What are Carbon Credits ?

The United Nation's Framework Convention for Climate Change's (UNFCCC's) Kyoto Protocol had the developed countries (Annex I countries) agree to limit their green house gas (GHG) emissions to certain set targets set forth in Annex B of the protocol. The protocol also made additional provisions for the defaulters to compensate their excess emissions by three market based mechanisms. The aim was to reduce the global concentration of GHGs by sustained development programs in developing countries.

The main GHG being Carbon Dioxide (CO2), trading takes place in CO2 units. In the emissions trading market, also called the Carbon Market, the unit of currency is one Carbon Credit. This is equivalent to one ton of CO2 saved.

Other GHGs are converted to CO2 equivalents by using the Global Warming Potential (GWP). For example Methane has a GWP of 21 or 1 ton of Methane emission is equivalent to 21 tons of CO2 emission.

The three market based mechanisms are:

1. Emissions Trading. Organizations and industries within Annex 1 countries can trade excess GHG emissions with reduced GHG emissions in member countries.
2. Joint Implementation (JI) projects.Countries in Annex 1 can implement development projects within Annex 1 countries. These projects when implemented lead to reduced GHG emissions known as Emission Reduction Units (ERU's). These ERU's are traded. Each ERU is equivalent to 1 ton of CO2 emissions reduced.
3. Clean Development Mechanism (CDM)projects. Countries in Annex I with an emission default can buy Certified Emission Reductions (CERs) from Developing countries. CERs are reductions in CO2 emissions from CDM projects. CDM projects are sustainable development projects implemented in developing countries that would have reduced GHG emissions. Implementation and monitoring of theses projects are by UNFCCC's designated agencies . Each CER is equivalent to one ton of CO2 emissions reduced.

These three mechanisms allow the trading of GHG emissions so that defaulters can compensate on the reduced emission of others at the same time creating sustained development in third world countries.

The Carbon Market in 2008 was around 40 billion Euro. Emission trading in the European Union is the highest followed with CERs from CDM projects.

The next article discusses the basic requirements to earn credits from CDM projects.