What’s Carbon Credit Trading?

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Carbon credit trading offers companies a way to reduce their overall carbon output in order to comply with pollution laws and regulations. In a typical carbon trading scheme, companies buy or sell carbon credits. One ton of carbon generally equals one carbon credit. Collectively, commercial companies must meet an overall carbon emission limit. Carbon credit trading is also referred to as a cap and trade transaction, carbon emissions trading, CO2 emissions trading, or simply emissions trading.

Carbon credit emissions trading takes place both domestically and internationally, and the trading limits and rules that apply to each emissions trade vary from country to country. Some countries promote voluntary emissions trading by offering tax credits or other incentives to companies participating in the schemes. Other countries make carbon credit negotiation mandatory. For example, several countries have signed an international agreement on emissions trading, known as the Kyoto Protocol, which makes the trading of carbon credits mandatory. Under the Kyoto Protocol, each participating country must adhere to certain limits on greenhouse gas emissions.

There are also other international carbon credit schemes. A European emissions trading scheme, known as the European Union Emissions Trading Scheme (EU ETS), is one of the largest carbon credit trading schemes in the world. Under the EU ETS, companies that emit large amounts of carbon dioxide must supervise and report on their emission levels. Furthermore, each year these companies must provide the government with an amount of emission allowances equivalent to their total production of carbon emissions.

Regardless of whether they are mandatory or voluntary, most carbon credit trading schemes operate in a similar way. Typically, companies receive a carbon emission cap from a government agency or international authority. If a company’s carbon output exceeds its cap, the company can sell the excess to a company that has not reached its carbon credit limit. In essence, companies that emit too much carbon dioxide have to pay to pollute the environment, while companies that pollute less are compensated financially. The policy behind this scheme is to require companies that have the ability to reduce their emissions.

Carbon trading is one of the major financial markets aimed at reducing greenhouse gas emissions. Other types of pollutants that can be traded on an emissions market include acid rain, methane, nitrous oxide and hydrofluorocarbons. The goal of these commercial emissions markets is ultimately to help curb emissions growth by helping companies comply with pollution laws.

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