Carbon credits are generated by enterprises i the developing world that shift to cleaner
technologies and thereby save on energy consumption, consequently reducing their
greenhouse gas emissions. For each tonne of carbon dioxide (the major GHG) emission
avoided, the entity can get a carbon emission certificate which they cansell either
immediately or through a futures market, just like any other commodity.
The certificates are sold to entities in rich countries, like power utilities, who have emission
reduction targets to achieve and find it cheaper to buy 'offsetting' certificates rather than do
a clean-up in their own backyard.
This trade is carried out under a UN-mandated international convention on climate change
to help rich countries reduce their emissions.
What is meant by carbon credit? Who gets
it? What is its significance?
In financial circles carbon credit is often mentioned. Ido not understand its significance.
7 months ago
Best Answer - Chosen by Asker
Carbon credits are a key component of national and international emissions trading
schemes. They provide a way to reduce greenhouse effect emissions on an industrial scale
by capping total annual emissions and letting the market assign a monetary value to any
shortfall through trading. Credits can be exchanged between businesses or bought and sold
in international markets at the prevailing market price. Credits can be used to finance
carbon reduction schemes between trading partners and around the world.
There are also many companies that sell carbon credits to commercial and individual
customers who are interested in lowering their carbon footprint on a voluntary basis. These
carbon offsetters purchase the credits from an investment fund or a carbon development
company that has aggregated the credits from individual projects. The quality of the credits
is based in part on the validation process and sophistication of the fund or development
company that acted as the sponsor to the carbon project. This is reflected in their price;
voluntary units typically have less value than the units sold through the rigorously-
validated Clean Development Mechanism
Burning of fossil fuels is a major source of industrial greenhouse gas emissions, especially
for power, cement, steel, textile, and fertilizer industries. The major greenhouse gases
emitted by these industries are carbon dioxide, methane, nitrous oxide, hydrofluorocarbons
(HFCs), etc, which all increase the atmosphere's ability to trap infrared energy and thus
affect the climate.
The concept of carbon credits came into existence as a result of increasing awareness of the
need for controlling emissions. The IPCC has observed that:
Policies that provide a real or implicit price of carbon could create incentives for producers
and consumers to significantly invest in low-GHG products, technologies and processes.
Such policies could include economic instruments, government funding and regulation,
while noting that a tradable permit system is one of the policy instruments that has been
shown to be environmentally effective in the industrial sector, as long as there are
reasonable levels of predictability over the initial allocation mechanism and long-term
The mechanism was formalized in the Kyoto Protocol, an international agreement between
more than 170 countries, and the market mechanisms were agreed through the subsequent
Marrakesh Accords. The mechanism adopted was similar to the successful USAcid Rain
Program to reduce some industrial pollutants.
The Protocol agreed 'caps' or quotas on the maximum amount of Greenhouse gases for
developed and developing countries, listed in its Annex I . In turn these countries set quotas
on the emissions of installations run by local business and other organisations, generically
termed 'operators'. Countries manage this through their own national 'registries', which are
required to be validated and monitored for compliance by the UNFCCC. Each operator has
an allowance of credits, where each unit gives the owner the right to emit one metric tonne
of carbon dioxide or other equivalent greenhouse gas. Operators that have not used up their
quotas can sell their unused allowances as carbon credits, while businesses that are about to
exceed their quotas can buy the extra allowances as credits, privately or on the open
market. As demand for energy grows over time, the total emissions must still stay within
the cap, but it allows industry some flexibility and predictability in its planning to
By allowing allowances to be bought and sold, an operator can seek out the most cost-
effective way of reducing its emissions, either by investing in 'cleaner' machinery and
practices or by purchasing emissions from another operator who already has excess
Since 2005, the Kyoto mechanism has been adopted for CO2 trading by all the countries
within the European Union un its European Trading Scheme (EU ETS) with the
European Commission as its validating authority. From 2008, EU participants must link
with the other developed countries who ratified Annex I of the protocol, and trade the six
most significant anthropogenic greenhouse gases. In the United States, which has not
ratified Kyoto, and Australia, whose recent ratification comes into force in March 2008,
similar schemes are being considered.
