Emission credits are part of carbon trading, where a government puts a price on carbon emissions and places a cap on the amount of emissions that can be produced. Companies that reduce emissions below the cap receive credits that can be sold or deposited. This model aims to reduce collective emissions, and monitoring systems ensure compliance. Critics argue that it redirects motives away from conservation towards profit.
Emission credits, also called carbon credits or offset credits, are part of an economic strategy to reduce greenhouse gas emissions through carbon trading. In carbon trading, a government or other legislative body puts a price on carbon emissions and requires industries to pay for their emissions, creating an economic incentive to reduce pollution. To allow for some flexibility, the government also places a cap, or limit, on the amount of emissions that can be produced without paying, so a company can operate freely under the cap or pay to produce more carbon. If a company reduces emissions below the maximum limit, the company receives emissions credits for every ton of carbon it doesn’t produce. These credits can be sold or deposited.
The issue of carbon emissions is on environmental agendas around the world. When fossil fuels, such as coal, gas or oil, are burned to create energy, they release carbon in the form of carbon dioxide (CO2). Carbon dioxide is a greenhouse gas, which is a gas that traps heat in the atmosphere and contributes to global warming. Climate change has a large negative impact on humans and the environment.
To curb this problem, the U.S. National Air Pollution Control Administration began work on a carbon emissions trading program in the 1960s, which it began implementing in the Clean Air Act of 1977. Emissions trading continued to spread, being more fully integrated into US environmental policy and added to environmental policies in the European Union. In addition to countries using emissions trading and credits, coverage has also expanded. Coverage refers to the types of industries that need to comply with emissions trading program standards and procedures.
Monitoring systems are also in place to ensure that emission sources are reporting emissions correctly and operating below the cap. When a company cuts emissions below the cap and receives emission credits for non-produced carbon, it has several options for how to use the credits. The company may choose to store its emissions credits, holding them for later use, at a time when the company may need to produce more greenhouse gases. The company can also sell the credits to another participating company that wants to produce more greenhouse gases than the cap allows.
This model of trading in carbon credits aims at a reduction in collective emissions, rather than individual reductions. Consider a hypothetical example where there is an emission limit of ten tons of carbon per source of emissions in a given sector, such as a textile industry. Textile Factory A reduces its emissions to eight tons of carbon, earning two carbon credits. To save money, Textile Factory B also reduces its emissions, but continues to produce twelve tons of carbon, forcing it to purchase two of Factory A’s emissions credits. While Factory B is still operating above the limit, the as a whole it reduced its emissions to reach the limit.
Less commonly, a basic carbon trading and credit program can also use economic incentives and emission credits as a means to reduce greenhouse gas production. Unlike cap and trade, base and credit programs do not charge sources that operate above a maximum emissions limit. Instead, sources are rewarded with emission credits for reducing gas production below a reference level. The goal, however, remains the same: to reduce collective rather than individual emissions. Critics complain that carbon credit trading redirects motives away from conservation, towards the drive for profit.
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