Carbon credits are crucial to mitigating climate change by reducing greenhouse gas emissions. The concept is based on the principle of cap and trade, which involves setting a limit (or cap) on the total amount of greenhouse gases emitted by certain entities, such as companies or nations.
Here's how it typically works:
Setting a Cap: Government authorities or regulatory bodies
limit the amount of greenhouse gases emitted by specific
entities within a defined period. This cap is often based on the overall
emissions reduction goals to combat climate change.
Issuing Credits: Under this system, entities that emit less
than their allocated limit of greenhouse gases are awarded carbon credits.
These credits represent a quantified amount of emissions, usually equivalent to
one metric ton of carbon dioxide (CO2) or its equivalent in other greenhouse
gases.
Trading: Entities with surplus credits can sell them to those exceeding their allocated limits. This creates a market for
carbon credits, where the price is determined by supply and demand dynamics.
Compliance: Entities subject to emission limits can use
purchased credits to meet their regulatory obligations, effectively offsetting
their excess emissions. This incentivises emission reductions by creating a
financial penalty for exceeding the emissions cap and a reward for staying
below it.
Carbon credits can be generated through activities that either directly reduce emissions (e.g., renewable energy projects,
afforestation) or remove carbon dioxide from the atmosphere (e.g.,
reforestation, carbon capture and storage projects). Each credit is rigorously
measured, verified, and certified to ensure that the emissions reductions are
real, additional (meaning they wouldn't have happened without the incentive of
the credit), permanent, and verifiable.
The idea behind carbon credits is to create a financial
incentive for reducing greenhouse gas emissions, encouraging investment
in cleaner technologies and practices while providing flexibility for
industries to comply with emission reduction targets cost-effectively. However, the effectiveness of carbon credit systems can vary depending
on how they are designed, implemented, and enforced.