WHAT ARE THE CARBON CREDIT ?
WHAT ARE THE CARBON CREDIT ?
- A carbon credit is a tradable certificate or permit, representing the right to emit one tonne of carbon dioxide or equivalent amount of emissions of any other greenhouse gas, issued by a government agency.
- It is tradable in the market at the prevailing price.
Breaking Down Carbon Credit
- The carbon credit system was a solution that came by the end of the 20th century, as people became more aware that human industrial activity is potentially responsible for global warming and environmental degradation.
- The premise of the system is that a government or another body can regulate the total tonnes of carbon dioxide emitted, but is given some flexibility as to how exactly the regulation is accomplished.
- A carbon credits is essentially a permit that allows the receiver to burn a specified amount of hydrocarbon fuel over a specified period of time.
- Credits are granted to companies or other groups that take action to measurably reduce carbon emissions.
An Example of Carbon Credit
- Trees of the Future, an environmentalist group that works to reduce mega tonnes of greenhouse gases from the atmosphere, plants enough trees to reduce emissions by one tonne and is awarded a credit.
- If a steel producer has an emissions quota of 10 tonnes, but is expected to produce 11 tonnes, it can purchase the carbon credit from the environmental group.
Under Kyoto Protocol, an organisation can earn carbon credit in the following ways:
- It can reduce its own greenhouse gas emissions. An organisation which produces 1 tonne less than the standard level of carbon emission is allowed to earn a carbon credits.
- It can help some other organisations or nations in decreasing carbon emissions. Under Kyoto Protocol, only developed nations have the legal responsibility to reduce carbon emissions. As a result, organisations within developed nations are required to curtail emissions.
- However, on the other hand, organisations in the developing nations have no such legal responsibility to reduce carbon emission. As a result, they have recently emerged as the largest sellers of carbon credit.
- For instance, at present China controls 70% of carbon credit market Carbon credits, like any other item, are traded in multi commodity stock exchange (MCX). MCX is the first exchange in India to trade in carbon credits.
3. Carbon trading:
- It refers to the purchase and sale of carbon credits. This exchange may take place at the domestic level or at an international level at market rate.
- It is further of two types:
- Emission trading or cap and trade: Under Kyoto Protocol, Annex I countries are allowed emissions up to a certain level. If this emission allowance is not exhausted, then the remaining allowance can be traded in the market.
- Offset trading or carbon project or baseline and credit trading: Under this, an organisation achieves GHG reduction by investing money in a project or changing its methodology of production. The emissions thus reduced can be sold in the market in the form of carbon credits.