What is Carbon Credit?
185 Views · Updated December 5, 2024
Carbon credits, also known as carbon offsets, are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of one ton of carbon dioxide or the equivalent in other greenhouse gases.The carbon credit is half of a so-called cap-and-trade program. Companies that pollute are awarded credits that allow them to continue to pollute up to a certain limit, which is reduced periodically. Meanwhile, the company may sell any unneeded credits to another company that needs them. Private companies are thus doubly incentivized to reduce greenhouse emissions. First, they must spend money on extra credits if their emissions exceed the cap. Second, they can make money by reducing their emissions and selling their excess allowances.Proponents of the carbon credit system say that it leads to measurable, verifiable emission reductions from certified climate action projects, and that these projects reduce, remove, or avoid greenhouse gas (GHG) emissions.
Definition
Carbon emission rights, also known as carbon offsets, are permits that allow the holder to emit a certain amount of carbon dioxide or other greenhouse gases. One emission allowance permits the emission of one ton of carbon dioxide or an equivalent amount of another greenhouse gas.
Origin
The concept of carbon emission rights originated from international efforts to combat global climate change, formally established in the 1997 Kyoto Protocol. This protocol introduced the 'emissions trading' mechanism aimed at reducing greenhouse gas emissions through market-based approaches.
Categories and Features
Carbon emission rights are mainly divided into two categories: compliance markets and voluntary markets. Compliance markets are set up by governments or international agreements, and companies must adhere to these regulations. Voluntary markets allow companies and individuals to purchase carbon emission rights voluntarily to offset their carbon footprint. Compliance markets are characterized by mandatory and legal obligations, while voluntary markets offer more flexibility and innovation.
Case Studies
A typical case is the European Union Emissions Trading System (EU ETS), one of the largest carbon markets in the world. By capping total emissions and allowing companies to trade allowances, the EU ETS has successfully reduced greenhouse gas emissions across various industries. Another example is California's carbon market in the United States, which combines mandatory and voluntary measures to encourage companies to reduce emissions through innovative technologies.
Common Issues
Investors often face issues such as market price volatility and uncertainty due to policy changes when applying carbon emission rights. Additionally, many misunderstand carbon emission rights as 'pollution permits,' overlooking their role in promoting emission reductions.
Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation and endorsement of any specific investment or investment strategy.