Carbon credits
Carbon credits are a key component of national and international emissions trading schemes. They provide a way to reduce greenhouse gas emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading. Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price.
There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project.
Burning of fossil fuels is a major industry sources of greenhouse gas emissions, especially for power, cement, steel, textile, and fertilizer industries. The major greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons (HFCs), etc, which all increase the atmosphere's ability to trap infrared energy and thus affect the climate.
The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions. It was formalized in the Kyoto Protocol, an international agreement between 169 countries. The mechanism adopted was similar to the successful US Acid Rain Program to reduce some industrial pollutants.
The Protocol agreed 'caps' or quotas on the maximum amount of Greenhouse gases that each participating country can produce. In turn these countries set quotas on the emissions of installations run by local business and other organisations, generically termed 'operators'. Each each operator has an allowance of credits, where each unit which gives the owner the right to emit one metric tonne of carbon dioxide or other equivalent greenhouse gas. Operators that have not used up their quotas can sell their unused allowances as carbon credits, while businesses that are about to exceed their quotas can buy the extra allowances as credits, privately or on the open market. As demand for energy grows over time, the total emissions must still stay within the cap, but it allows industry some flexibility and predictability in its planning to accomidate this.
By allowing allowances to be bought and sold, an operator can seek out the most cost-effective way of reducing its emissions, either by investing in 'cleaner' machinery and practices or by purchasing emissions from another operator who already has excess 'capacity'.
Since 2005, the Kyoto mechanism has been adopted for carbon trading by all the countries within the European Union under its European Trading Scheme (EU ETS). From 2008, this will link with the other developed countries who ratified the protocol, and cover the six most significant anthropogenic greenhouse gases. In the United States and Australia, which have not ratified Kyoto, similar schemes are being considered by some of their states.
A credit can be an emissions allowance which is allocated or auctioned by the administrators of a cap-and-trade program or an offset of emissions. Such offsetting and mitigating activities can occur in any developing country which has ratified the Kyoto Protocol, and agrees to validate its carbon project through one of the UNFCCC's approved mechanisms. Once approved, these units are termed Certified Emission Reductions, or CERs.
