What Are Carbon Credits and How Does the Carbon Market Work?

The carbon market is a concept based on “polluter pays” and cap and trade principle. The objective is to reduce gas emissions through the use of market law. It assembles voluntary organizations that exchange the rights to issue carbon dioxide.

When the companies are listed, the administration decides on the total amount of gas emissions they can emit as a group. Normally the total amount is lower than the one emitted the previous year. The main idea here is to reduce this level every year.

After the central administration decides on the total amount, a specific amount of gas emissions is distributed to each company. During the year, if a company manages to emit less than the allowable amount, it can sell the remainder to another company. This transaction doesn’t change the total emissions of the group. Therefore, one company must emit a lower-than-allowable amount in order for another company to emit more.

As we can see, this procedure encourages companies to make changes in order to reduce their gas emissions and respect their allotted amount. The companies who surpass their allowable emissions must pay for the surplus by buying more permits. Another important aspect is that it encourages companies to emit less in order to acquire extra profit (see: How to Finance your Business with Carbon Credits) by selling their right to pollute.

The carbon market has already started in Europe and North America. It works pretty much like the stock exchange. The problem with this system is that it needs rigid regulations and enforcement in order to have a large impact. There is no law limiting the amount of carbon emissions by a company. The carbon market is purely based on volunteerism, which works well for the companies already involved. This system was at the heart of Kyoto.

Leave a comment