Carbon Credits and Their Role in Climate Policy

What are carbon credits?
Entities receive carbon credits that grant them permission to produce defined amounts of carbon dioxide or environmentally equivalent greenhouse gas emissions. A single carbon credit allows one to eliminate or prevent or remove one metric ton of CO₂ from the air. The implementation of these credits establishes monetary value to carbon reduction activities that drives environmental companies to lower their greenhouse gas emissions.

The operation of carbon credits provides essential support to the carbon trading framework because there exist two fundamental carbon markets. Compliance Markets represent state-managed systems such as the EU Emissions Trading System (EU ETS) and Clean Development Mechanism (CDM) under the Kyoto Protocol. To meet their emission requirements businesses exceeding set limits need to make purchases from organizations producing lower emissions.

2. Outside regulated limits businesses together with private individuals can purchase carbon credits which support environmental projects that include reforestation and renewable energy implementation and carbon capture activities.

All carbon trading operations adhere to a cap-and-trade structure which enables authorities to establish emission limits and grant allowance through distribution or auctioning choices. The emission reduction process occurs because the cap value declines progressively in the program.

Government Measures to Promote and Regulate Carbon Credits;
Governments around the world established policies which both restrict carbon trading and support its use of carbon credits.
Both the EU ETS and California’s Cap-and-Trade Program employ cap-and-trade systems to establish controlled emission thresholds alongside the possibility to trade credits within their regulations.

The combination of carbon taxes in Canada together with Sweden supports existing credit market operations to provide further penalties against high emissions.
Support of carbon offset projects through initiatives that involve both afforestation and clean energy development leads to accepted carbon credits.
As part of their climate strategy nations get motivated to implement carbon credit systems through the Paris Agreement.