What Are Carbon Credits
Carbon credits are a financial instrument that is part of national and international attempts to reduce greenhouse gas emissions. One carbon credit is equal to one ton of destroyed greenhouse gasses. These credits are generated by projects that either absorb carbon or otherwise reduce emissions through clean energy. Many individuals are now taking an interest in their carbon footprints, trying to lower their usage, as well as trying different ways to offset their carbon usage.
Carbon credits are part of an approach to emissions trading. With a certain amount of greenhouse gas allotted to markets, each individual group is given the opportunity to decide how much of a limited amount can be designated to each area. This allows industries to control the amount of greenhouse gasses they are using. This also allows industrial and commercial processes to market in the direction of lower emissions, or approaches that are used to not emit carbon dioxide and other greenhouse gasses into the atmosphere. This helps to finance carbon reduction schemes.
Carbon credits are in two different markets, the large compliance market and the smaller voluntary market. Corporations and industries participate in the compliance market where they purchase carbon offsets to comply with caps on carbon dioxide emissions. In 2006, about $ 5.5 billion of carbon offsets were purchased in the compliance market. This represents about 1.6 billion metric tons of CO2e reductions.
Many companies sell carbon credits. Carbon credits are purchased from investment funds or carbon development companies. Many of these companies have saved these credits from other individual products, and offset themselves and the buyers by selling them. The quality of the credits is based on the validation process, the type of fund, and the development company. The price is also affected by these things. Voluntary units typically have less value than the units sold through the rigorously-validated Clean Development Mechanism.
There are common features to carbon offsets: vintage, source, and certification regime. Vintage refers to the year in which the carbon reduction takes place, while the source refers to the project or technology used in offsetting the carbon emissions. The certification regime describes the rules and regulations that are in correlation to the carbon offsets.
In the smaller, voluntary market, individuals, companies, and others purchase carbon offsets because of their own determination to lower greenhouse emissions. The emissions they focus on lowering are most often transportation and electricity usage. In 2006, about $ 91 million of carbon offsets were purchased in the voluntary market, representing about 24 million metric tons of CO2e reductions.
There are two distinct types of carbon credits: carbon offset credits (COCs) and carbon reduction credits (CRCs). Carbon offset credits consist of clean forms of energy production, wind, solar, hydro and biofuels. Carbon reduction credits consist of the collection and storage of carbon from the earth’s atmosphere through reforestation, forestation, ocean and soil collection and storage efforts. Both ways are valid and positively recognized, each used in different situations.
Carbon credits initially came into existence as an attempt to inform and create awareness of the need to control emissions. Since then, it has been proven that the concept of carbon credits can be highly successful. This tradable system is one of the policy instruments that are very effective. As long as prices are maintained it should continue to be positive.