What are Carbon Credits?

A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent (tCO2e) equivalent to one tonne of carbon dioxide. Carbon credits and carbon markets are a component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). One carbon credit is equal to one metric tonne of carbon dioxide, or in some markets, carbon dioxide equivalent gases. Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources.

The markets can be divided into two basic types:

The Certified Carbon Market

This came about as a direct consequence of the Kyoto Protocol. Most developed countries in the world, except for the U.S. and Australia, ratified the Kyoto Protocol. Industries and governments in these countries had to meet specific targets for reductions. Those that could not meet their predetermined reductions were allowed to enter the carbon market to buy carbon credits or emission reduction units.

The Voluntary Carbon Market

Those in the U.S. may look at the carbon trading activity in Europe, and especially at the prices that carbon credits are bringing overseas, and see that prices for carbon credits are much higher than on the voluntary market in the U.S. That’s one difference between a compliance and a voluntary carbon market. The basic principle for carbon trading is different in a voluntary system. Unlike the Certified Market the Voluntary Market includes more than just business and organizations.

Individual consumers from anywhere in the world can buy credits in the Voluntary Carbon Market. One advantage of the Voluntary Market is that participants can buy both credits which originate from the certified market and credits which originate from the voluntary market. Carbon credits generated within the Voluntary Carbon Market are recognized within the particular trading scheme with which they are associated, unlike credits generated within the Compliance Carbon Market.

Both the compliance and voluntary markets have seen substantial growth in recent years with recent downward pressure perceived as a direct correlation between carbon prices and reduced industrial output during the recent global economic downturn.

As many economies are now coming out of the recession and with ever stringent UN emissions targets coming into force, most experts expect the emissions markets to experience significant growth. Businesses are now more aware of their public perception and social responsibility and are extremely motivated to announce their green credentials.