Kyoto's 'Flexible mechanisms'
A credit can be an emissions allowance which was originally allocated or auctioned by the
national administrators of a cap-and-trade program, or it can be an offset of emissions.
Such offsetting and mitigating activities can occur in any developing country which has
ratified the Kyoto Protocol, and has a national agreement in place to validate its carbon
project through one of the UNFCCC's approved mechanisms. Once approved, these units
are termed Certified Emission Reductions, or CERs. The Protocol allows these projects to
be constructed and credited in advance of the Kyoto trading period.
The Kyoto Protocol provides for three mechanisms that enable countr es or operators in
developed countries to acquire greenhouse gas reduction credits
* Under Joint Implementation (JI) a developed country with relatively high costs of
domestic greenhouse reductio would set up a project in another developed country.
* Under the Clean Development Mechanism (CDM) a developed country can 'sponsor' a
greenhouse gas reduction project i a developing country where the cost of greenhouse gas
reduction project activities is usually much lower, but the atmospheric effect is globally
equivalent. The developed country would be given credits for meeting its emission
reduction targets, while the developing country would receive the capital investment and
clean technology or beneficial change in land use.
* Under International Emissions Trading (IET) countries can trade in the international
carbon credit market to cover their shortfall in allowances. Countries with surplus credits
can sell them to countries with capped emission commitmentsunder the Kyoto Protocol.
These carbon projects can be created by a national government or by an operator within the
country. In reality, most of the transactions are not performed by national governments
directly, but by operators who have been set quotas by their country.
For trading purposes, one allowance or CER is considered equivalent to one metric tonne
of CO2 emissions. These allowances can be sold privately or in the international market at
the prevailing market price. These trade and settle internationally and hence allow
allowances to be transferred between countries. Each international transfer is validated by
the UNFCCC. Each transfer of ownership within the European Union is additionally
validated by the European Commission.
Climate exchanges have been established to provide a spot market in allowances, as well as
futures and options market to help discover a market price and maintain liquidity. Carbon
prices are normally quoted in Euros per tonne of carbon dioxide or its equivalent (CO2e).
Other greenhouse gasses canalso be traded, but are quoted as standard multi les of carbon
dioxide with respect to their global warming potential. These features reduce the quota's
financial impact on business, while ensuring that the quotas are met at a national and
Currently there are at least four exchanges trading in carbon allowances the Chicago
Climate Exchange, European Climate Exchange, Nord Pool, and PowerNext. Recently,
NordPool listed a contract to trade offsets generated by a CDM carbon project called
Certified Emission Reductions (CERs). Many companies now engage in emissions
abatement, offsetting, and sequestration programs to generate credits that can be sold on.
Managing emissions is one of the fastest-growing segments in financial services in the City
of London with a market now worth about €30 billion, but which could grow to €1 trillion
within a decade. Louis Redshaw, head of environmental markets at Barclays Capital
predicts that quot;Carbon will be the world's biggest commodity market, and it could become
the world's biggest market overall.quot;
Setting a market price for carbon
Unchecked, energy use and hence emission levels are predicted to keep rising over time.
Thus the number of companies needing to buy credits will increase, and the rules of supply
and demand will push up the market price, encouraging more groups to undertake
environmentally friendly activities that create carbon credits to sell.
An individual allowance, such as a Kyoto Allocation Allowance Unit (AAU) or its near-
equivalent European Union Allowance (EUA), may have a different market value to an
offset such as a CER. This is due to the lack of a developed secondary market for CERs, a
lack of homegeneity between projects which causes difficulty in pricing, as well as
questions due to the principle of supplementarity and its lifetime. Additionally, offsets
generated by a carbon project under the Clean Development Mechanism are potentially
limited in value because operators in the EU ETS are restricted as to what percentage of
their allowance can be met through these flexible mechanisms.
How buying carbon credits can reduce emissions
Carbon credits create a market for reducing greenhouse emissions by giving a monetary
value to the cost of polluting the air. Emissions become an internal cost of doing business
and are visible on the balance sheet alongside raw materials and other liabilities or assets.
