid Rain Program. Under that program acid rain levels have dropped by 40 percent.
Kyoto Protocol
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The Kyoto Protocol is an emissions target agreement established in 1997. The international agreement calls for 37 countries to reduce their greenhouse gas emissions by 2012. The agreement uses market-based approaches to enable countries to meet their targets, including emissions trading (using carbon credits), joint implementation and clean development mechanisms.
Under the program, each country is given an annual emissions quota. If they have too many emissions, then they may purchase credits from another country in the program. The goal of the program is to reduce emissions by 5.2 percent of the 1990 levels by 2012.
Benefits of Carbon Credits
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Carbon credit trading can be advantageous to governments, consumers and industry. Carbon credits are relatively cheap compared to the price they will be in the future when demand skyrockets. So companies have an incentive to buy them now. Additionally, when companies use and buy/sell credits, they are reducing their emissions and energy consumption, which is good for the environment and the company and consumer who are saving money on energy costs.
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