What is Carbon Credit?

Global warming is a modern menace where numerous modern steps have been taken to tackle it. One such step has been taken by the United Nations Framework Convention on Climate Change (UNFCCC) which has added an economic meaning to the whole issue. Carbon credit is an innovative way of reducing the carbon emissions and establishing a legal obligation on corporations to act in the best interest of the society. It is an idea which originated during the Kyoto Protocol and has become an everyday affair for every toxic releasing corporation. Before I explain what carbon credit is, I would like to provide numerical information about it,

1 carbon credit = One metric tonne of carbon

Kyoto Protocol subjects a quota on every country for the amount of CO2 and GHG gases that it emits into the atmosphere. So, to comply with it every country further imposes a quota on various domestic industries, depending upon the historic amount of its emission. Every corporation is then legally compelled to emit only a certain level of carbon from its production facilities. If a corporation manages to contain itself below the limit, it earns itself carbon credits, calculated per metric tonnes. While, if the corporation exceeds its limit, it needs to buy carbon credits from other corporations to bring its emission within the specified limit. This carbon credits are traded on commodity exchanges all over the world. This type of credit is termed as carbon reduction credit. There is another type of credit which can be earned if a corporation uses cleaner forms of energy to run its business, like wind power, solar energy, hydro power, etc. This is termed carbon offsetting credits.

All trades are validated by UNFCCC and each country, ratified by the Kyoto Protocol, needs to adhere it. Some of the targets for developed nations are 8% for European Union and 6% for Japan, while for nations such as Australia and Iceland, which has large stretches of greenery and ice, have 8% and 10% respective permissible increase. This effort of UNFCCC is expected to reduce the carbon emission by 5.2% compared to 1990 levels. India has come out as a strong contender in supplying the credits to the developed nations. A recent World Bank report suggests that India could corner 25% of the $100bn carbon credit market by 2010. The advantage that awaits India is the huge tracts of plantation lands. India could hit a jackpot if the United States agrees to ratify itself with the Kyoto Protocol.

An alternative to carbon credits was carbon tax, where carbon emitting corporations were incrementally taxed for its emission. Given the inefficiency in levying taxes and the benefits of credits, which is treated as a commodity and gives an incentive to corporations rather than a charge, carbon credits has taken off big time. The only hindrance in its success is setting the right quota for the industry so that the trade-off between cutting down emissions and corporate profits is well managed.

Source: Alumni,Praxis Business School

Date: 2nd Dec.,2009

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