How Are Carbon Credits Created?

To understand how carbon credits are created it is important to first understand the framework in which they exist and why emissions trading developed. Carbon credits are one tenet within a voluntary pledge made by over 180 countries and multitudes of corporations and individuals to reduce greenhouse gas (GHG) emissions.

Coal, natural gas and oil are fossil fuels, and burning these releases GHGs. These gasses include: carbon dioxide, methane, nitrous oxide and hydro-fluorocarbons. When GHGs are released into the environment they enhance the atmosphere’s ability to trap infrared energy, which may directly impact our climate.

The Intergovernmental Panel on Climate Change sounded the alarm that GHGs were reaching dangerous levels and should be moderated for the health, and ultimately the habitability, of our planet.

In response, a diplomatic core came together in Kyoto, Japan, in 1997 and determined that greenhouse gasses should be reduced to 6 to 8 percent below 1990 levels and developed a reduction plan known as the Kyoto Protocol.

The creators of the Kyoto Protocol recognized some of the pledging countries would meet and exceed their GHG reduction goals, while others would struggle. They built flexibility into the plan, allowing countries to create excess GHG reductions and sell them to countries not meeting goals. For trading purposes, one carbon credit is equal to one metric ton of GHG reductions.

These credits had to be measured, certified and brokered, and offset providers were developed to do just that. Hundreds of providers exist throughout the world, and they are regulated by the United Nations Framework Convention on Climate Change (UNFCCC) and the Financial Industry Regulating Authority (FINRA).

Buying carbon credits is easy. Anyone with a debit card who wants to reduce his carbon footprint may buy credits online.

Offset providers expanded membership beyond countries to include corporations and individuals. Like countries, these provider members make a pledge to GHG reduction and are eligible to create and sell carbon credits.

Several types of programs are eligible to receive carbon credits. Examples include: planting trees; disposing of waste organically; capturing and converting methane gasses produced by landfills, coal mines and agriculture.

The owner of the project submits it to an offset provider to determine eligibility. If eligible, the owner contracts with an accredited verifier. That person confirms and measures the GHG reduction, and submits a report to the offset provider and FINRA.

If approved, the provider issues carbon credits to the project owner. They are serialized documents which may be sold only once and then are canceled.

Carbon credits are big business. After the project owner receives carbon credits, she may sell them at the prevailing market rate, which ranges from $1 to $30. By the end of 2009, hundreds of billions of carbon credits had been issued and sold on the open market.

Related Post: Carbon Credits for Green Technology