Carbon Credit: All Important Information


India has been at the forefront of a fierce battle to reduce its carbon footprint and protect the environment. To this end, it has made significant investments in low-carbon technologies, successfully transitioned to renewable energy, and increased its efforts to protect forests. Hundreds of millions of carbon credits, or emission reduction certificates, or CERs, were earned in the process. Carbon credits are used in a market-based system of carbon trading under the current Kyoto Protocol climate agreement. Carbon trading allows countries and businesses to cash in on their carbon credits. The United Nations Climate Change Conference, also known as COP 25, was held in Madrid on December 13, 2019.

What Is a Carbon Credit?

A carbon credit is a permit that allows the holder to emit a certain amount of CO2 or other greenhouse gases. One credit allows one tonne of carbon dioxide to be released into the atmosphere.

The carbon credit is one part of a “cap-and-trade” method. Carbon emitting companies are given credits that allow them to continue to pollute up to a certain limit. This limit is reduced on a regular basis. Meanwhile, the company may sell any credits that are no longer needed to another company that requires them.

As a result, private companies are incentivized twice as much to reduce greenhouse gas emissions. If they exceed the cap, they will first face a fine. Second, they can generate income by reselling or saving some of their emissions allowances.

Understanding a Carbon Credit

Theultimate goal of carbon credits is to reduce greenhouse gas emissions into the atmosphere. As previously stated, a carbon credit is equal to one tonne of CO2. In terms of carbon dioxide emissions, the Environmental Defense Fund estimates that it’s the equivalent of a 2,400-mile drive.

Companies or countries are given a certain number of credits, which they can trade to help balance global emissions. “People simply speak of trading in carbon,” the United Nations observes, “because carbon dioxide is the principal greenhouse gas.”

The goal is to gradually reduce the number of credits available, incentivizing businesses to come up with new ways to reduce greenhouse gas emissions.

Cap-And-Trade Programs

Cap-and-trade is a cost-effective and an environment friendly method of limiting and controlling greenhouse gas emissions, which are the main cause of global warming. It’s a policy change aimed at reducing large-scale gas emissions from a number of sources. This method establishes an overall cap, or the maximum amount of gas emissions per specified compliance period, for all sources covered by the program.

The cap sets a limit on gas emissions that is periodically reduced to reduce and control the number of toxins released into the atmosphere by pollutants. On the other hand, trade creates a ready market for carbon permits, allowing industries, companies, and factories to innovate in order to meet their emission targets. The less pollution these factories produce, the more money they make, and vice versa. As a result, companies will be more motivated to reduce pollution.

Cap-And-Trade Programs Today

Cap-and-trade schemes are still divisive in the United States. According to the Center for Climate and Energy Solutions, 11 states have adopted market-based approaches to greenhouse gas reduction. Ten of these are Northeastern states that have banded together to combat the problem through the Regional Greenhouse Gas Initiative (RGGI).

California’s Cap-and-Trade Program

In 2013, the state of California launched its cap-and-trade program. The regulations apply to large electric power plants, industrial plants, and fuel distributors throughout the state.

After the European Union, South Korea, and the Chinese province of Guangdong, the state claims that its program is the fourth largest in the world.

The U.S. Clean Air Act

The U.S. has been regulating energy emissions since the passage of the U.S. Clean Air Act of 1990, which is credited as the world’s first cap-and-trade program (although it is called the caps “allowances”).

The Environmental Defense Fund credits the program with significantly reducing sulfur dioxide emissions from coal-fired power plants, which were the source of the horrific “acid rain” of the 1980s.

The United Nations’ Kyoto Protocol

The United Nations’ Intergovernmental Panel on Climate Change (IPCC) developed a carbon credit proposal to reduce the worldwide carbon emissions in a 1997 agreement known as the Kyoto Protocol. The agreement established binding emission reduction targets for the signatories. The Marrakesh Accords, another agreement, laid out the groundwork for the system’s operation.

The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change (UNFCCC), which commits its Parties by setting internationally binding emission reduction targets.

  1. The Kyoto Protocol was adopted in Kyoto, Japan, in December 1997 and entered into force in February 2005.
  2. The first commitment period under the Kyoto Protocol was from 2008-2012. The Doha Amendment to the Kyoto Protocol was adopted in Qatar in December 2012. The amendment includes new commitments for parties to the Kyoto Protocol who agreed to take on commitments in a second commitment period from January 2013 to December 2020 and a revised list of greenhouse gases to be reported on by Parties in the second commitment period.
  3. Recognizing that developed countries are principally responsible for the current high levels of Greenhouse Gas (GHGs) in the atmosphere, the Kyoto Protocol places commitments on developed nations to undertake mitigation targets and to provide financial resources and transfer of technology to the developing nations.
  4. Developing countries like India have no mandatory mitigation obligations or targets under the Kyoto Protocol.

The separate Clean Development Mechanism for developing countries issued carbon credits called a Certified Emission Reduction (CER). A developing nation could receive these credits for supporting sustainable development initiatives. The trading of CERs takes place in a separate market. The first commitment period of the Kyoto Protocol ended in 2012. (The U.S. dropped out in 2001.)

Paris Agreement

The Kyoto protocol was revised in 2012 in an agreement known as the Doha Amendment, which was ratified as of October 2020, with 147 member nations having “deposited their instrument of acceptance.”

The Paris Agreement of 2016 is a historic international accord that brings almost 200 countries together in setting a common target to reduce global greenhouse emissions in an effort to fight climate change.

The pact seeks to keep global temperature rise to below 2 degrees Celsius from pre-industrial levels and to try and limit the temperature increase even further to 1.5 degrees Celsius.

To this end, each country has pledged to implement targeted action plans that will limit their greenhouse gas emissions.

The Agreement asks rich and developed countries to provide financial and technological support to the developing world in its quest to fight and adapt to climate change.


Cap and trade have been proven effective in the United States through the acid rain program, which reduced pollution levels quickly and effectively at a far lower cost than expected. The EU Emissions Trading System has demonstrated that cap and trade can be applied to carbon, resulting in a carbon price that drives emissions reductions. Pollution reductions that industry feared would be prohibitively expensive were achieved for a fraction of the cost originally estimated. Carbon credit has the potential to be a global solution to a global problem. Cap and trade allow for rigor in emissions monitoring, reporting, and verification, which is critical for any climate policy to maintain integrity.

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