Carbon Credits (CCs) is a scheme of emissions trading entitling polluters holding CC units to emit a ton of Carbon Dioxide (or a CO2 ton equivalent of another greenhouse gas ) into the atmosphere for each CC unit they purchase and expend. CO2 (Carbon Dioxide) is a greenhouse gas said to contribute to global warming and erratic weather patterns and is a by-product of industry including power generation through the burning of oil and coal.

Obtaining CCs entails purchasing them from ‘carbon offset providers’ who in turn generate or buy them directly from ‘carbon offset projects’ or buy them indirectly through the ‘carbon market’. CCs can vary in price at around US$10 depending on a variety of factors including a CC’s certification level and market forces. “Carbon projects” are designed to have the effect of lowering CO2 in the atmosphere when compared to the outcome whereby such a project either never occurred (eg flat land vs forest) or would have occurred in a more environmentally destructive manner (eg the installation of a ‘dirty coal’ plant vs a ‘clean coal’ plant, or rather a solar-thermal plant instead.) The degree to which a carbon project lowers or prevents CO2 emissions determines the quantity of CC units that can be generated and then sold from a project. Hence by buying up and expending CCs , polluters are able to maintain a ‘carbon neutral’ status as their emissions are said to be offset through the promotion of alternative and counteractive behaviour elsewhere. This becomes important when operating within varying regulatory or legislative frameworks (eg the Kyoto protocol) or settings of corporate and individual social responsibility that require the use of CCs as offsets to polluting activity.

The best use of the CCs scheme for the sake of global sustainable development is when a carbon project has the attribute of “additionality,” that is, it would not have occurred had the scheme not been in existence. This situation occurs when carbon projects are not economically viable unless the credits they generate are sold and used as part of the project’s financing. In fact, some companies initiate projects in developing nations by utilizing the carbon offset capital allowances of their client companies coupled with the provision of equity for some type of additional financial return. So, when a project does not have Additionality, it would have proceeded “business-as-usual” no matter whether or not from it any CCs would have been generated and used as part of a project’s financing. It is for this reason that BP probably said “it would not buy credits resulting from improvements in industrial efficiency or from most renewable energy projects in developed countries,” that is, BP is looking for credits generated from projects with the utmost Additionality.

Beyond Additionality, other factors play a role in determining a CC’s effectiveness at reducing or preventing carbon emissions as determined by the nature of its underlying project from which it was generated. For example, ‘leakage’ is an attribute that occurs when a carbon project’s purported reductions cause increased emissions elsewhere. Ultimately the quality and effectiveness of a CC can be verified by third-party assessors who certify when a carbon project and hence its generated CCs may meet certain criteria with there being many certification standards now in existence.

Moreover, once generated, CCs can be bought and sold on the Carbon Market thereby allowing for the trade of CCs. The sophistication and breadth of this market is increasing with a number of CCs exchanges now in existence:

World Green Exchange, USA
Chicago Climate Exchange, USA
Nordpool, Europe
EEX, Europe
ECX, Europe
Powernext, France
EXAA, Austria
Gulf Exchange, Qatar
ACX, Australia
FEX, Australia
ACX-Change, Asia
Regi, New Zealand
CantorCO2e, Online
5 upcoming Kyoto-centric exchanges
Environmental and Social Investment Exchange, Brazil (non-offset)
CDM Bazaar, UN (informational)

The Carbon Credits scheme on the whole can be effective at financing carbon projects and reducing greenhouse gas emissions to promote human-friendly weather patterns and to benefit stakeholders of carbon projects. Ideally, the scheme discourages reliance on fossil fuels and their resultant greenhouse gas emissions by enabling the placement of either self-imposed or government imposed financial penalties on their use with those penalties in turn financing environmentally friendly alternatives and corrections. That said, emissions trading is only part of what makes nations and individuals more environmentally conscious and caring in their behaviour. At best, if used in conjunction with supporting legislation and regulatory bodies then emissions trading can have a very positive impact on the environment and sustainable global development. At worst, it serves as a way to justify environmental neglect and irresponsibility in a voluntary, uncertain and at times unregulated industry that can include destructive and ineffective carbon projects. Hence, the notion of “reduce what you can, offset what you can’t” has never been so important.