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Introduction to Carbon Credits

Introduction

Carbon credits are a market-based mechanism designed to reduce greenhouse gas (GHG) emissions and combat climate change.

They represent a unit of measurement that allows organizations or individuals to take responsibility for their carbon footprint by financing emission reduction projects or initiatives.

How do Carbon Credits function?

Carbon credits function within a cap-and-trade, or emissions trading system.

In this system, there is a predetermined limit on the total amount of emissions allowed within a certain industry sector.

This cap is often set by governments or regulatory bodies. Within this cap, organizations can buy or sell carbon credits based on their emissions performance.

2 Cases for companies

In cases where a company manages to reduce its emissions below its allocated amount, it can then generate surplus carbon credits which can be sold to other entities facing challenges in meeting their emission reduction targets.

In the other case, where organizations that exceed their allocated emissions, must purchase additional carbon credits to offset the excess.

This entire situation creates a financial incentive for companies to invest in emission reduction projects or implement cleaner technologies, as it can be economically advantageous to reduce emissions and generate surplus credits.

Countries that have adopted or implementing Carbon credits

  1. European Union (EU) : The EU operates the European Union Emissions Trading System (EU ETS) which is the largest carbon market in the world.It covers various industries such as manufacturing, aviation, power generatio, etc.

The EU ETS has been in operation since 2005 and includes all EU member states.

2. United States : While there is no nationwide carbon credit program in the United States, some individual states have implemented their own initiatives.

Some examples are California’s Cap-and-Trade Program, which covers various industries and the Regional Greenhouse Gas Initiative (RGGI), a cooperative effort among several northeastern states to reduce carbon dioxide emissions from power plants.

3. China : China launched its national carbon market in 2021, becoming the world’s largest emissions trading system.

The initial phase of the program covers the power sector and involves the allocation and trading of carbon allowances.

It is expected to expand to other sectors in the future.

4. South Korea : South Korea established the Korean Emissions trading System (KETS) in 2015 and covers around 600 companies from various sectors.

The KETS operates on a cap-and-trade basis and allows the trading of emission permits.

5. New Zealand : New Zealand operates a cap-and-trade system called the New Zealand Emissions Trading Scheme (NZ ETS).

It covers multiple sectors, including forestry, energy, industrial processes, and waste.

Participants can trade carbon units representing emissions and removals.

6. Japan : Japan launched its nationwide emissions trading system, the Tokyo Cap-and-Trade Program in 2010.

It initially focused on large commercial and industrial facilities in the Tokyo metropolitan area. However, the program was suspended in 2017 and is currently being revised for potential future implementation.

The carbon credits market operates on a voluntary or mandatory basis. In some cases, governments may mandate participation in emissions trading schemes, while in others, organizations may choose to voluntarily participate as part of their sustainability efforts.

The credits themselves are typically traded on specialized exchanges or platforms, where buyers and sellers can engage in transactions.

It’s important to note that the concept of carbon credits is not without criticism. Some argue that it allows polluters to continue emitting by simply purchasing offsets, rather than addressing the root causes of emissions. Others raise concerns about the credibility and effectiveness of some offset projects, highlighting the need for robust verification and monitoring mechanisms.

Conclusion

Overall, carbon credits represent an innovative approach to incentivize emission reductions and promote sustainable practices. By creating a market for carbon, they aim to encourage organizations to take responsibility for their environmental impact while fostering the transition to a low-carbon economy.