Carbon credits, also known as carbon offsets, are permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of one ton of carbon dioxide or the equivalent in other greenhouse gases.

The carbon credit is half of a so-called cap-and-trade program. Companies that pollute are awarded credits that allow them to continue to pollute up to a certain limit, which is reduced periodically. Meanwhile, the company may sell any unneeded credits to another company that needs them.

Reduce Greenhouse Emissions

Private companies are thus doubly incentivized to reduce greenhouse emissions. First, they must spend money on extra credits if their emissions exceed the cap. Second, they can make money by reducing their emissions and selling their excess allowances. Proponents of the carbon credit system say that it leads to measurable, verifiable emission reductions from certified climate action projects and that these projects reduce, remove or avoid greenhouse gas emissions.

Key Takeaways

Carbon credits were devised as a mechanism to reduce greenhouse gas emissions. Companies get a set number of credits, which decline over time, and they can sell any excess to another company. Carbon credits create a monetary incentive for companies to reduce their carbon emissions. Those that cannot easily reduce emissions can still operate, at a higher financial cost.

How Do Carbon Credits Work?

The ultimate goal of carbon credits is to reduce the emission of greenhouse gases into the atmosphere. As noted, a carbon credit represents the right to emit greenhouse gases equivalent to one ton of carbon dioxide. According to the Environmental Defense Fund, that is the equivalent of a 2,400-mile drive in terms of carbon dioxide emissions.

Final Words

Companies or nations are allotted a certain number of credits and may trade them to help balance total worldwide emissions. Since carbon dioxide is the principal greenhouse gas, the United Nations notes, people speak simply of trading in carbon. The intention is to reduce the number of credits over time, thus incentivizing companies to find innovative ways to reduce greenhouse gas emissions.