Carbon Credits

Key takeaways
* A carbon credit permits the emission of one metric ton of carbon dioxide (or equivalent greenhouse gases).
* Credits are central to cap-and-trade systems that cap total emissions and allow trading of surplus allowances.
* Regulated carbon credits are issued by governments; voluntary carbon offsets are sold by projects and organizations.
* Programs exist at state, national, and international levels; prices vary by market and policy.

What are carbon credits?
Carbon credits are tradable permits that allow the holder to emit a specified amount of greenhouse gases—typically one metric ton of CO2-equivalent per credit. The system’s aim is to cap total emissions and create a financial incentive for emission reductions.

How carbon credit systems work
* Cap-and-trade: Regulators set a declining cap on total emissions and distribute or auction credits to regulated entities. Companies that emit less than their allowance can sell excess credits; companies that exceed their allowance must buy credits.
* Monitoring and reporting: Governments (or independent registries) monitor emissions, issue credits, and track trades to ensure compliance.
* Voluntary offsets: Separate from regulated markets, voluntary offsets fund projects—such as reforestation or renewable energy—that claim to remove or avoid emissions. These offsets can be purchased by anyone to offset emissions voluntarily.

Regulated credits vs. voluntary offsets
* Regulated credits: Issued by governments under mandatory programs. Buyers and sellers are typically businesses and governments subject to emissions limits.
* Voluntary offsets: Issued by projects, organizations, or individuals on voluntary markets. Anyone can buy these offsets to reduce their net emissions footprint.

Who can sell credits and offsets?
* Regulated credits are sold by governments or by entities that hold surplus allowances. Sales occur on regulated carbon markets.
* Voluntary offsets are sold by project developers, NGOs, landowners, and other entities that implement carbon-reduction or sequestration projects and register them with recognized standards.

Why companies buy carbon credits
* Compliance: To meet legal emissions limits under regulated programs.
* Net-zero and corporate commitments: To offset emissions that are currently unavoidable while reducing emissions elsewhere through funded projects.
* Strategic flexibility: Buying credits can be more feasible in the short term than eliminating all emissions immediately.

U.S. carbon credit initiatives
* State programs: Several U.S. states operate market-based programs. Notably, northeastern states participate in the Regional Greenhouse Gas Initiative (RGGI).
* California: Launched a statewide cap-and-trade program covering large power plants, industrial facilities, and fuel distributors.
* Clean Air Act legacy: Market-based allowance trading, often cited for sulfur dioxide reductions, influenced later carbon trading ideas.
* Inflation Reduction Act: Expanded incentives for carbon capture and utilization/storage by increasing tax credits per metric ton of CO2 captured—intended to spur investment in carbon removal technologies.

International initiatives and history
* Kyoto Protocol: Established one of the first international carbon trading frameworks with mechanisms for industrialized and developing countries to trade emission reductions.
* Paris Agreement and Article 6: Created frameworks for cross-border cooperative approaches and international transfer of mitigation outcomes. Negotiations at COP26 in Glasgow advanced rules for international carbon markets, including provisions for trading, limited carryover of older credits, and funding mechanisms for adaptation.
* Ongoing evolution: Global markets and rules continue to develop as countries refine targets and implement trading or offset mechanisms.

Who receives the money?
* In regulated markets, proceeds from selling allowances go to the entity that sold them (often a government in auction systems or a company that reduced emissions).
* In voluntary markets, payments for offsets go to the project developer or organization implementing the carbon-reduction activity.

Are carbon credits effective?
* Advantages: Cap-and-trade programs can lower emissions cost-effectively and incentivize investment in cleaner technologies. Voluntary offsets channel funding to emission-reduction projects.
* Limitations: Offsets do not always result in permanent or additional emission reductions; the quality and verification of projects vary. Critics argue that overreliance on offsets can delay needed direct emission cuts.

Price variability
Carbon credit prices vary by market, regulatory design, supply and demand, and policy shifts. Prices differ significantly across regions and can change as caps tighten or rules evolve.

Conclusion
Carbon credits create an economic mechanism to limit greenhouse gas emissions by capping total emissions and enabling trading of permits. Regulated credits address compliance obligations, while voluntary offsets fund additional mitigation projects. Proper design, transparent accounting, and rigorous verification are essential to ensure these mechanisms deliver real and lasting emission reductions.