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Carbon Credits: The Basics

Though there are a number of ways to reduce your carbon footprint significantly, it is impossible to bring it to zero without the help of carbon credits, defined as "a value assigned to a reduction or offset of greenhouse gas emissions". But what are carbon credits and where do you get them from? Here are some commonly asked questions: carbon credits

  1. What is a Carbon Credit?

  2. When Was the Carbon Credit Created?

  3. What is the UNFCC and Kyoto Protocol?

  4. Information on the Carbon Markets

  5. What is the Difference Between Voluntary and Regulated Markets?

  6. Can You Tell Me What Types of Credits are Available?

  7. Which Credit is Right for Me?

What is a Carbon Carbon Credit?

Most people do not understand what carbon credits are and that's understandable. Part of the reviled "cap and trade" legislation hotly debated in Congress in 2009 and 2010, it's a complex issue. Many nations regulate how much carbon and other emissions businesses can release into the atmosphere. The United States is not among them, though the U.S. does have certain regional and state regulated carbon markets.

In a nutshell, a carbon credit is a generic term for any tradable certificate or permit representing emissions reductions equaling one ton of carbon dioxide or carbon dioxide equivalent. Return to Top

When Was the Carbon Credit Created?

The term "carbon credit" was created in 1992 during the the United Nations Framework Convention on Climate Change (UNFCCC) in 1992. The term was further refined during the "Kyoto Protocol", a set of guidelines adopted in Kyoto, Japan, on 11 December 1997 and entered into force on 16 February 2005. The detailed rules for the implementation of the Protocol were adopted at COP 7 in Marrakesh in 2001, and are called the 'Marrakesh Accords." Return to Top

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The UNFCCC and Kyoto Protocol

During the 1992 UNFCCC, 154 nations signed an international treaty aimed at reducing worldwide greenhouse gas emissions. Two years later it went into effect, at which time participating nations were expected to:

  • Gather and share information on greenhouse gas emissions, national policies, and best practices.
  • Launch national strategies for addressing greenhouse gas emissions and adapting to expected impacts, including the provision of financial and technological support to developing countries.
  • Cooperate in preparing for adaptation to the impacts of climate change.

However, the UNFCCC treaty was little more than a suggestion. None of the nations were required to follow its guidelines, thus minimizing its potential for inspiring change. So when the United Nations met in Kyoto, Japan, in 1997, the Kyoto Protocol was born - a legally-binding addition to the UNFCCC treaty. The Kyoto Protocol was signed by 37 industrialized nations (as mentioned previously, the United States infamously not among them) and the European Union.

The Kyoto Protocol went into effect in 2005, requiring participating nations to reduce greenhouse gas emissions by 5.2 percent between 2008 and 2012, which would mean a return to pre-1990's greenhouse gas levels. Return to Top

The Carbon Markets

Aside from the obvious measures nations can take to reduce emissions (e.g., solar, wind, hydroelectric power), the Kyoto Protocol created three "market based mechanisms", to help nations meet their goals. One of these mechanisms is the "carbon market".

As stated on the official UNFCCC website:

"Emissions trading, as set out in Article 17 of the Kyoto Protocol, allows countries that have emission units to spare - emissions permitted them but not 'used' - to sell this excess capacity to countries that are over their targets. Thus, a new commodity was created in the form of emission reductions or removals. Since carbon dioxide is the principal greenhouse gas, people speak simply of trading in carbon. Carbon is now tracked and traded like any other commodity. This is known as the carbon market."

Since then, a number of organizations, communities, businesses and individuals have taken steps to embrace the carbon credit concept in a variety of incarnations, some regulated, some voluntary and some speculatory. As a result, the worldwide carbon market has an estimated worth of $170 billion - a value that is projected to reach $1 to 2 trillion by 2020! Return to Top

Carbon Credits Purchased From Voluntary vs. Regulated Markets

Carbon Credits Purchased From Voluntary Carbon Markets  When members of voluntary carbon markets buy carbon credits, they are called offsets. Both businesses and individuals may fall into this category. After adding up your personal carbon footprint using a carbon calculator, you can buy an equal amount of carbon offsets so you can become carbon neutral.

