Carbon Credits Explained

Do you know that the carbon credit market is worth a couple of billions! Information about carbon credits explained further helps you to know more about this popular term in the financial market...

Increasing levels of carbon dioxide gas in the atmosphere has raised world wide concerns regarding global warming. In the international carbon trading market, control on the rate of emission of carbon dioxide has become a hotly debated topic. Carbon credits explained by scholars in carbon market is defined as a generic term that can be referred to any legal document or certifications that restricts emission of CO2 into the atmosphere. Governments and large corporations buy carbon credits as it is their moral responsibility to reduce emissions of carbon dioxide. Still wondering what are carbon credits? Read further...

What Are Carbon Credits?

Mathematically, one carbon credit is awarded to an organization for preventing the emission of one metric ton of carbon dioxide into the atmosphere. It is called a CO2e (CO2 equivalent). In the year 1990, the world's major polluters were identified by a study based on CO2 emissions. Based on common census, nearly 37 countries signed the Kyoto Protocol in December 1997, in a world summit in Japan. It however, came into force on February 16, 2005 after Russia also ratified it. The long hiatus between the signing and execution of Kyoto protocol was due to the fact that at least 55 countries were required to sign it, before it must come into existence. Moreover, the global production of these 55 parties must be at least 55% of total global green house gas production.

The participating countries that ratified Kyoto protocol have pledged not only to reduce emissions of CO2 but also of four other green house gases; methane (CH4), Nitrous Oxide (N2)O, Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs) and Sulfur Hexafluoride (SF6). If the countries that have ratified Kyoto protocol go above their target emissions, they have to buy "credits" from other countries that have been able to cut their greenhouse gas emissions, significantly.

The Kyoto protocol was introduced under the chapter of United Nations Framework Convention on Climate Change (UNFCCC or FCCC). As per the Kyoto protocol industrialized countries have promised to lower CO2 emissions by 5% by 2008 -2012. So are you getting what are carbon credits? More information about carbon credits explained further will help you to understand this environmental economics term in a more enlightened way.

Buying and Selling Carbon Credits

Trading carbon credits is quite a common financial bargain for various countries. A country is given carbon credit for every metric ton of carbon dioxide that it doesn't allow to go into the atmosphere. This can done through many processes like hydro power projects that replace coal fueled plants or by planting trees and starting afforestation projects.

To get your queries regarding carbon trading explained, we will help you with another example. Consider for instance, there is a steel company in a developing country that is using eco - friendly methods in its factories like wind energy generation power plants to boost its production. The steel company emission quota is 12 tons. However, if it expecting to release 14 tons of carbon dioxide, it can buy 2 credits from the wind generation power plants. Credits are awarded to developed countries that have been able to cut back on their emissions. Developing countries can buy credits from developed countries in case, they exceed their emission targets.

In the last segment regarding carbon credits explained, we wish to inform you that in practice, the aim of the Kyoto Protocol has been very noble. However, owing to its amazingly complex trading system, carbon credit trading has suffered flaws and lack of transparency. It is said that various large corporations put in extra money to grab carbon credits, instead of seriously trying to reduce their carbon footprints. Understanding carbon trading is certainly not an easy task especially now, when it has been almost a decade, wherein it has failed to a large extent.

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