Carbon credits are intended to help countries reduce pollution.
Carbon credits, or carbon calculations, were first implemented after the Kyoto Protocol on climate change took effect in 2005. They are a way of quantifying carbon emissions so that countries can calculate how much pollution they generate. One carbon credit equals 1 ton of emitted carbon dioxide or other greenhouse gases. Caps on emissions are set through negotiations between nations. Those that exceed their carbon credits can buy credits from countries that stay below their emissions cap. The money generated by trading carbon credits helps develop renewable energy programs.
Kyoto Protocol
More than 170 nations have ratified the Kyoto Protocol, although the list did not include the U.S. as of 2010. The protocol sets limits on pollution for each of the signatories. The carbon credit was introduced as a mechanism for countries to internally manage their own resources by allocating a specific number of carbon credits to the countries' industries. The goal is to encourage companies to reduce the amount of greenhouse gases they generate. Companies that exceed the caps are fined.
Policy Implementation
The amount of carbon dioxide emitted by each industry is tracked by government agencies that specialize in environmental issues. In some cases, a government will create a subagency whose sole purpose is tracking emissions data from various companies. The companies are audited on a regular basis for accurate reporting and compliance with pollution standards.
Carbon Trading
Some companies are able to reduce their emissions to the point that they accumulate surplus credits. Others exceed their allotted credits for various reasons, such as increased carbon emissions because of faulty equipment. Companies with excess carbon credits can sell them to firms that have exceeded their allotment. The price of carbon credits is set through international exchanges such as the Chicago Climate Exchange. Rules for trading are governed by the United Nations Framework Convention on Climate Change.
The Ultimate Goal
Emissions reduction is the ultimate goal of carbon trading. The Kyoto Protocol aims at an overall 5.2 percent reduction in greenhouse gas emissions from 1992 levels by 2012. The target amount for each country varies depending on the amount of pollution it generates.
