Carbon Credit Market

In the following sections, we will explore the carbon credit market and understand how it is creating an impact in reducing greenhouse gas emissions while helping organizations utilize their credits effectively to manage daily processes or generate cash flow.

Carbon credits are permits that represent 1 tonne of carbon dioxide removed from the atmosphere. It can be purchased by an individual or, more commonly, a company to make up for carbon dioxide emissions from industrial production, delivery vehicles or travel. Companies that have excess carbon credits can trade them to other companies which emit more carbon than the limit, to prevent the latter from legal penalties.

When formally traded, these are also known as carbon offsets which are authorizations provided to or purchased by organizations or individuals, that permit the holder to release a specific quantity of CO₂. Each credit corresponds to the allowance for emitting 1 tonne of carbon dioxide or its equivalent in alternative greenhouse gases.

Exhibit 1 shows how this system works. When a company exceeds the prescribed emissions limit, it buys credits to legally emit the excess from another company which the same below the set threshold. This exchange of credits forms the foundation of the carbon market.

Carbon credits can be traded on official carbon exchanges by countries, the UN carbon exchange platform, or on private carbon exchanges by signing up for the exchange and listing the excess credits or purchasing them. Carbon emissions are calculated using the Greenhouse Gas (GHG) Protocol, a global corporate standard for carbon footprint measurement and reporting. It standardizes the measurement, management, and reporting of GHG emissions generated by a company.

The concept of carbon credits came into existence when the United Nations’ Intergovernmental Panel on Climate Change (IPCC) developed a carbon credit proposal to reduce worldwide carbon emissions in a 1997 agreement known as the Kyoto Protocol. The agreement set binding emission reduction targets for the countries that signed it. Since then, there have been revisions and re-evaluation of the impact of the Kyoto Protocol, as presented in Exhibit 2.