Carbon credit is a generic term for any tradable certificate or permit that represents the right to emit one metric ton of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide (tCO2e) equivalent to 1 metric ton of carbon dioxide.
Environment protection has evolved as a major concern for the people around the globe, over a period of time. Green houses gases are one of the major concern of the environment protection activists. Burning of fossil fuels is one of the major causes of industrial greenhouse gas emissions, especially for power, steel, cement, textile, fertilizer and many other industries which rely on fossil fuels like, coal, electricity derived from coal, oil and natural gases.
The major greenhouse gases emitted by these industries are carbon dioxide, nitrous oxide, methane, hydro fluorocarbons (HFCs), etc. All of these gases increase the atmosphere’s ability to trap infrared energy or helps in depletion of ozone layer, thus affect the climate, and create abject conditions to live.
The concept of “carbon credits” came into existence as a result of increasing awareness of the need for controlling emissions of several greenhouse gases. The IPCC (Intergovernmental Panel on Climate Change) observed that, the policies that can provide a real or implicit price of carbon could create significant benefits for producers and consumers to invest in low-GHG products, technologies and processes. Such policies may include economic instruments, government funding and regulation.
IPCC also noticed that a tradable permit system should be one of the policies instruments that can prove to be environmentally effective in the industrial sector, till the time there are reasonable levels of predictability regarding the initial allocation mechanism and long-term price.
The mechanism was formalized in the “Kyoto Protocol”. It is an international agreement between more than 170 countries in which the market mechanisms were agreed through the subsequent accorders. And hence, the concept of “Carbon credits” came into being.
Kyoto Protocol was made under the United Nations Framework Convention on Climate Change (UNFCCC). The treaty was negotiated in Kyoto, Japan in December 1997, which was later opened for signature on March 16, 1998, and finally closed on March 15, 1999. The agreement came into force on February 16, 2005, under which demanded the industrialized countries to reduce their collective emissions of greenhouse gases.
India signed and ratified the Protocol in August, 2002 and since then has emerged as a world leader in reduction of greenhouse gases by adopting Clean Development Mechanisms (CDMs). It has been recently reported in media that the Delhi Metro has become the first rail project in the world to earn carbon credits worth 47 crore Rupees for next seven years. The UN body under the Kyoto Protocol has certified that the DMRC has helped in reducing emission of harmful gases.
Carbon credits and carbon markets are components of national and international attempts to mitigate the growth of greenhouse gases (GHGs). As one carbon credit is equal to one metric ton of carbon dioxide, or in some markets, carbon dioxide equivalent gases, carbon trading is nothing but an application of emissions trading approach. Upper limits for Greenhouse gas emissions are set and then markets allocate the emissions among the group of regulated sources.
The goal of carbon credit system is totally focused to encourage market mechanisms to drive industrial and commercial processes in a direction favoring low emissions or less carbon intensive approaches. Since GHG mitigation projects generate credits, this approach can also be used to finance carbon reduction schemes between trading partners and around the world.
There are so many companies who sell carbon credits to commercial and individual customers who are interested in lowering their carbon emissions voluntarily.
These carbon off-setters purchase carbon credits from an investment fund or a carbon development company that has aggregated there credits from individual projects. Buyers and sellers can also use an exchange platform to trade, such as the Carbon Trade Exchange, which is quite similar to stock exchange for carbon credits.
The carbon credit system also encourages afforestation. For example, if an environmentalist group plants enough number of trees to reduce emissions by one ton, the group shall be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is expecting to produce 11 tons, it can then purchase this carbon credit from the environmental group. Even though a company can buy carbon credits, yet the upper limit determined can’t be surpassed.
The carbon credit system seeks to reduce emissions by having countries honor, their emission quotas and offer incentives for being below them.
Carbon Credit is indeed a great step towards environment protection, yet it must be modified from time to time to meet the existing needs of environment protection. One thing is certain that carbon credit is not just a term in the field of environmental practices but is also a gift to the mankind.