By way of example, consider a business that owns a factory putting out 100,000 tonnes of
greenhouse gas emissions in a year. Its government then enacts a law that limits the
emissions that the business can produce. So the factory is given a quota of say 80,000
tonnes per year. The factory either reduces its emissions to 80,000 tonnes or is required to
purchase carbon credits to offset the excess.
After costing up alternatives the business may decide that it is uneconomical or infeasible
to invest in new machinery. Instead may choose to buy carbon credits on the open market
from organizations that have been approved as being able to sell leg itimate carbon credits.
* One seller might be a company that will offset emissions by planting a number of trees
for every carbon credit you buy from them under an approved CDM project. So although
the factory continues to emit gases, it would pay another group to go out and plan trees
which will draw back 20,000 tonnes of carbon dioxide from the atmosphere each year.
* Another seller may have already invested in new low-emission machinery and have a
surplus of allowances as a result. The factory could make up for its emissions by buying
20,000 tonnes of allowances from them. The cost of the seller's new machinery would be
subsidized by the sale of allowances. Both the buyer and the seller would submit accounts
for their emissions to prove that their allowances were met correctly.
Credits versus taxes
Credits were chosen by the signatories to the Kyoto Protocol as an alternative to Carbon
taxes. A criticism of tax-raising schemes is that they are frequently not hypothecated, and
so some or all of the taxation raised by a government may be applied inefficiently or not
used to benefit the environment.
By treating emissions as a market commodity it becomes easier for business to understand
and manage their activities, while economists and traders can attempt to predict future
pricing using well understood market theories. Thus the main advantages of a tradable
carbon credit over a carbon tax are:
* the price is more likely to be perceived as fair by those paying it, as the cost of carbon is
set by the market, and not by politicians. Investors in credits have more control over their
* the flexible mechanisms of the Kyoto Protocol ensure that all nvestment goes into
genuine sustainable carbon reduction schemes, through its internationally-agreed validation
Creating Real Carbon Credits
The principle of Supplementarity within the Kyoto Protocol means that internal abatement
of emissions should take precedence before a country buys in carbon credits. However it
also established the Clean Development Mechanism as a Flexible Mechanism by which
capped entities could develop real, measurable, permanent emissions reductions voluntarily
in sectors outside the cap. Many criticisms of carbon credits stem from the fact that
establishing that an emission of CO2 equivalent GHG has truly been reduced involves a
complex process. This process has evolved as the concept of a carbon project has been
refined over the past 10 years.
The first step in determining whether or not a carbon project has legitimately lead to the
reduction of real, measurable, permanent emissions is understanding the CDM
methodology process. This is the process by which project sponsors submit, through a
Designated Operational Entity (DOE), their concepts for emissions reduction creation. The
CDM Executive Board, with the CDM Methodology Panel and their expert advisors,
review each project and decide how and if they do indeed resul in reductions that are
Additionality and Its Importance
It is also important for any carbon credit (offset) to prove a concept called additionality.
Additionality is a term used by Kyoto's Clean Development Mechanismto describe the fact
that a carbon dioxide reduction project (carbon project) would no have occurred had it not
been for concern for the mitigation of climate change. More succinctly, a project that has
proven additionality is a beyond-business-as-usual project.
It is generally agreed that voluntary carbon offset projects must also prove additionality in
order to ensure the legitimacy of the environmental stewards claims resulting from the
retirement of the carbon credit (offset). According the World Resources Institute/World
Business Council for Sustainable Development (WRI/WBCSD) : quot;GHG emission trading
programs operate by capping the emissio of a fixed number of individual facilities or
sources. Under these programs, tradable 'offset credits' are issued for project-based GHG
reductions that occur at sources not covered by the program. Each offset credit allows
facilities whose emissions are capped to emit more, in direct proportion to the GHG
reductions represented by the credit. The idea is to achieve a zero net increase in GHG
emissions, because each tonne of increased emissions is 'offset' by project-based GHG
reductions. The difficulty is that many projects that reduce GHG emissions (relative to
historical levels) would happen regardless of the existence of a GHG program and without
any concern for climate change mitigation. If a project 'would have happened anyway,' then
issuing offset credits for its GHG reductions will actually allow a positive net increase in
GHG emissions, undermining the emissions target of the GHG program. Additionality is
thus critical to the success and integrity of GHG programs that recognize project-based
Environmental restrictions and activities have traditionally been imposed on businesses
through regulation. Many people were, and still are, uneasy at the use of a novel market-
based approach to managing emissions, although the concept of Cap and Trade eventually
won the day in international negotiations.
