What You Need to Know about Carbon Credit & The Carbon Market

What comes to your mind when you hear the word “Carbon?”

Many of us think it’s a complicated technical term, or only chemists know it. For this reason, some people avoid the topic altogether.

When I was a primary student, I came to know that pencils have carbon in them. Organic chemistry was an interesting subject too. I could remember the organic structures with many ‘c’s when I was in high school.

Carbon is not a sophisticated scientific term. The truth is it is a part of this world. The most important one is that it is also like a fish, lions, you, and me.

But what about carbon dioxide (CO2)?

It’s carbon married to two oxygen molecules. Likewise, when two oxygen molecules match, we name it oxygen (O2). The air has 4% carbon dioxide (CO2) and 21% Oxygen (O2).

So everything is simple right.

What Happens If the Percentage of Carbon Dioxide Increases in The air?

Just imagine what will happen if the number of snakes is more than humans in your home town?. Everything will collapse right. So there is forever a need for a balance between particles.

We are a type of animal that inhales oxygen and exhales unnecessary particles such as carbon dioxide (CO2). What will happen if the oxygen level drops? It may eventually lead to the extinction of every animal on the planet. The same for plants, too, because they will be at risk if they don’t have sufficient carbon dioxide (CO2). Therefore, it is a necessity to balance all particles, including invisible ones.

Do you know that most of our food producing green house gases. Meat, cheese and eggs have the highest carbon footprint.

If our car runs out of fuel, we can walk or use a bicycle. But if the same happens to the oxygen level, we don’t have an alternative.

In a previous article, I spoke about this. We have cut down around 50% of trees already. But the human population increases rapidly. We are forming an imbalance to influence other creatures to suffer and threaten their survival too.

It will happen to a human, like a boomerang. That’s why numerous countries are attempting to recreate eco-stability. They promote reforestation, alternatives for plastics, and substitutes for water in production.

Since the creatures’ balance is at risk, what are the actions taken?

• Environmentalists (e.g. Greta Thumberg) organized many protests
• Agreements such as the Paris agreement and the Kyoto protocol signed between countries
• Different rules (e.g., emission tax) are applied in various countries.

It s a good move to have a positive mindset.

What Are Carbon credits?

First, we have to know what are Greenhouse gases(GHG).

Those Gases help the earth to maintain a stable temperature. Without them, this planet would be a frozen ice ball. But some contribute to the warming more than the others. They are as follows.

• Carbon dioxide (CO2)
• Methane (CH4)
• Nitrous oxide (N2O)
• Industrial gases (Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulfur hexafluoride (SF6), Nitrogen trifluoride (NF3)).

The carbon dioxide (CO2) we humans and other animals produce is inhaled by plants for photosynthesis. What if vehicles emitting greenhouse gases while reducing forests?. We may want to plant more extra trees/plants to minimize these, though reforestation progress in many countries.

A carbon credit is also a move by countries to reach reducing emissions. This is much required as there is an imbalance due to the rise in emissions on this earth. The Carbon credit is a reward system. Type of allowance to those who implement strategies to minimize emissions.

How Does the Carbon Credit Market work?

Besides, the carbon credit is a market mechanism under the Kyoto Protocol and Paris Agreement. Carbon Credits are generally traded in units of 1 ton of carbon dioxide (CO2).

It’s estimated that credits worth 2 billion tons of carbon dioxide (CO2) will be needed to get to the 2030 target.

To reduce complexity, I would summarize them as below.

Carbon market mechanisms under Kyoto Protocol

1. Assigned Amount Unit (AAU) Each country signed agreements and committed to decreasing GHG emissions with a target.
2. A Removal Unit (RMU) Based on activities such as reforestation, avoiding cutting down rainforests.
3. An Emission Reduction Unit (ERU) This is generated by an implementation project (e.g., energy efficiency measures). This enables a country to emission reduction or limitation commitment.
4. A Certified Emission Reduction (CER) It is generated from a clean development mechanism project activities . (e.g., a rural electrification project using solar panels or installing more energy-efficient boilers).

Carbon market mechanisms under Paris Agreement

1. Voluntary Emissions Reduction (VER) carbon offset is exchanged in the retail or voluntary market for credits.
2. Certified Emissions Reduction (CER) A carbon credit (Emission credits) is created through a regulatory framework to offset a project’s emissions.

The differences between Carbon offset and Carbon credit can understand with this link.

What Kyoto protocol do with carbon credit market/trading.

Article 17 of the Kyoto protocol committed many countries to limit the agreed amount (AAU) of greenhouse gas emissions. It also allows the trade of carbon credit. It is permitted in public and private markets.

The trading is tracked and recorded under Kyoto Protocol through registry systems. Further transactions of emission units being ensured by the international transaction log.

As per references, carbon credits must be based on projects. Then only can they be eligible for trading? The projects have been independently validated and monitored throughout their lifecycle.

The Paris agreement also allows carbon credit market/trading.

The Paris Agreement provides an ambitious and robust basis for the use of international markets. It strengthens global goals, transparency, and accountability of parties.

Article 6 of the Paris agreement admits that parties use the international trade of emissions allowances to recognize the importance of global carbon markets. This will help achieve emissions reduction targets.

It establishes a framework for strict accounting rules.

Summary of Carbon Credit and Carbon market

Suppose a country achieves its target of emissions reduction and has excess volume. In that case, it can sell or trade to other countries/organizations or hold the remaining carbon credit. That is, the purchaser is buying the seller’s emissions/carbon allowance or credit. Likewise, a carbon market was formed globally by the Kyoto Protocol and Paris agreement. It also describes as emission trading.

After summarizing the Kyoto protocol and the Paris agreement, carbon credit trading can begin per voluntary or compulsory limits. Voluntary markets facilitate the trading of carbon credits outside of the regulatory environment. In the compulsory limit, the amount of GHG reduction is agreed in agreements. If a country/organization fails to reduce the agreed emission, they have to pay a fine. Thus, they purchase carbon credits to avoid it.

Like the share market, forex market, carbon credit prices fluctuate due to supply and demand levels. The Carbon market trading is happening in public and private markets.

For the period up to May 2021, 64 carbon pricing policies are in operation and three are planned to implement. Carbon taxes and emissions trading schemes (ETS) are some of them. It covers about 22 percent of worldwide emissions.

At the same time, flexible mechanisms are accepted upon in the agreements mentioned above. It implied that specific targets need not be reached materially.

What do you think about this? Will these work for the actual reduction of greenhouse gases?

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Thank you for reading!

This article originally published in Medium

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