Carbon Credits Explained

A Carbon Credit is created when the equivalent of one metric tonne of carbon dioxide is prevented from entering the atmosphere. Internationally known as Certified Emission Reductions, Emission Reduction Units, or Verified Emission Reductions, each carbon credit has a monetary value depending on the type and origin of the emission reduction produced.  
Each carbon credit can be traded on the open market, with the current spot rates on the European Union’s Emission Trading Scheme averaging 25 Euros per tonne during 2008, (EUA DEC ’08). 

With the onset of the current global financial crisis and the reduction in the price of oil, the emissions market has been affected. Please see the current spot rate as indicated by the graph just below. As the economy begins to recover and the price of oil rises, the value of carbon credits will also increase.





Carbon credits are mostly purchased by governments & corporations who have a legal or moral duty to reduce their carbon footprint. A growing number of individuals are also purchasing sufficient personal carbon credits to claim a ‘carbon neutral’ lifestyle.  

Although these organizations could implement change in their home country by sponsoring emission reduction projects locally, the economic benefits of deploying an equivalent emissions reduction scheme in the developing world for a fraction of the cost is what drives the international trade in ‘carbon offsets’.  

Carbon offsetting is the process by which a successful emissions reduction is produced in one geographical location and claimed by another.  

For example, a hydro electricity generation plant established in South America with the financial assistance of the Japanese government displaces the more polluting local oil & coal fired power stations, thereby creating a sizable carbon emissions reduction.

In return for providing the financial assistance, (without which the project would not have occurred), and allowing the international transfer of technology to support the plant, the Japanese government may claim the carbon emission reduction for their home country, thereby offsetting their national carbon reduction commitments.

In return, the developing nation develops sustainable resources, retains first world technology & benefits from a cleaner domestic environment.

In recent years, the term ‘carbon offsetting’ has become synonymous with unregulated voluntary contributions made by individuals and corporations to operators claiming to ‘invest’ the proceeds in worthy carbon emission reduction schemes. With no transparent mechanism through which to evaluate the effectiveness of a particular scheme, many investments have fallen fowl of the opportunist seeking to profit from an emerging market without clear guidelines. This is where the United Nations system of certifying carbon credits becomes indispensable.

Only projects that carry the seal of approval from the United Nations Framework Convention on Climate Change, (UNFCCC), can truly claim to have had their emissions reduction impact verified. The two types of carbon credits created by UNFCCC approved projects are CERs and ERUs. This is the legacy of the Kyoto Protocol.

Receiving UNFCCC approval for emissions reduction projects in order to yield carbon credits is a complex procedure. At both national and international levels, approvals, validations & verifications must be received. This system separates the opportunist voluntary carbon projects from the true business of developing sustainability whilst reducing pollution in the developing world.

Carbon credits are not always made up of purely carbon dioxide; there are six Greenhouse Gasses, (GHGs), classified by the UNFCCC as directly responsible for accelerating Global Warming.

Carbon Dioxide, (CO2), is used as the base to measure all the other GHGs.  The term ‘tonnes of carbon dioxide equivalent’, or t-CO2e, is used to represent the impact of a particular atmospheric pollutant, based on the equivalent tonnes of CO2 the emission would represent. Below, the six gasses are shown with the tonnes of CO2 equivalent they represent.

 GWP  Green House Gas
 1  Carbon dioxide (CO2)
 21  Methane (CH4)
 298 Nitrous oxide (N2O)
 9,200  Perfluorocarbons (PFCs)
11,700  Hydrofluorocarbons (HFCs)
 22,800  Sulphur hexafluoride (SF6)

As a response to the climate change threat, following the evidence of human impact on climate, the United Nations Framework Convention on Climate Change (UNFCCC) was established in 1992.

Governments realized that stronger commitments were needed to mitigate climate change. Following years of negotiations, the Kyoto Protocol entered into force on February 16, 2005. It established legal commitments for participating countries to reduce their emissions, or suffer financial penalties.

The Kyoto Protocol requires the signatory countries to reduce, or limit their emissions relative to their base year. Each country has been given a target related to the base year (normally 1990), and the combined effect of this should reduce these countries’ greenhouse gas emissions by 5% per year in the period 2008–2012.

The Kyoto Protocol has three separate market-based mechanisms that help countries achieve targets. A Clean Development Mechanism (CDM) project is a co-operation between a company in a country with reduction commitments and a company in a developing country without commitments. The idea is that the company in the sponsoring country should support implementation of project activities that cost-effectively reduce emissions of a company in the host country and also give sustainable development benefits.

The reductions must be additional to any that would have occurred without the project taking place. Certified emission reductions (CERs) generated can be used to meet reduction commitments or they can be traded on the open market as a futures commodity.

Lawmakers, such as the previous Secretary of State for the Environment, Rt Hon. David Miliband MP, passed legislation to cut 60% of CO2 emissions in the United Kingdom by the year 2050.

“…If all industrialized countries took on emission-reduction commitments of 60-80%, purchased half of their reductions in the developing world, with each credit valued at $10, the global market would be worth $100bn per year…”    [United Nations]

Robotic Parking Systems can also help in the drive to reduce greenhouse gas emissions. The recently completed Ibn Battuta Gate parking garage in Dubai reduces CO2 emissions by more than 100 tons per year with comparable reductions in other pollutants and greenhouse gases. It additionally saves 9,000 gallons of gasoline per year thus contributing significantly to carbon footprint reductions.


One thought on “Carbon Credits Explained”

  1. Great Great article and very much informative. Carbon credits and Carbon trading have taken a new step into the market which is going to enhance the reduction of carbon footprints and topics like these are going to make us all aware of such actions in the society and help up to reduce the environment depleting sources.
    Thanks again for such a nice article.

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