Carbon credits are a range of
tradable permits or certificates – measured in tones of CO2 equivalent (tons
CO2e) - that give the holder the ‘right to pollute’.
Emissions permitted to countries but not "used" can be sold to countries that are over their targets. This has created a new commodity in the form of emission reductions or removals. Since carbon dioxide is the principal greenhouse gas, it is more commonly called carbon trading.
Provided the market price for credits is high, the system has incentives towards companies to reduce their emissions so they can profit from selling their excess pollution ‘credits’ to other companies who pollute over their quota.
Every company uses energy and resources, emitting pollution during the process. Today, this energy use and pollution can be measured in tonnes of emitted carbon dioxide. Companies can look at all aspects of their business to assess their overall carbon emissions, to produce an approximate company ‘carbon footprint ’.
As of July 2010, a cap was put on the emissions of the six main greenhouse gases under the Kytoto protocol. Industrialised countries have agreed to cut their yearly emissions of carbon, as measured in the six greenhouse gases, by varying amounts as compared to 1990. In order to reach this target countries were given quotas – or caps – on their greenhouse gas emissions. However, presently inspite of the various international environmental meeting, the Kyoto protocol has failed to verify.
A country can then meet its emission targets by allocating the big polluting companies within their country a set number of allowances, capping their emissions and allowing them to trade with one another or companies from other countries.
The EU adopted the Kyoto mechanism in 2005 and now has the most developed carbon trading market – the EU Emissions Trading Scheme (EU ETS) – involving all EU countries. It covers around half of the EU’s total CO2 emissions. A second round of trading began in 2008 and will run until 2012.
Under the EU ‘cap and trade’, each government allocates their given credits as they see fit among its heaviest polluting industries, including power generators, steel, cement and ceramics companies.
Aviation, aluminium and ammonia production have been included from 2012. Companies must submit their annual emissions figures and ensure they have sufficient carbon credits to cover them. This has caused ruffles in Indian Airline industry, with Airlines hiking up their price rates to Europe.
Operators that pollute over their allowance have the option of buying credits from companies that have excess. Implementing more energy efficient production processes or switching to low emissions fleets, for example, will reduce a company’s total emissions.
By selling their excess credits, such companies should be able to recoup some of the initial capital costs of greening their business while over-polluters are forced to pay for more credits if they fail to cut their emissions.
Types of carbon credits
There are four types of carbon credits:
Emissions permitted to countries but not "used" can be sold to countries that are over their targets. This has created a new commodity in the form of emission reductions or removals. Since carbon dioxide is the principal greenhouse gas, it is more commonly called carbon trading.
Provided the market price for credits is high, the system has incentives towards companies to reduce their emissions so they can profit from selling their excess pollution ‘credits’ to other companies who pollute over their quota.
Every company uses energy and resources, emitting pollution during the process. Today, this energy use and pollution can be measured in tonnes of emitted carbon dioxide. Companies can look at all aspects of their business to assess their overall carbon emissions, to produce an approximate company ‘carbon footprint ’.
As of July 2010, a cap was put on the emissions of the six main greenhouse gases under the Kytoto protocol. Industrialised countries have agreed to cut their yearly emissions of carbon, as measured in the six greenhouse gases, by varying amounts as compared to 1990. In order to reach this target countries were given quotas – or caps – on their greenhouse gas emissions. However, presently inspite of the various international environmental meeting, the Kyoto protocol has failed to verify.
A country can then meet its emission targets by allocating the big polluting companies within their country a set number of allowances, capping their emissions and allowing them to trade with one another or companies from other countries.
The EU adopted the Kyoto mechanism in 2005 and now has the most developed carbon trading market – the EU Emissions Trading Scheme (EU ETS) – involving all EU countries. It covers around half of the EU’s total CO2 emissions. A second round of trading began in 2008 and will run until 2012.
Under the EU ‘cap and trade’, each government allocates their given credits as they see fit among its heaviest polluting industries, including power generators, steel, cement and ceramics companies.
Aviation, aluminium and ammonia production have been included from 2012. Companies must submit their annual emissions figures and ensure they have sufficient carbon credits to cover them. This has caused ruffles in Indian Airline industry, with Airlines hiking up their price rates to Europe.
Operators that pollute over their allowance have the option of buying credits from companies that have excess. Implementing more energy efficient production processes or switching to low emissions fleets, for example, will reduce a company’s total emissions.
By selling their excess credits, such companies should be able to recoup some of the initial capital costs of greening their business while over-polluters are forced to pay for more credits if they fail to cut their emissions.
Types of carbon creditsThere are four types of carbon credits:
EUAs – The original credits, the European Union Allowances
(EUAs), are issued freely by the EU and valid for use during the set period of
trading within the Emissions Trading Scheme (EU ETS). The second phase of
trading will end on 31 December 2012 and all second-phase EUAs must be used
within that period.
CERs – (known as Certified Emission Reductions).The developing –
or non Annex-I – countries that signed the Kyoto Protocol can establish
projects to cut carbon emissions, such as constructing a wind farm or planting
trees in deforested areas. These produce carbon ‘offsets’ that can be added to
the pool of credits available to companies.
ERUs – Emission Reduction Units (ERUs) are credits created under
the Kyoto Protocol as Joint Implementation (JI). JI is when a developed country
sets up a carbon cutting project in another developed country where it might be
more appropriate and/or cost-effective.
VERs – For companies not obliged to cut their carbon
emissions under the Kyoto Protocol, Verified Emission Reductions (VERs) offer a
way to offset unavoidable carbon emissions to become ‘carbon neutral’.
The biggest criticism of the EU trading system is that the cap isn’t tight enough to provide the economic incentives companies need to cut their emissions.
An over allocation of pollution permits in the first round of trading meant companies easily stayed within their allowance and the market was flooded with near-worthless excess credits.
The start of the second round of trading in 2008 has been hit by the global recession that has caused a steep drop in output and therefore carbon emissions.
Carbon credit trading – how does it work?
- One allowance is the equivalent to one metric ton of
emitted CO2.
- Allowances can be traded privately or on the
international market at current market prices.
- Allowances are usually priced in Euros per tonne of
carbon dioxide or its equivalent (CO2e).
- Five markets exist for trading carbon allowances: the
European Climate Exchange, the Chicago Climate Exchange, Nord Pool,
PowerNext and the European Energy Exchange.
- Many private companies now provide carbon offsetting
projects to generate credits that can be sold on one of the trading
markets to over-polluters.
@Notes courtesy of Aparna, Shruti Gokhale, Dhanika and myself
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