Carbon
credits are a key component of national and international attempts
to mitigate the growth in concentrations of Greenhouse Gases (GHGs). Carbon
trading is an application of an emissions trading (Emissions trading is an administrative approach used to
control pollution by providing economic incentives for achieving reductions in
the emissions of pollutants approach) & Greenhouse gas emissions are capped
and then markets are used to allocate the emissions among the group of
regulated sources. The idea is to allow market mechanisms to drive industrial
and commercial processes in the direction of low-emissions or less "carbon
intensive" approaches than are used when there is no cost to emitting CO2
and other GHGs into the atmosphere. Since GHG mitigations projects generate credits,
this approach 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.
Clean Development Mechanism (CDM)
is an arrangement under the Kyoto Protocol allowing industrialized countries
with a greenhouse gas reduction commitment (called Annex B countries) to invest
in projects that reduce emissions in developing countries as an alternative to
more expensive emission reductions in their own countries. A crucial feature of
an approved CDM carbon project is that it has established that the planned
reductions would not occur without the additional incentive provided by
emission reductions credits, a concept known as "additionality".
The CDM allows net global
greenhouse gas emissions to be reduced at a much lower global cost by financing
emissions reduction projects in developing countries where costs are lower than
in industrialized countries. However, in recent years, criticism against the
mechanism has increased.
BACKGROUND
Burning of fossil fuels is a
major source of industrial greenhouse gas emissions, especially for power,
cement, steel, textile, fertilizer and many other industries which rely on
fossil fuels (coal, electricity derived from coal, natural gas and oil). The
major greenhouse gases emitted by these industries are carbon dioxide, methane,
nitrous oxide, hydro fluorocarbons (HFCs), etc, all of which 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 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 US Acid 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 organizations,
generically termed 'operators'. Countries manage this through their own
national 'registries', which are required to be validated and monitored. 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
accommodate this.
By permitting 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 'capacity'.
Since 2005, the Kyoto mechanism
has been adopted for CO2 trading by all the countries within the
European Union under 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 that 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 ratification came into
force in March 2008, similar schemes are being considered.
