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Carbon Credit

Carbon Credit

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Carbon credits are market mechanisms of greenhouse gases emission. Governments or different types of regulatory authorities set the caps on greenhouse gas emissions. There are companies the immediate reduction of the emission is not economically viable, therefore they can purchase additional carbon credits to comply with the emission cap from companies that can reduce the emissions immediately. Companies that manage to reduce the emissions of greenhouse gases are usually rewarded with additional carbon credits. Also, the sale of the credits’ surplus may be used to subsidize future projects for the reduction of emissions.

The introduction of carbon credit was ratified in the Kyoto Protocol and the Paris Agreement validates the application of carbon credits to reduce emissions of the greenhouse gases and sets the provisions for the further facilitation of the carbon credit markets.


Types of Carbon Credits

There are two types of carbon credits:


  • Voluntary emissions reduction (VER)- It is a carbon offset that is exchanged in the over-the-counter market for credits.
  • Certified emissions reduction (CER)-Emission units or carbon credits created through a regulatory framework to offset a project’s emission. The main difference between these two is that there is a third party certifying that regulates the CER as opposed to the VER.


How does The System of Carbon Credits Work?

The 1997 Kyoto Protocol governs how much CO2e each country is allowed to emit at a global level. Participating nations agree on a maximum annual emission limit.

The Protocol is aware of the fact that countries differ in their ability to tackle climate change due to their varying levels of economic development. These countries are categorized as Annex 1 (developed nations) and Non-Annex 1 (developing countries).

Only Annex 1 countries agree on emissions-limit, while Non-Annex 1 countries can earn carbon credits by investing in projects that reduce carbon emissions in their own countries. These carbon credits can also be sold to Annex 1 countries to allow them to emit more CO2e.


Things to know about the Kyoto Protocol

This is where it all began. The idea of trading in carbon credits was signed at this gathering some years ago. Here are some of the characteristics of the Kyoto Protocol:

  • UNFCCC-The Kyoto Protocol saw the formation of the United Nations Framework Convention on Climate Change.
  • Cap-and-trade-At this gathering a system was devised to impose national caps on greenhouses of developed nations that ratified the Kyoto Protocol. They were aligned as Annex B countries.
  • AAU’s-Each of these countries were given an allotment and the corresponding number of emissions allowances known as Assigned Amount Units.
  • Trading targets-The countries that participated were required to reduce their emissions to below nineteen-ninety levels and below five percent by 2012. They also could reduce their emissions by trading in emissions allowances with countries that already had surplus allowances.
  • Two flexible mechanisms-The costs of reducing emissions were kept minimal. To increase cost-effectiveness, the Kyoto Protocol also founded two “flexible mechanisms” known as the Clean Development Mechanism and Joint Implementation.


Which Carbon Credit Method Works Best-Mandatory or Voluntary?

There are many voluntary alternatives towards making concerted efforts to reduce carbon emissions while protocols and regulations are in place. At this point, it’s important to consider which method works better. Next, we are going to list carbon credits by key historical features and assigned mandates. 


  • Mandatory Carbon Credits-The Kyoto Protocol was the precursor to mandatory carbon credits. Here are some of the main outcomes from that historic conference and those that followed it:


  • Cap-and-trade systems-Under a cap-and-trade program, a limit on certain types of emissions is set, and companies are allowed to sell or trade the unused portion of their limits to other companies that are struggling to comply.
  • CDM-The Clean Development Mechanism enforces countries to partially meet Kyoto targets through the financing of carbon reduction vehicles in mainly developing countries.
  • JI-Tradable units from Joint Implementation initiatives are known as Emissions Reductions Units.
  • EU-ETS-The European Union Emissions Trading Scheme is a group of countries that have been given an overall cap to work from as a single body. The member states were nicknamed “bubble” in Europe.


  • Voluntary Carbon Credits- They are best known by their acronym, VERS, Voluntary Emission Reductions, reminiscent for bartering, are carbon offset traded voluntarily for carbon credits. Reductions are monitored by a voluntary certification process. Also, voluntary carbon credit enables companies and businesses to purchase carbon credits voluntarily to satisfy Corporate Social Responsibility objectives.



How Does The Carbon Credit System Affect Businesses and Organizations?

Many countries operate national or regional carbon credit schemes, such as the European Union Emissions Trading Scheme, California’s greenhouse gas scheme or the Regional Greenhouse Gas Initiative (RGGI).

These schemes require mandated businesses to obtain credit for each ton of CO2e that they emit annually. Businesses that reduce their emissions can sell their excess carbon credits to other participants whose emissions have increased.

Whether international, national or regional, a carbon credit gives each business the right to emit one ton of CO2e within a given period. If the company emits more CO2e than it has credits, it must buy extra carbon credit.

This system encourages organizations to evaluate the financial benefits of investing in their carbon reduction measures to keep within agreed emission limits.



In this article, we explained what carbon credits are, how they work and what kind of features they have. 

A carbon credit is a permit that allows a company or an organization to emit a certain amount of carbon dioxide or other greenhouse gases. This is very important because this way, we can protect the environment more.

We hope this article was helpful!

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