The money you spend on the carbon offset is used to support projects that actively reduce, avoid, destroy or sequester carbon dioxide from entering the atmosphere. These are projects that would not have otherwise taken place without your purchase of the offset, such as providing the resources for a company to convert landfill methane into energy or the planting of new trees in a deforested area.

Voluntary carbon credits are typically the kind of credits one can purchase in the U.S.

Carbon Credits Purchased From Regulated Carbon Markets  When members of regulated carbon markets buy carbon credits they are called allowances (nations who signed the Kyoto Protocol, for example). Each member is allowed to emit a certain amount of carbon. Those who exceed the goal and have allowances (or credits) leftover sell these credits into the carbon pool. These credits are then bought by other members of the carbon market who exceeded their carbon allowances and a way of making up for it.

So if you (personally or as a business) emit a certain amount of carbon, and buy an offset for an equal amount, you are supporting a project that is keeping that much carbon from entering the atmosphere. You are "offsetting" your own carbon emissions by investing in a project that keeps carbon out of the air. Yes, you polluted, but you are canceling it out by investing in a project that helps prevent an equal amount of carbon from entering the atmosphere.

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Types of Carbon Credits

All carbon credits are not created equal, and they certainly do not go by the same name. Terms referring to carbon credits are frequently and mistakenly used interchangeably. To set the record straight, let's examine the 2 classes of carbon credits within the Regulated and Voluntary Carbon Markets.

Carbon Allowances are permits (credits) to emit greenhouse gases for members of a regulated carbon market - like the Kyoto Protocol or the Regional Greenhouse Gas Initiative (the first mandatory, market-based effort in the US, which includes 10 Northeastern and Mid-Atlantic states). Any member that generates fewer emissions than is allowed may sell the remaining emissions (allowances) to another member that has exceeded its allotment. So the member that managed to reach and exceed its goal is compensated and the member that failed to meet its goal pays the price. One carbon allowance = 1 ton of carbon.

Carbon Offsets are also known as VER's (voluntary emission reductions), CRT's (carbon reduction tons) and ERT's (emission reduction tons). Carbon offsets represent an opportunity for anyone to support projects that reduce, avoid, destroy or sequester carbon dioxide - from forestry projects to the capture of methane from landfills - all as a means of "offsetting" your carbon footprint. There are a number of factors that go into the carbon offset certification process, but chief among them is proof of "additionality" in that the offset goes above-and-beyond business as usual. In other words, the project that is reducing, avoiding, destroying or sequestering CO2 would not have taken place without the carbon offset purchase. One carbon offset certificate = one ton of carbon.

Renewable Energy Credits (REC's) are not technically carbon credits at all, and it is precisely for this reason that REC's are mentioned here; the term is frequently used interchangeably with carbon offsets. However, unlike a carbon offset that represents one ton of emission reductions, a renewable energy credit represents 1 MWh of energy generated by a renewable energy source, such as wind, solar and hydroelectric power. Return to Top

Which Credit is Right For You?

Carbon allowances only apply to members of regulated carbon markets, like the Kyoto Protocol (at least until we see a regulated personal carbon trading market). However, individuals and businesses may purchase both carbon offsets and renewable energy credits. So how do you know which one is right for you? The answer is both.

Since carbon offsets directly prevent CO2 emissions, buy them to offset your own direct emissions, such as driving a gas-powered vehicle.

On the other hand, renewable energy credits only indirectly prevent CO2 emissions, as a side effect of existing as a zero-emissions energy source. So buy REC's to offset your own indirect emissions, such as electricity use.

That said, note this. Though the prospect of supporting a renewable energy project through REC's sounds ideal, keep in mind that this market is not held to the same accountability standards as carbon offsets. So, after exploring your REC options carefully, you may opt to go with carbon offsets across the board. Return to Top