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:
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:
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.
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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