What are carbon credits?

Imagine a stock exchange where a multitude of brokers scream to sell and buy. Calls, handshakes, shouts. But there’s something different. Brokers do not exchange stocks, but… trees.

“Carbon credits” is a term often associated to other words like Kyoto Protocol, emission trading, cap and trade. Let’s try to explain in the simplest way what carbon credits are: it is a form of market, a stock exchange created to provide those who want to reduce their greenhouse gas emissions with economic incentives. However, it is a stock exchange that doesn’t use a currency as unit of measure, such as dollars or euros, for transactions, but CO2 expressed in tonnes.

“The basic concept is really simple: greenhouse gas emissions threaten the ecosystem’s balance, it is thus necessary to reduce them,” explains Simone Molteni, Scientific Director at LifeGate. “If we want things to not go wasted, the best way is to price them. This easy move sets a virtuous circle: who doesn’t commit to fighting community’s problems will be penalised, whilst those who succeed in reducing their own emissions will obtain recognition.” Not only economically.

How carbon credits work

A national or supranational authority sets a global cap on CO2 emissions. This value is divided among countries and businesses into “emission rights”. Their commitment is to maintain CO2 emissions lower or equal to the Assigned Amount. If their emissions are higher than the Assigned Amount, the subject has to purchase the missing credits from those who have extra credits because they have succeeded in limiting their emissions in relation to the cap.

The advantages of carbon credits

Countries and businesses that succeed in cutting their emissions earn both economically and in reputation. Economically, they earn from the trade in carbon credits, and as far as reputation is concerned they demonstrate to the entire system (clients, providers, involved parties, society) that they are able to respect rules and care about the Earth’s future and health.

The tools

The largest and most structured market is the one introduced by the Kyoto Protocol in 1997. Thanks to the “flexibility mechanisms”, industrialised countries have the tools needed to meet the reduction targets set by the Protocol. The theory is “pay less, but everyone pays”, which means to act jointly in order to cut the costs of a project aimed to reduce CO2 emissions.

There are three flexibility mechanisms, depending on the economic development of a country: the first offers the possibility of creating shared projects among industrialised countries; the second among industrialised and developing countries; the third allows countries commercialising emission rights obtained with previous mechanisms.

Pros and cons of carbon credits

Thanks to this mechanism, regional emissions markets have developed. The largest and most advanced is the European Union Emission Trading Scheme (EU ETS), the market established by the European Union to combat climate change. The United States has always been adverse to the introduction of carbon credits markets, fearing an obstruction of its economic growth and consumption freedom.

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