Carbon Credits: What Are They and Why Do We Use Them

Almost everyone owns and frequently uses credit cards and it has become common knowledge about how they work. You buy something from a store and charge it to your card, then pay it off at a later time. But on the other hand, credit allows the possibility for a lot of good, if used responsibly. For example, paying off college loans, or a dream car. However this is also how many people go into debt. It is when you go over that credit is when problems start to arise. This is where we get into carbon credits, as well as the problems and benefits that surround them.


Carbon Credits

First off before getting into all of the details of carbon credits, a lot of people probably have no idea what carbon credits even are. Basically, carbon credits a tradable certificate or permit representing the right to emit a certain amount of carbon dioxide or other greenhouse gas equivalent. One carbon credit equals one tonne of carbon dioxide or, again, another greenhouse gas equivalent. This was started in an attempt to lower the global carbon emissions and enforce the use of clean energy.


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How it is supposed to work is fairly simple. Each company, or nation, will receive a set of quota credits. The amount they get depends on the size of their company and what they do. Every year they get a new set of credits, which they can use up throughout the year. However, going over the credits given will result in a very harsh penalty. By giving companies essentially an allowance of carbon that they are allowed to emit, it should force the companies to better regulate their output of emissions and how much energy they use.

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These carbon credits were put into effect by the Kyoto protocol which turned carbon emissions into a market system. It works by giving the companies the option to sell the carbon credits that they do not use to other companies. If they go over their carbon allowance, they simply buy more from a company who is not using them, or sell them. However, many issues and controversy have risen from this protocol claiming that since there is the market, there is no real incentive for companies to stay only with their allotted emission cap.


How Carbon Credits Work

Large companies, governments and other entities are required by law to purchase carbon credits so they can emit greenhouse gases. The market system of carbon offsets is based on the cap and trade principle. Basically, it sets a limit on the amount of pollution an entity is allowed to emit within the period of time. If the company or organization stays under their credit limit, they can sell the credits they did not use to other persons. On the other hand, if the company exceeds their allowance, they will need to purchase additional carbon credits.


Where does the money go when companies buy or sell these carbon credits? Well, it goes to fund carbon offset projects. These projects aim to absorb or eliminate the amount of carbon dioxide gas that is equal to the amount being emitted. When companies buy credits from offset providers, the money is used for specific projects like planting forests which can absorb carbon naturally, or diverting methane gas from livestock farms for conversion into electricity at a power plant. Other carbon offsets come in the form of renewable energy, which are called renewable energy credits. These support green energy sources like wind and solar power. The difference between carbon offsets and renewable energy credits is while offsets reduce a verifiable amount of carbon dioxide, RECs supply a certain amount of clean energy to the market. This ends up subsidizing the cost of developing these technologies.


The goal of placing a value on carbon emissions is to incite carbon credit buyers to choose less carbon-intensive activities. Companies that emit less, enjoy higher profits by selling their rights to emit carbon. This way, carbon emissions become just as important of a cost of business as materials or anything else.


Kyoto Protocol

The Kyoto Protocol is an international treaty which was entered into force in 2005. In this treaty, the objective is to fight global warming by reducing the greenhouse gas concentrations in the atmosphere to “a level that would prevent dangerous anthropogenic interference with the climate system.” Basically, reducing the concentration of carbon and other gases to a level that will not harm the atmosphere or human life further than it already has. To do this, the protocol puts the obligation to reduce the current emissions on the already developed countries that have historically been responsible for the current levels of greenhouse gases in the atmosphere.


Through the Kyoto Protocol is where we get carbon credits and the trading of those credits. There are three flexible mechanisms that the Kyoto Protocol has in place. The Joint Implementation, Clean Development Mechanism, and Emissions Trading.


  • Under the Joint Implementation, a developed country would set up a project in another developed country in order to receive more carbon credits.
  • The Clean Development Mechanism is when a developed country sponsors a greenhouse gas reduction project in a developing country, where the cost of those activities would be much lower. The developed country would receive credits for meeting its emission reduction targets, while the developing country would receive the investment and clean technology or beneficial change in land use.
  • In the International Emissions Trading, countries can trade in the international carbon credit market to cover them exceeding their allowance. Thus countries with surplus credits can sell them to other countries that are exceeding their allowances.


