CARBON CREDIT BUSSINESS:

Definition:
The Collins English Dictionary defines a carbon credit as a certificate showing that a
government or company has paid to have a certain amount of carbon dioxide removed from
the environment.
The Environment Protection Authority of Victoria defines a carbon credit as a generic term
to assign a value to a reduction or offset of greenhouse gas emissions; usually equivalent to
one tonne of carbon dioxide equivalent (CO2-e).
The Investopedia Inc. investment dictionary defines a carbon credit as a permit that allows
the holder to emit one ton of carbon dioxide. Which can be traded in the international
market at their current market price.

About:
A carbon credit is a generic term for any tradable certificate or permit representing the right
to emit one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon
dioxide equivalent (tCO2e) equivalent to one tonne of carbon dioxide.
Carbon credits and carbon markets are a component of national and international attempts to
mitigate the growth in concentrations of greenhouse gases (GHGs). One carbon credit is
equal to one tonne of carbon dioxide, or in some markets, carbon dioxide equivalent gases.
Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions
are capped and then markets are used to allocate the emissions among the group of regulated
sources.
The goal is to allow market mechanisms to drive industrial and commercial processes in the
direction of low emissions or less carbon intensive approaches than those used when there is
no cost to emitting carbon dioxide and other GHGs into the atmosphere. Since GHG
mitigation projects generate credits, this approach can be used to finance carbon reduction
schemes between trading partners and around the world.
Types:
There are two main markets for carbon credits;

Compliance Market credits

Secondary / Verified Market credits (VERs)

1. Compliance Market credits

In 1992 the United Nations Framework Convention on Climate Change (UNFCCC) was
created to raise awareness and build knowledge to help mitigate climate change. In 1997,
more than 170 countries adopted the Kyoto Protocol to the Convention. This set legally
binding targets for 37 industrialised countries to limit or reduce overall GHG emissions by at
least 5% below 1990 levels during the period 2008-2012.

To achieve the targets set within this protocol, three flexible financial mechanisms were
created:
Emissions Trading the international transfer of emission allocations between industrialised
countries. E.g. a country that stays within its target can sell the surplus allowances to another
country that has exceeded its limit.
The Clean Development Mechanism (CDM) creates carbon credits called Certified
Emission Reductions (CERs) through emission reduction projects in developing countries,
regulated by the United Nations. Emitters who have exceeded their emission allocations can
purchase these CERs to make up the difference.
Joint Implementation any country can invest in emission reduction projects in any other
country as an alternative to reducing emissions domestically.
The rational behind such schemes is that climate change is a global problem and that the
location of GHG emission reductions is irrelevant in scientific terms. The emission
reductions generated by these flexible mechanisms are collectively referred to as carbon
credits. A carbon credit is a financial instrument that represents a reduction or the avoidance
of one tonne of carbon dioxide equivalent (tCO2e) from the atmosphere.

2. Secondary / Verified Market credits (VERs):

Voluntary Emissions Reductions or Verified Emissions Reductions. Both refer to the
emerging market for carbon credits outside the Kyoto Protocol compliance regime. The
voluntary market may at present be smaller and less liquid than the compliance market,
however, general market opinion is that the wider scope of the voluntary market, and growth
led by the private sector, not public policy, means that it has a strong potential to outstrip the
mature market size of the compliance regime.
VER credits are not liquid credits and do not have a transparent and clear market for
exchange and therefore may not be suitable for short term or speculative activity.