Carbon Credits are a tool used by governments and regulators to mitigate climate change by incentivizing companies and individuals to reduce their carbon footprint. They are used in a “Cap and Trade” scenario where a government or agency will cap the total amount of emissions allowed in a year and then issue permits (Carbon Credits) for each industry. Each industry has its own different cap on emissions. It is important to note that each Carbon Credit is worth one metric ton of carbon emissions and the amount of Carbon Credits issued each year decreases.
How They Work
A government or agency will issue Carbon Credits for an industry. There are many different governments and agencies that issue Carbon Credits, some big examples being China, the European Union, South Korea, and California. Once they are issued, they are either auctioned off or handed out to companies or individuals. Once they are received by said companies or individuals, they can be used or traded in a secondary market. The incentive for companies is to use the Carbon Credits so that they do not get fined by the government or agency overseeing them, which can often lead to bad publicity and become extremely expensive. An extra incentive to reduce carbon emissions is to make money on the secondary carbon market by selling extra Carbon Credits that you don’t need.
Carbon Credits are just one way to incentivize companies and individuals to reduce their carbon footprint. There is this sort of dual incentive situation occurring where companies and individuals can make money by reducing carbon emissions and trading extra Carbon Credits with others.