Carbon credit trading offers a way for companies to reduce their overall carbon dioxide output in order to comply with pollution laws and regulations. In a typical carbon emissions trading scheme, companies buy or sell carbon credits. One ton of carbon is usually equivalent to one carbon credit. Collectively, the trading companies must adhere to an overall total carbon emissions limit. Carbon credit trading is also referred to as a cap and trade transaction, carbon emission trading, CO2 emissions trading, or simply emissions trading.
Carbon credit emissions trading occurs both nationally and internationally, and the limits and trading rules that apply to each emissions trade vary from country to country. Some countries promote voluntary emissions trading by offering tax credits or other incentives to companies that participate in the schemes. Other countries make carbon credit trading mandatory. For example, a number of countries have signed an international emissions trading agreement, known as the Kyoto Protocol, which makes carbon credit trading mandatory. Under the Kyoto Protocol, each participating country must adhere to certain caps on greenhouse gas emissions.
Other international carbon credit schemes also exist. A European emissions trading scheme, known as the European Union Emission Trading System (EU ETS), is one of the largest global carbon credit trading schemes. Under the EU ETS, companies that emit large amounts of carbon dioxide must oversee and report on their emissions levels. In addition, each year these companies must give the government an amount of emissions allowances equivalent to their total carbon emissions output.
Whether mandatory or voluntary, most carbon credit trading schemes work in a similar manner. Typically, companies are given a carbon emissions cap by a government agency or an international authority. If a company’s carbon output exceeds its total cap, the company can sell the excess to a company that has not reached its carbon credit limit. In essence, companies that emit too much carbon dioxide must pay for polluting the environment while companies that pollute less are financially rewarded. The policy behind this system is to require companies that have the ability to reduce their emissions to do so.
Carbon trading is one of the largest financial markets targeted at reducing greenhouse gas emissions. Other types of pollutants that can be traded on an emissions market include acid rain, methane, nitrous oxide, and hydrofluorocarbons. The goal of these emissions trade markets is ultimately to help reduce emissions growth while helping companies comply with pollution laws.