The Kyoto mechanism is the only internationally-agreed mechanism for regulating carbon
credit activities, and, crucially, includes checks for additionality and overall effectiveness.
Its supporting organisation, the UNFCCC, is the only organisation with a global mandate
on the overall effectiveness ofemission control systems, although enforcement of decisions
relies on national co-operation. The Kyoto trading period only applies for five years
between 2008 and 2012. The first phase of the EU ETS system started before then, and is
expected to continue in a third phase afterwards, and may co-ordinate with whatever is
internationally-agreed at but there is general uncertainty as to what will be agreed in post-
Kyoto negotiations on greenhouse gas emission As business investment often operates
over decades, this adds risk and uncertainty to their plans. As several countries responsible
for a large proportion of global emissions (notably USA, Australia, China and India) have
avoided mandatory caps, this also means that businesses in capped countries may perceive
themselves to be working at a competitive disadvantage against those in uncapped
countries as they are now paying for their carbon costs directly.
A key concept behind the cap and trade system is that national quotas should be chosen to
represent genuine and meaningful reductions in national output of emissions. Not only does
this ensure that overall emissions are reduced but also that the costs of emissions trading
are carried fairly across all parties to t e trading system. However, governments of capped
countries may seek to unilaterally weaken their commitments, as evidenced by the 2006
and 2007 National Allocation Plans for several countries in the EU ETS, which were
submitted late and then were initially rejected by the European Commission for being too
A question has been raised over the grandfathering of allowances. Countries within the EU
ETS have granted their incumbent bus inesses most or all of their allowances for free. This
can sometimes be perceived as a protectionist obstacle to new entrants into their markets.
There have also been accusations of power generators getting a 'windfall' profit by passing
on these emissions 'charges' to their customers. As the EU ETS moves into its second phase
and joins up with Kyoto, it seems likely that these problems will be reduced as more
allowances will be auctioned.
Establishing a meaningful offset project is complex: voluntary offsetting activities outside
the CDM mechanism are effectively unregulated and there have been criticisms of
offsetting in these unregulated acti ities. This particularly applies to some voluntary
corporate schemes in uncapped countries and forsome personal carbon offsetting schemes.
There have also been concerns raised over the validation of CDM credits. One concern has
related to the accurate assessment of additionality. Others relate to the effort and time taken
to get a project approved. Questions may also be raised about the validation of the
effectiveness of some projects; it appears that many projects do not achieve the expected
benefit after they have been audited, and the CDM board can only approve a lower amount
of CER credits. For example, it may take longer to roll out a project than originally
planned, or an afforestation project may be reduced by disease or fire. For these reasons
some countries place additional restrictions on their local implementations and will not
allow credits for some types of forestry or land use projects.
Hope this info is useful to u...
7 months ago
Thanks a lot for such a detailed answer to my query. Now I have a clear idea of
what is meant by carbon credit.
I am surprised at the sincerity of so many people in answering ques
tions put up in
this forum. Hats off to you Yahoo Answers.
sted on 23-12-2007
Why should I buy carbon credits?
Filed Under (Politics) by Nick
I have noticed a slew of websites appearing on the net that sel carbon credits to people that
want to offset the carbon emissions produced as a by-product of the goods and services
they consume. Thanks to former Vice President Al Gore’s eco-documentary An
Inconvenient Truth — and I say this with tongue in cheek — we are now all aware of the
climate change effects of carbon dioxide emissions. Maybe it is this new awareness (or
guilt) that encourages us to open our wallets and purchase these carbon credits.
