What Are Carbon Credits?
Carbon credits are permits that authorize the holder to emit a specified amount of carbon dioxide or other greenhouse gases (GHGs). One credit permits emission equivalent to one metric ton of carbon dioxide or its equivalent in other GHGs. These are often referred to as carbon offsets.
The concept of carbon credits is a pivotal part of the cap-and-trade system aimed at reducing overall emissions. Companies that exceed their set emission limits can buy extra credits, while those that reduce their emissions can sell their surplus. This system not only caps emissions but also incentivizes companies to innovate in cutting down their carbon footprints.
Key Benefits
- Carbon credits are instrumental in reducing global greenhouse gas emissions.
- Companies receive annual credits allotments that can either decrease over time or be traded with others.
- The goal is to drive a financial motive for reducing emissions.
- This concept has historic roots in 1990s efforts to curtail sulfur emissions, establishing a precedence for the modern carbon market.
- An international carbon credit trading market was agreed upon at the COP26 Summit in Glasgow.
The proponents assert that the carbon credit system results in quantifiable and certified emission reductions, constituting an integrated method for governments and private sectors to confront climate issues. There are numerous active carbon compliance markets globally, demonstrating the widespread adoption of this strategy.
How Do Carbon Credits Work?
The primary objective of carbon credits is to mitigate the emission of GHGs. Each carbon credit signifies permission to release one metric ton of carbon dioxide. This is akin to the emissions from approximately a 2,400-mile atmospheric pollution caused by a driven vehicle.
States or private companies get a specified number of credits, which can be traded to balance global emissions. By reducing the credits over time, there’s an encouragement for more eco-efficient technological solutions and energy practices to reduce emissions industry-wide.
U.S. Carbon Credits: Current Approaches
California’s Cap-and-Trade Program
In 2013, California launched its cap-and-trade system addressing emissions for electric power plants, industrial operators, and fuel distributors. This is the fourth-largest global program next to the EU’s, South Korea’s, and China’s. Such systems equate emission to monetary value, thereby incentivizing investments in greener technologies to avoid growing permit costs.
The U.S. Clean Air Act
Since 1990, the U.S. has been mitigating airborne emissions, starting with the introduction of the Clean Air Act. Known for initiating the world’s maiden cap-and-trade programs under its
Related Terms: carbon offsets, greenhouse gases, emissions trading, cap-and-trade, carbon capture
References
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- Ecosystem Marketplace. “Voluntary Carbon Markets Rocket in 2021, on Track to Break $1B for First Time”.
- S&P Global. “Voluntary Carbon Markets: How They Work, How They’re Priced and Who’s Involved”.
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