Carbon credits

Definition

Carbon credits are permits that allow the holder to emit a specific amount of carbon dioxide or other greenhouse gases. Each credit represents one ton of carbon dioxide emissions, and they are used in carbon trading systems to help reduce overall greenhouse gas emissions by creating a financial incentive for companies to lower their emissions.

5 Must Know Facts For Your Next Test

1. Carbon credits play a vital role in international agreements like the Kyoto Protocol, which aims to combat climate change by regulating greenhouse gas emissions.
2. Companies can buy or sell carbon credits in a market, allowing those that reduce their emissions to profit from their efforts while providing funds for others to invest in cleaner technologies.
3. The concept of carbon credits supports the idea that reducing emissions can be done more efficiently through market mechanisms rather than strict regulatory measures.
4. Different countries and regions have established their own systems for carbon credits, with varying rules and regulations impacting how credits are issued and traded.
5. The effectiveness of carbon credits in reducing global emissions depends on proper monitoring, reporting, and verification of emissions reductions to ensure integrity within the system.

Review Questions

• How do carbon credits function as a financial incentive for companies to reduce their greenhouse gas emissions?
  • Carbon credits create a financial incentive by allowing companies that lower their emissions to sell surplus credits on the market. This means that companies can profit from being environmentally friendly, encouraging them to invest in cleaner technologies and processes. Conversely, companies that exceed their emission limits must purchase additional credits, which can drive them to find ways to reduce their own emissions to avoid these costs.
• Discuss the role of cap-and-trade systems in relation to carbon credits and how they facilitate emission reductions.
  • Cap-and-trade systems set a cap on total greenhouse gas emissions within a specific area or sector and allocate a certain number of carbon credits to companies. These companies can then buy and sell credits based on their individual performance in reducing emissions. This market-based approach allows companies with higher costs of reduction to purchase credits from those who can reduce at a lower cost, promoting overall efficiency in achieving emission targets while also encouraging innovation in emission-reducing technologies.
• Evaluate the potential challenges associated with the implementation of carbon credit systems and their effectiveness in combating climate change.
  • One major challenge is ensuring accurate measurement and verification of emission reductions to maintain the integrity of the carbon credit system. Without reliable data, companies might falsely claim reductions, undermining the program's goals. Additionally, market volatility can affect credit prices, which may discourage long-term investments in sustainable practices. Lastly, there is often criticism regarding whether carbon credits allow companies to continue polluting rather than pushing for more substantial changes in behavior, raising questions about the overall impact on climate change mitigation.

Related terms

carbon offset: A carbon offset is a reduction in emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions produced elsewhere.

cap-and-trade: Cap-and-trade is an environmental policy tool that controls pollution by providing economic incentives for achieving reductions in the emissions of pollutants.

emissions trading system (ETS): An emissions trading system is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants.