How buying carbon credits can reduce emissions
Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. Emissions become an internal cost of doing business and are visible on the balance sheet alonside raw materials and other liabilities or assets.
By way of example, consider a business that owns a factory putting out 100,000 tonnes of greenhouse gas emissions in a year. Its government then enacts a law that limits the emissions that the business can produce. So the factory is given a quota of say 80,000 tonnes per year. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.
After costing up alternatives the business may decide that it is uneconomical or infeasible to invest in new machinery. Instead may choose to buy carbon credits on the open market from organizations that have been approved as being able to sell legitimate carbon credits.
- One seller might be a company that will offset emissions by planting a number of trees for every carbon credit you buy from them under an approved CDM project. So although the factory continues to emit gasses, it would pay another group to go out and plant trees which will draw back 20,000 tonnes of carbon dioxide from the atmosphere each year.
- Another seller may have already invested in new machinery and have a surplus of allowances. The factory could make up for its emissions by buying 20,000 tonnes of allowances from them. The cost of the seller's new machinery would be subsidised by the sale of allownces. Both the buyer and the seller would submit accounts for their emissions to prove that their allowances were met correctly.