Carbon Trading

What is Carbon Trading? 

Carbon trading is the practice of reducing overall emissions of carbon dioxide, along with other greenhouse gases, by providing a regulatory and economic incentive. Indeed the term “carbon trading” is a quite misleading, as the number of greenhouse emissions can be regulated under what are known as cap and trade systems.As a result, some people prefer the term “emission trading,” to emphasize the fact that far more than just carbon is being traded. 

Benefit of Carbon Trading

It provides a very good incentive for companies to improve their efficiency and reduce their greenhouse gas emissions, by implementing such reductions into a physical cash benefit. Moreover, it is a disincentive for being inefficient, as companies are effectively penalized for failing to meet emissions goals. In this way, regulation is accomplished largely through economic terms, rather than through draconian government measures, encouraging people to engage in carbon trading because it's potentially profitable.Basically, it is a practice which is designed to reduce overall emissions of carbon dioxide, along with other greenhouse gases, by providing a regulatory and economic incentive. 

Carbon credits are effective solution to reduce the amount of Green House Gas (GHGs) emissions in the atmosphere. Generating and selling carbon credits funds carbon projects which would not have gone ahead i.e additional to business as usual. Carbon credits also contribute lower the costs of renewable and low carbon technologies as well as assisting in the technology transfer to developing countries.

Implementation of Carbon Credits

Carbon credits can be implemented from various types of projects including:

Renewable energy: Shifting from fossil fuels to a ‘clean’ energy. For example, wind and solar energy.
Forestation and Afforestation: New tree plantation contributes absorbing CO2 by trees. For example, forest regeneration.
Energy efficiency: Decreasing emissions through increasing energy efficiency.For example, installation of energy-efficient machinery.
Methane capture: Avoiding methane emissions through capture and burning to create energy.For example,landfill methane capture.

The eligibility of the project for carbon credits depends on whether a project follows one of the Kyoto Protocol’s project-based mechanisms or an independent voluntary standard.

Government sets a national goal for total greenhouse gas emissions over a set period of time, such as a quarter or a year, under a cap and trade system and then allocates “credits” to companies which allow them to emit a certain amount of greenhouse gases. If a company is not able to use all of its credits, it can sell or trade those credits with a company which is panic to exceed its allowance.


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