Carbon credits

Definition

Carbon credits are permits that allow the holder to emit a specific amount of carbon dioxide or other greenhouse gases, typically measured in metric tons. These credits are part of international efforts to combat climate change by creating a financial incentive for companies and countries to reduce their emissions, effectively linking environmental responsibility with market mechanisms.

5 Must Know Facts For Your Next Test

1. One carbon credit typically represents one ton of CO2 equivalent emissions that can be legally emitted.
2. Carbon credits can be traded on various international markets, encouraging businesses to innovate and find cost-effective ways to reduce emissions.
3. The concept of carbon credits is rooted in the Kyoto Protocol, which established international legal frameworks for reducing greenhouse gas emissions.
4. Countries and companies that exceed their emissions targets can sell their excess credits, creating a financial reward for reducing pollution.
5. Critics argue that carbon credits can sometimes lead to 'greenwashing,' where companies buy credits instead of making significant changes to reduce their actual emissions.

Review Questions

• How do carbon credits function within the context of international efforts to combat climate change?
  • Carbon credits operate as a mechanism for countries and companies to comply with emission reduction targets set by international agreements. By allowing the trading of credits, these systems create a financial incentive for entities to reduce their carbon output. The flexibility in buying and selling credits enables businesses to find economically viable ways to meet their obligations while contributing to global climate goals.
• Evaluate the effectiveness of the cap-and-trade system in achieving real reductions in greenhouse gas emissions compared to other environmental policies.
  • The cap-and-trade system has shown varying levels of effectiveness across different regions and industries. By imposing a limit on emissions and allowing trading, it can stimulate innovation and investments in cleaner technologies. However, its success depends on the strictness of the cap and the regulatory environment; if too lenient, it may fail to drive substantial emission reductions compared to direct regulations or taxes aimed at fossil fuels.
• Assess the implications of carbon credit trading on global financial markets and economic inequality.
  • Carbon credit trading has significant implications for global financial markets by introducing new assets that can be bought and sold. This market creates opportunities for investment in sustainable technologies but may also exacerbate economic inequality if wealthier nations or corporations dominate the market, allowing them to purchase credits rather than invest in local emission reduction strategies. The balance between profit motives and genuine environmental responsibility becomes crucial as markets evolve.

Related terms

cap-and-trade: A market-based approach that limits overall greenhouse gas emissions by setting a cap on total emissions and allowing companies to buy and sell allowances as needed.

emissions trading system (ETS): A market system designed to reduce greenhouse gas emissions by allowing companies to trade emission allowances, providing flexibility in how emissions targets are met.

sustainability: The practice of meeting present needs without compromising the ability of future generations to meet their own needs, often encompassing environmental, social, and economic dimensions.