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But what do you really get for your carbon credits? Web sites like greenpig, Climate
Friendly, and Carbonfund charge about $25 to offset 1 tonne of carbon emissions, and you
get a nice little certificate to certify your purchased carbon credits. You can then hang that
certificate on the wall and feel good about yourself.
It is worth noting that you can purchase 1 tonne of thermal coal for about $70. Roughly 1
tonne of coal produces about 2 tonnes of CO2 emissions. So if you bought half a tonne of
coal for $35 and stashed it somewhere so that it is never used, then you are effectively
sparing the Earth of 1 tonne of CO2 emissions for the cost of $35. So maybe these carbon
credits are cheap by comparison. It will certainly save me from stockpiling coal in my
So where does your money go? Well they go to environmental project such as tree
planting and wind farms. As to how much of your money goes directly into these projects
is another question. I am highly sceptical of these carbon credit businesses (if you can call
them a business). They are probably more like charities where about 15% of your donation
actually goes directly to helping people in need, and the rest of your money is wasted on
expensive overheads like the CEO’s salary.
Buying half a tonne of coal and stashing it in your backyard is sounding like a more
effective strategy. If everyone did this then coal prices will increase due to a reduction in
supply of coal on the open market. Energy becomes more expensive as a result, and
economists would lead us to believe that consumers will demand less energy as a result.
Consuming less energy wil mean less CO2 emissions.
Also why would I want to give my hard earned money to these businesses so that they can
then invest in wind farms that will eventually make them more money? Where is my cut of
the money from these wind farms? You would be better off investing your money directly
into a renewable energy company that is listed on the stock exchange. At least then you
become a shareholder in the wind farm and can earn dividends and capital growth from
your investment, and still feel good about yourself for saving the planet.
The only benefit I can see from purchasing carbon credits as an individual is that I will
effectively be giving up a proportion of my income. By giving up a proportion of my
income I will therefore have less money to consume carbon dioxide producing goods and
services. Although at the same time I will probably be making somebody else rich,
presumably the owners of the carbon credit websites, and thus enabling them to purchase
more carbon dioxide producing goods and services than me.So at the end of the day this
notion of carbon credits will simply redistribute carbon emissions amongst society with a
bias towards the rich.
I will never opt to buy carbon credits as there is no clear way of measuring the
effectiveness of the individual’s contribution. I will however endeavour to become more
eco-friendly by continuing to buy energy saving light bulbs, powering down my
workstation at the office over weekends, and petitioning Google to change the background
colour of their search page to black.
How Much Do Carbon Credits Cost?
Play the Zero Emissions Market
By Marcus Ricci
Looking to purchase some carbon credits, but trying to shop around for the best deal? Well,
unfortunately, determining carbon credit prices is a pretty complicated business. There is
no one set market rate for individual carbon purchases, and prices tend to fluctua based
on a variety of factors. The type of offset being sold, whether or not the selling
organization is non-profit, the level of offset certification included in the purchase, the type
of project the purchased offsets will benefit, where the offsets come from, and the market
demand for carbon credits are all taken into consideration before cost is determined.
Because carbon trading is a relatively new concept with so many potential variables, the
buying process has yet to become streamlined. So, for your convenience, here are some
helpful links to assist in your search for a good, honest, environmentally friendly carbon
This site features an extremely helpful chart that offers a rundown on the leading carbon
offset providers, including cost, project type, offset type, and method of certification. It’s a
great place to begin your search.
This Wikipedia entry on carbon credits provides some useful background, from the origin
of carbon trading in the Kyoto Protocol to the current economic climate in which credits
are bought and sold.
This site offers an in-depth analysis of carbon credits and how they are incorporated into
the global economy.
Before buying carbon credits, calculate your impact with this carbon calculator on Al
Gore’s site. It’ll give you a good ballpark idea of just how many credits you’ll want to
Want to learn more about carbon credits?
How to Measure and Price Carbon Credits
Selling Carbon Credits on eBay—Solution or Scam?