Carbon Credit System

Global warming and other climate changes due to over-industrialization coupled with depleting natural resources were the primary reasons why the Kyoto protocol happened, which is an international treaty established in order to commit State parties to the reduction of greenhouse gases emission based on the premises that global warming exists and that man made CO2 emissions have caused the same. Under said arrangement, carbon emissions or lack thereof, are converted to an “economic commodity” and the same are traded in the form of carbon credits.

The carbon credit market works on a concept known as “polluter pays” and cap and trade principle. Notably however, countries like USA, India and China do not have mandatory caps.

The easiest way to explain the CCS is with an example. Assume that two companies, A and B, in the same sector have been given a carbon emission allowance of 10 tons that is to say that they can release 10 tons in the atmosphere unfettered. Now, A being a company relying on wind-power emits only 8 tons in contrast to B emitting 12 tons due to being powered by coal. The CCS allows A to sell his surplus credits (two carbon credits as it is the difference between permissible and actual emission) to B so that B can pay for exceeding the emission level.

As we can see, this procedure encourages companies to make changes in order to reduce their gas emissions and respect their allotted amount. The companies who surpass their allowable emissions must pay for the surplus by buying more permits. Another important aspect is that it encourages companies to emit less in order to acquire extra profit by selling their right to pollute.

Of course, like any scheme, his too has been subject to a lot of criticism, the key ones being listed below.

While Carbon credits are often hailed as a savior as the polluters pay for the pollution, the issue of fake carbon credits has been propping up for quite some time now, with companies investing into dams solely for the purpose of credits and not for the benefit a dam offers in itself. This is problematic since the dam then undermines the objective of the Kyoto protocol and causes increased problems.

It is left to the international community to see then and consider truly whether market mechanisms can ever properly solve the problems created by the market itself.



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