Carbon Credits

Carbon Credits

Subject – Environment

Context – The Glasgow pact recently signed at COP26 deals with many issues of the Paris Agreement, such as finance, reporting of climate actions, transparency in climate actions, and rules for creating global market for trading in carbon offsets (carbon credits).

Concept –

• Carbon credit is a financial instrument issued to an entity, a company or municipal body, for undertaking an activity, that has the effect of either avoiding emission of CO2 into the atmosphere or absorbing back some of the already emitted CO2 (sequestration).
• A carbon credit is a permit that allows the company that holds it to emit a certain amount of carbon dioxide or other greenhouse gases. One credit permits the emission of a mass equal to one ton of carbon dioxide.
• Carbon credits were devised as a market-oriented mechanism to reduce greenhouse gas emissions.
• Companies get a set number of credits, which decline over time. They can sell any excess to another company.
• Thus, “cap-and-trade” is an incentive to reduce emissions.
  • Companies that pollute are awarded credits that allow them to continue to pollute up to a certain limit. That limit is reduced periodically. Meanwhile, the company may sell any unneeded credits to another company that needs them.
• Negotiators at the Glasgow COP26 climate change summit in November 2021 agreed to a global carbon credit offset trading market.

Its history –

• With the signing of the Kyoto Protocol in 1997, a market was created for the reduction of greenhouse gases, assigning a monetary value to the reduction of emissions. One of the Flexible Mechanisms defined by the Kyoto Protocol is the Clean Development Mechanism (CDM).
• The signatory countries of the Protocol have agreed to reduction targets. Carbon credits received in the process of meeting these targets can be sold to governments or companies that have not been able to reduce their emissions.
• Despite the difficulty some countries have had in reducing emissions, experts agree that the most important thing from an ecosystem perspective is the global effort to reduce greenhouse gases, regardless of political boundaries and progress toward compliance in specific jurisdictions.
• Thus the carbon market allows a government or business to acquire emissions reductions created elsewhere to achieve its own objectives.
• The goals of the initial agreement were expanded and updated at the Durban Climate Change Conference in 2011.
• Carbon markets existed under the Kyoto Protocol, which is being replaced by the Paris Agreement in 2020.

How is a Carbon Credit different from a Renewable Energy Certificate?

Other trading units under Kyoto Protocol –

The other units which may be transferred under the scheme, each equal to one tonne of CO2, may be in the form of:

• A Removal Unit (RMU) on the basis of land use, land-use change and forestry (LULUCF) activities such as reforestation.
• An Emission Reduction Unit (ERU) generated by a joint implementation project.
• A Certified Emission Reduction (CER) generated from a clean development mechanism project activity.

Transfers and acquisitions of these units are tracked and recorded through the registry systems under the Kyoto Protocol.

Internationally Transferred Mitigation Outcomes (ITMO)

• Internationally Transferred Mitigation Outcomes (ITMO) are units from the new mechanism for the international emissions trading between Parties to the Paris Agreement.
• General rules in this regard are stipulated in Article 6(2) of the Paris Agreement but details for this mechanism are to be established yet.
• All assets under the Paris Agreement – called International Traded Mitigation Outcomes – are authorised for use in another country’s NDC are subject to an adjustment mechanism to ensure that only one party takes credit for these reductions.
  • Parties have the right to include the reduction of emissions in any other country as their NDC, as per the system of carbon trading and accounting.
• One reason for international transfers of mitigation outcomes is that they allow a ‘buyer’ country to finance lower-cost emissions reductions in another country to meet its own commitment without losing environmental integrity. This allows them to be more ambitious.
  • It also allows ‘seller’ countries to finance domestic mitigation beyond what can be achieved with their own resources.