Understanding Carbon Credits

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Terms like carbon credits, carbon taxes, carbon offset, and carbon leakage are frequently discussed in climate action summits. Here’s a simplified explanation.

Let’s begin by defining carbon as the shortened form of carbon dioxide (CO2), a gas that hinders the Earth’s ability to cool itself. The burning of fossil fuels like coal, petrol, oil, and gas generates carbon dioxide. Countries with numerous factories heavily reliant on fossil fuels contribute significantly to global warming, resulting in adverse effects such as droughts, floods, sea level rise, heatwaves, and altered rainfall patterns.

Europe, Asia, and America are notable contributors to global carbon emissions.

Let’s return to the concept of carbon credits, it refers to permits granted to companies engaged in activities that pollute the atmosphere due to their business nature. For example, industries with carbon emission laws have a set limit on the amount of carbon dioxide they can emit. Any excess emissions must be paid for through the purchase of carbon credits, carbon credit prices typically ranged from $5 to $20 per ton of carbon dioxide equivalent (CO2e), allowing the emission of one extra ton of carbon dioxide.

In the carbon credit market, companies are allocated a maximum carbon dioxide emission level by the government. If they exceed this limit, they must buy carbon credits from authorized agencies for carbon offset. Some companies, through their operations, actively remove carbon dioxide from the atmosphere, such as those involved in tree cultivation. Mature trees, for instance, can absorb approximately 22 kilograms of carbon dioxide annually.

Polluting companies can buy credits from these environmentally beneficial enterprises, creating a system known as carbon offset. This would imply that for every carbon unit the pollutant company emits, it is absorbed by the contracted company. This type of trade is called carbon offset.

Carbon taxes, on the other hand, are levies imposed by governments on individuals using products that emit carbon gases, such as driving vehicles powered by petrol or diesel.

Carbon leakage refers to when a company moves its production from a country with tough anti-carbon policies such as heavy fines to a country that is more lenient.

In conclusion, carbon credits signifies the utilization of its abundant natural resources, such as forests, to absorb harmful gases emitted by industries in exchange for financial compensation.