Carbon Credit Trading Work
A carbon credit is a unit of measurement for greenhouse gas emissions reductions. Companies and individuals purchase credits in compliance programs or in the voluntary market to compensate for their own emissions or offset greenhouse gases from other sources. Each credit represents one ton of carbon dioxide or the equivalent of other greenhouse gas reduced, sequestered or avoided.
The compliance trade carbon credits market is regulated by governments and environmental organizations. It operates under the principles of a cap and trade program. Regulators set a limit on emissions – a cap – and then allow businesses to buy and sell permits, or allowances, to emit up to that amount each year. The idea is to encourage companies to reduce their emissions faster and reward innovation in cutting pollution.
As the cap decreases over time, companies that pollute less can sell their allowances in the carbon markets to companies that need to make up for their own emissions reductions. The process works a bit like swapping shares of stock.
How Does Carbon Credit Trading Work?
Another way to trade carbon credits is by acquiring them through a project that removes emissions from the environment. These projects, known as carbon offsets, are sometimes called “greenhouse gas neutralizers.” Companies that purchase these credits can offset emissions from their operations or from transportation activities such as trucking and air travel.
Some of these projects are run by nonprofits and government agencies while others are commercial ventures. Some generate co-benefits that are good for the environment and communities, such as improved water quality or economic development. The credits are verified by an independent third party and a registry of “retired” credits is maintained.
While the regulated compliance carbon market exists to encourage emission reductions, the voluntary market is open to anyone that wants to purchase them. That includes environmentally conscious businesses or individuals that want to demonstrate their commitment to the planet and perhaps avoid more stringent regulations.
The main problem with the voluntary carbon market is that it lacks a common structure to make it efficient for buyers and suppliers to connect. A uniform structure would consolidate trading activity around a few types of carbon credits and promote liquidity on exchanges. This could also help establish a standard set of attributes that can be used to describe a carbon credit. Using core carbon principles and standard attributes could also help reduce the number of different types of credits on the market.
The voluntary carbon market is growing, but it needs to do a lot of work to improve its efficiency and scale up to help meet climate goals. Developing the necessary standards and procedures to verify the quality of new credits is an important first step, but there are other challenges that need to be addressed as well. A more standardized market can only be built with the support of governments and businesses. It’s a big challenge, but it’s essential for the world to take its emissions reduction goals seriously. That’s why the United Nations is hosting a summit this year to discuss a global market for carbon credits.