What Are Carbon Credits?

Carbon credits are the trading unit of the global carbon market – a fairly young commodity market established with the purpose of reducing global greenhouse gas (GHG) emissions into the atmosphere and reversing potentially catastrophic climate changes. Carbon credits are produced by carbon offset installations and processes which result in reduced and verifiable GHG emissions . Each carbon credit is equivalent to the reduction of one metric ton of carbon dioxide emissions. Quantifying carbon emissions and assigning them a monetary value is believed to be a powerful mechanism for encouraging both producers and consumers to turn to low-emission technologies, products and services.

Carbon credits as a commodity were a direct result of the 1997 Kyoto Protocol when the international community formally recognized the urgent need for global and drastic greenhouse gas (GHG) emission reductions. Today, the 191 signatory countries have pledged to reduce by 2020 their GHG emissions by 5.2% below their 1990 levels. According to the agreement, each nation was allocated a limit on its GHG emissions. An authoritative body within each country then distributes quotas to its “dirty” industries and companies, which need to make the necessary adjustments to reduce their GHG emissions below the set level. The supply and demand of carbon credits on the global carbon markets are determined solely by the carbon reduction capabilities of the parties involved.

Below is a chart from the 2010 report by the International Energy Agency indicating the industries with the largest GHG emission levels in 2007-2008.

Isn’t there a more up-to-date graphic? We’re currently in 2011.—I tried finding something more current. The report I got this from was published in 2010, but not sure why the data is so old. We can scrap if it seems too outdated.