< Go Back
Carbon Credits 101: How They Work and Why They Matter
As the world grapples with the effects of climate change, carbon credits have emerged as a crucial tool in reducing greenhouse gas emissions. These credits provide an economic incentive for businesses and individuals to invest in environmentally friendly practices. But what exactly are carbon credits, and how do they function? This article provides a beginner-friendly guide to understanding carbon credits and their role in mitigating climate change.
What Are Carbon Credits?
Carbon credits are tradable permits that allow the holder to emit a certain amount of carbon dioxide (CO₂) or other greenhouse gases (GHG). One carbon credit typically represents one metric ton of CO₂ emissions reduced or removed from the atmosphere (World Bank, 2022). These credits are part of carbon offset programs that encourage businesses and industries to lower their carbon footprints by investing in sustainable projects such as reforestation, renewable energy, and carbon capture technologies.
How Do Carbon Credits Work?
The carbon credit system operates within two main markets: the compliance market and the voluntary market.
- Compliance Market: This market is regulated by governments and international agreements, such as the Kyoto Protocol and the Paris Agreement. Companies operating in industries with high emissions are required to stay within emission limits. If they exceed these limits, they must purchase carbon credits from organisations that have reduced emissions beyond their targets (UNFCCC, 2023).
- Voluntary Market: This market allows businesses, institutions, and individuals to purchase carbon credits voluntarily to offset their emissions. For example, an airline company might buy carbon credits to compensate for emissions produced by its flights by investing in reforestation projects (Gold Standard, 2023).
The Role of Carbon Credits in Reducing Global Emissions
Carbon credits play a vital role in global emission reduction strategies by:
- Encouraging Sustainability: Companies and governments are incentivised to adopt cleaner technologies and energy-efficient practices to earn carbon credits (IPCC, 2022).
- Funding Climate Projects: Revenue from carbon credit sales supports renewable energy initiatives, conservation efforts, and carbon sequestration projects that otherwise might not receive funding.
- Promoting Global Cooperation: Carbon trading enables developed nations to support emission reduction projects in developing countries, fostering international collaboration in addressing climate change.
Challenges and Criticisms
Despite their benefits, carbon credits face criticism. Some argue that they provide major polluters with a loophole to continue emitting greenhouse gases instead of implementing meaningful changes to their business models. Additionally, concerns exist about the accuracy of emission reductions claimed by certain projects, leading to calls for stricter regulation and transparency in the carbon credit market.
Conclusion
Carbon credits offer a market-based solution to reducing global greenhouse gas emissions. While they are not a standalone solution, they provide a valuable incentive for businesses and individuals to invest in sustainable practices. However, for carbon credits to be truly effective, they must be part of a broader strategy that includes policy changes, technological innovation, and robust climate action.
Reference List
- Gold Standard (2023) Understanding Carbon Credits. https://www.goldstandard.org
- IPCC (2022) Climate Change 2022: Mitigation of Climate Change. https://www.ipcc.ch
- UNFCCC (2023) The Kyoto Protocol and Carbon Trading Mechanisms. https://unfccc.int
- World Bank (2022) State and Trends of Carbon Pricing 2022. https://www.worldbank.org
About the author
Charmaine NkosiSocial Impact Analyst
Charmaine Nkosi is a dedicated Social Impact Analyst with a passion for sustainability, ESG, and Africa’s development. She channels her love for writing into creating awareness around the green economy.
Contact Us