Carbon Credits to Control Emissions

The concept of carbon credits came into existence as a result of increasing awareness of the need for controlling emissions. The mechanism was formalized in the Kyoto Protocol, an international agreement between more than 170 countries. The Protocol agreed has fixed quotas on the maximum amount of Greenhouse gases which can be emitted by the developed and developing countries. In turn these countries set quotas on the emissions of installations run by local business and other organizations.

Burning of fossil fuels is a major source of industrial greenhouse gas emissions, especially for power, cement, steel, textile, fertilizer and many other industries which rely on fossil fuels (coal, electricity derived from coal, natural gas and oil). The major greenhouse gases emitted by these industries are carbon dioxide, methane, nitrous oxide, hydro fluorocarbons (HFCs) etc. , all of which increase the atmosphere’s ability to trap infrared energy and thus affect the climate.

Each such business has been fixed with specified number of units, otherwise called ‘allowance of credits’, upto which can emit carbon dioxide or other equivalent greenhouse gas. Operators that have not used up their quotas can sell their unused allowances as Carbon Credits, while businesses that are about to exceed their quotas can buy the extra allowances as credits, privately or on the open market.

By permitting allowances to be bought and sold, an operator can seek out the most cost-effective way of reducing its emissions, either by investing in ‘cleaner’ machinery and practices or by purchasing emissions from another operator who already has excess ‘capacity’. Banks can use the opportunity for financing machinery for protecting emissions, or for green projects which get certificates for their projects and sell to the companies which exceed their quota of emission and are ready to buy the certificates.