Currently, there are 192 parties to the Protocol. Two of the biggest countries that are not part of the protocol are the United States and Canada. In addition, there are 37 countries with binding contracts, including the European Union.


How to Trade Carbon Credits

When it comes to trading carbon credits, there are a few ways to do so. A company can of course privately sell them, or they can be sold in the international market at the current market price. The carbon prices are normally quoted in euros per tonne of carbon dioxide. Each trade or sale is validated by the UNFCCC, which is the United Nations Framework Convention on Climate Change and each ownership transfer within the European Union is also validated by the European Commission.

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Currently, there are five exchanges trading in carbon credits. They are the European Climate Exchange, NASDAQ OMX Commodities Europe, PowerNext, Commodity Exchange Bratislava, and the European Energy Exchange.


Kyoto Protocol Vs Paris Agreement

Right now, the United States is the only country not to be a part of the Paris Agreement. It was the same back with the Kyoto Protocol. In fact, the Paris Agreement is meant to replace the Kyoto Protocol in 2020. The Paris Agreement is the newest international agreement to lower climate change, though there are some differences between the two. Most importantly, while the Kyoto Protocol was more geared toward greenhouse gas emissions, the Paris Agreement’s goal is to limit the rise of global temperature by 2 degrees celsius. In addition, while the Kyoto protocol had binding contracts with all of the parties involved, the Paris Agreement does not. Essentially, there are no consequences for a nation not meeting their goal, other than global embarrassment or disappointment.


As of April 2016, there were 177 signatures to the Paris Agreement. Recently, Saudi Arabia signed onto the Paris Agreement, leaving the United States as the only developed country not currently involved.  Nevertheless, many individual companies are doing their part to reduce their carbon footprint in an effort to become greener. Right now, the Paris Agreement is the only thing we have in terms of a globally recognised climate change plan.


Controversy Around Carbon Credits

There are a lot of arguments out there about carbon credits and why they do not work and the data actually backs it up, to a point. Actually, the emission of carbon dioxide has actually risen 25% since the implementation of the ‘cap and trade’ system.


There is one popular argument surrounding carbon credits. That the current trading system encourages companies to sell carbon emissions allowances they would not normally use. Meaning that wealthy companies that go over their allowance find it fairly easy and economical to pollute more if they choose to. The point of this argument is that the current trading system does not work. Wealthy companies will just buy more carbon credits and ignore their quota. So, wouldn’t a different system be better? Like instead of companies being able to buy more carbon credits, companies should only be allowed to buy carbon offsets.


Another argument is that the current system is much too difficult to regulate. The lack of transparency surrounding the trading market allows companies to get away with exceeding their allowance without being caught. Companies care mostly about one thing, money. Anything that threatens their annual income, they will do anything to get rid of. Especially when it comes to companies that have solely relied on fossil fuels.


Carbon Credits and the Future of Climate Change

While carbon credits do sound like a great idea, there has been very little change in the global carbon emissions level since the start of the Kyoto Protocol. Carbon emissions continue to rise at an alarming rate. Thankfully, most of the world has accepted climate change as scientific fact. Much of the world is actively trying to reduce the effects it has on the Earth. This through nature preserves, reforestification, investments in renewable energy, and a whole lot more. However it will be very difficult for any of these agreements to truly make a dent in climate change. Without the United States national involvement, which are one of the biggest polluters in the world.


This will probably not change in the coming years. Seeing as our current President refuses to acknowledge the presence of climate change. But, anything can happen and we are hopeful. For more about climate change and the environment, check out

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Patrick Sands

Hey, I'm Pat. I am a Millersville grad with a Bachelors of Arts in English. I love to write, play video games, watch movies and TV, basically be a total nerd whenever I can. Green and Growing is important to me because it allows me to help others be as green and eco-friendly as possible. With Climate Change being what it is, it is even more important for people to get educated about their environment. This website allows me to do my part in that. Also, I'm a huge goof who tries to add some humor into anything I write. Stay Excellent out there!

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