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Carbon Credits

Discerning an urgency to implement a worldwide reduction in emissions of greenhouse gases into the atmosphere, the Kyoto Protocol of 1997 contrived individual quotas for each of its 180 member countries. Said quota mandates the tolerable volume of carbon dioxide that may be emitted into the atmosphere.

carbon credits

Since manufacturing activities vary for each of the member countries and developing nations generate lower gas emission coefficients, an acceptable rating system needed to be formulated. Thus, use of carbon credits was introduced in the mainstream precisely to address this disparity.

Carbon credits are tradable permit bonds set with an assigned monetary value that have been devised to implement a global cutback on gas emissions. Each carbon credit bond gives the owner the right to emit one ton of greenhouse gas into the atmosphere.

Should the owner, say a manufacturing outfit, exceed the set credit quota, the purchase of additional bonds equivalent to the exceeded value becomes a form of penalty. Meanwhile, those that have significantly met or perhaps gone below emissions standards are handsomely paid for the effort.

For a while, it was difficult to track emission values and whether a particular company exceeded its quota or achieved reduced emissions. A system has been devised to estimate more accurately the amount of gas emitted into the atmosphere. This system is known as the carbon dioxide calculator and is deemed efficient in monitoring the volume of emissions.

Sectors that contribute to gas emissions

The combustion of fossil fuels, borne out of the use of vehicles powered by gasoline and the production run of gas, oil and coal fired power plants, tops the list of atmosphere pollutants.

Other major manufacturing plants engaged in the production of cement, steel, textile, air-conditioners, refrigeration units and fertilizer contribute to the release of methane, nitrous oxide and hydroflurocarbons, among others, also adds up to the massive build-up of greenhouse gasses. Because of the disastrous effect of these activities to the atmosphere, these companies are issued emission caps that would compel them to adapt to emission reduction measures.

Under the Kyoto Protocol, companies that would fail to meet carbon caps or quotas are required to undertake greenhouse reduction projects in other countries where costs are deemed much lower in order to compensate for the excesses generated in their locality.

This would stimulate a 2-fold effect; issuing credits to the developed country for meeting the greenhouse gas reduction quota while fueling new capital and technology to the developing country in the course of implementing the project. Under the same guidelines, countries with surplus credits can sell to countries that have exceeded emission limits and reduction targets.

How emission targets are reduced using carbon credits?

Since countries are given emission targets, companies down the line are in turn provided with quotas they have to manage and meet. If a company produces 200,000 tons of greenhouse gases in a given year, the host country can mandate a 25-percent reduction by means of legislation, so the company becomes compelled to adhere to the mandated quota or buy carbon credits from companies that meet emission targets.

Carbon credits create markets because of monetary consideration. Participants are paid by reducing greenhouse emissions and pollutants into the atmosphere. As emission levels are predicted to increase over time and with countries pursuing reduction targets, companies will be forced to rely on carbon credits and meet annual forecast. This will surely push market prices up and encourage environment friendly companies to double their efforts and sell more carbon credit bonds.

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