What Is A Carbon Credit?

Quite simply, you pay money to account for each tonne of carbon dioxide; or one of the other 5 common environmental pollutants that you create. 'You' can refer to individuals, corporations or political entities. So say, for example, that I generate 10 tonnes of carbon dioxide per year, and each carbon credit costs $20 per tonne. I would have to pay $200 to be carbon neutral; meaning, that I am paying a fee for each tonne of greenhouse gases I produce and this fee contributes to products that either sequester carbon, or invest in green, renewable energy projects. To summarize, I produce 10 tonnes of carbon and I pay to have ten tonnes removed from our atmosphere.

The Kyoto Protocol was initiated by the United Nations Framework Convention on Climate Change and ratified (agreed to in principle) by 181 countries and the European Union as a whole, individual entity in 1997, and was put into effect in 2005. This protocol was proposed by the international community to address and reduce greenhouse gas emissions that have led to global climate change. Member countries are placed into different categories; Annex I countries make up the industrialized nations. Annex II countries are developed countries that provide financial support to the developing countries. The Annex II grouping consists of countries that are members of the Organization for Economic Co-operation and Development.

The third and final category makes up the developing nations, who have no limitations on greenhouse gas emissions as emissions are an essential byproduct to building a stable economy and raising their citizens out of poverty. Once these countries become 'developed' they are then subject to the greenhouse caps that Annex I and II countries currently have. Many countries are both Annex I and II countries. The allowable emissions for member countries are between 6 and 8% less than their 1990 emission levels; meaning the limit is different for every member country; keeping in mind that developing nations are exempt from emission caps and are ineligible to sell carbon credits.

It is up to each individual country to regulate their industrial outputs to meet the 1990 levels of emissions. Although the Kyoto meeting was one of many meetings that took place in the COP(Conference of Parties), it is the most well known because it is the conference that made countries legally liable for exceeding allowable greenhouse emissions. The Kyoto Accord is the teeth in the United Nations Framework Convention on Climate Change, and is therefore synonymous with raising global awareness about climate change.

Typically, companies who explore, produce and promote alternate energy sources such as wind, solar and geothermal energy sell carbon credits. Other organizations with available carbon credits include companies that destroy carbon dioxide or other greenhouse gases directly. Carbon dioxide sequestration is the process of converting CO2 gas into a solid form by chemical or physical means. For example, carbon dioxide combined with quick lime (calcium oxide) forms limestone that can be used in construction projects.
The Clean Development Mechanism is a governing set of rules set by the Kyoto Protocol to determine which companies and projects can generate carbon credits.

This is necessary because anyone who sets up a company could promise that they were developing/using/investing in alternative energy sources, start selling carbon credits and make out like bandits while doing nothing to stop climate change. The CDM is not the only regulatory body to certify carbon credits, but they are the most well known. If you are purchasing a CDM certfied carbon credit, you know that you are investing in a company that has been thoroughly investigated and approved by the UN.

The other carbon credit certification bodies include the Chicago Climate Exchange, the Western Climate Initiative, and the Regional Greenhouse Gas Initiative in the northeastern U.S. In addition, there are various standards bodies who set the carbon emission bar such as the Chicago Climate Exchange, the Voluntary Carbon Standard and the CDM Gold Standard (based on the Kyoto Protocol).

Key to the establishment of carbon credit generation is the concept of additionality. This principle is that a carbon credit isn't truly environmentally beneficial unless the carbon credit producer would not have been able to reduce emissions or invest in researching renewable energy sources without the money given to them from carbon credits. This avoids giving money to organizations that would be doing the exact same business regardless of income from carbon credits. To summarize, the money your company earns from carbon credits must be put to additional greenhouse gas reducing initiatives. Who makes the decision about additionality? The CDM board has established a set of guidelnes by which they certify a company for selling carbon credits.

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