Carbon Credit; History and Importance

Carbon emissions have been a global issue in recent decades. Countries with aggressive economic activities have a high carbon footprint. At the same time, the emissions of some countries are way too low. So, carbon credits are issued to each country or organization.

What are carbon credits? Are they good to combat air pollution and climate change in the long run? Do carbon credits work for countries only? These are some questions that always pop up in mind when we listen to the word carbon credits. This article will give you a brief insight into carbon credits and help you find the answer to these questions.

These are permits that are bound to produce a certain amount of emissions. According to Corporate Credit Institution, “It is a tradable permit that allows the holder to emit one ton of carbon dioxide or the equivalent of any greenhouse gas. Countries can trade their carbon credits.”
A carbon credit is right to emit greenhouse gases into the atmosphere. According to Environmental Defense Fund, one ton of carbon dioxide is equal to emissions from the drive for 2400 miles.


Thank you to jasmin essler and Unsplash for the image.

Why is Carbon Credit Necessary?

The pollution level has reached the highest across the globe. Eradicating fossil fuels is one of the main objectives of this agreement. So, carbon pricing, Eco tax, and carbon credits are introduced. These are some initiatives for change. Carbon price gives a signal to polluting businesses to discontinue their activities that have harmful effects. Thereby encouraging to utilize cost-effective yet cleaner and renewable resources of energy. 

How was the idea developed?         

In 1997, in UNFCC, the nations agreed to bring a carbon credit system to reduce the country’s greenhouse gas emissions. Later, in Germany in 2001, 191 countries, including Japan, France, Australia, and the EU, ratified the protocol. Almost 37 nations signed the protocol to cut down their emissions. This way, the idea of carbon credit was brought to the table. 

Under the Kyoto Protocol reference, countries can increase or decrease their assigned amount by trading units with other parties.

Carbon credit makes a monetary incentive for companies that reduce their pollution. But companies that cannot operate without causing emissions, such as the oil and gas sector, can buy it from other companies. So, a carbon credit is a mechanism to limit air pollution to a certain level. The carbon credit system works on the Cap-and-Trade model. This model helped to limit sulphur emissions in the 1990s successfully.

But the question is, why only carbon credit? Other greenhouse gases have more potential to pollute the environment. According to United Nations, carbon dioxide is the principal greenhouse gas, so people talk about trading in carbon. The approach is to minimize credits of companies with time. So, the companies seek innovative ways to reduce greenhouse gases emission.

Do the Carbon Credits Work? 

YES! The system is working across the globe. United Nations Intergovernmental Panel (IPCC) developed a carbon credit proposal in Kyoto Protocol. Kyoto Protocol is an international agreement among nations to reduce their carbon dioxide emissions. The deal was set binding for countries that signed it. Marrakesh Accord provides rules for the complete working of this system. Since it works on the cap-and-trade model, sooner or later, the signed countries would make innovative products to substitute fossil fuels. 

How does it Work?

Kyoto Protocol has divided the countries into Annex I – industrialized countries – and Annex II – developing economies. Annex I operated with their emission trading. Under Emission Reduction Purchase Agreement (ERPA), a country with a surplus of credits can sell it to another country. On the other hand, Certified Emission Reduction (CER) credits are issued for developing countries. If a developing nation supports sustainable infrastructure, clean energy initiatives, and emission reduction, these credits are granted.

Carbon offset      

A carbon offset is a way of balancing scales on pollution. Offset are discrete units sold by the price per metric tons of carbon dioxide. Carbon offset trading is a wildly popular and controversial way to fight climate change. 

The voluntary carbon offset market traded 199 million metric tons of carbon dioxide equivalent in 2018. The market offset came close to $300 million. This market’s size is estimated to grow more. The market size of voluntary carbon offset is projected to increase up to $700 million by 2027.

A carbon offset is a valuable tool to combat climate change. It ranges from a couple of tons to gigatons of carbon dioxide to meet the targets. Say a company wants to minimize its emissions but does not have money to upgrade its technology. It can, but carbon offset and broker will use that money for ecosystem restoration. So, purchasing offset for ecosystem restoration would reduce the company’s equivalent amount of carbon dioxide. This way, if the company cannot afford high technology can still play its role in environmental upgrades. 

However, the carbon trading system is controversial as some countries do not comply, and they tend to strengthen their economy at the cost of the environment. For instance, the United States remains controversial. It’s 11 Northeast states have adopted a market-based approach to reducing greenhouse gas emissions. Their initiative is known as Regional Greenhouse Gas Initiative (RGGI). This is successfully working as California claims that its cap-and-trade program is the fourth largest globally.


A carbon credit is a permit given to countries to limit their emissions to a certain level. Nations can trade their credits with those who have high emission patterns. It is an approach to cleaning the environment and combating climate change. Although the market is increasing, carbon trading is not a sustainable solution to combat climate change. The world must seek a zero-emission strategy rather than buy and sell carbon offset. So, working together, countries can reduce their emissions by shifting to cleaner energy sources.