What is a Carbon Credit?
A carbon credit is a tradable permit or certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas – it’s essentially an offset for producers of such gases. The main goal for the creation of carbon credits is the reduction of emissions of carbon dioxide and other greenhouse gases from industrial activities to reduce the effects of global warming.
Carbon credits are market mechanisms for the minimization of greenhouse gases emission. Governments or regulatory authorities set the caps on greenhouse gas emissions. For some companies, the immediate reduction of the emission is not economically viable. Therefore, they can purchase carbon credits to comply with the emission cap. Companies that achieve the carbon offsets (reducing the emissions of greenhouse gases) are usually rewarded with additional carbon credits. The sale of credit surpluses may be used to subsidize future projects for the reduction of emissions.
Types of Carbon Credits
There are two types of credits:
A carbon offset that is exchanged in the over-the-counter or voluntary market for credits.
Emission units (or credits) created through a regulatory framework with the purpose of offsetting a project’s emissions. The main difference between the two is that there is a third-party certifying body that regulates the CER as opposed to the VER.
KEY TAKEAWAYS
Carbon credits were devised as a market-oriented mechanism to reduce greenhouse gas emissions.
Companies get a set number of credits, which decline over time. They can sell any excess to another company.
Thus, "cap-and-trade" is an incentive to reduce emissions.
Negotiators at the Glasgow COP26 climate change summit in November 2021 agreed to a global carbon credit offset trading market.