The Origin of Carbon Credit Exchange
Carbon credits are a key tool in the fight against climate change. A carbon credit represents a reduction in greenhouse gas (GHG) emissions, typically carbon dioxide (CO2), that has been achieved through a specific project or activity. Each credit is equal to one tonne of CO2, and they can be bought and sold on the carbon credit exchange.
The Beginning of Carbon Credit Exchange
The idea of carbon credits emerged in the late 1980s as a way to incentivize businesses to reduce their greenhouse gas emissions. The first carbon credit program was launched in the early 1990s as part of the United Nations Framework Convention on Climate Change (UNFCCC). This program, called the Clean Development Mechanism (CDM), allows businesses in developed countries to invest in GHG reduction projects in developing countries, earning carbon credits in return.
The Kyoto Protocol and Carbon Credit Exchange
The CDM was established as part of the Kyoto Protocol, an international treaty signed in 1997 that aimed to reduce global GHG emissions. The Kyoto Protocol set binding targets for developed countries to reduce their GHG emissions by an average of 5% below 1990 levels by 2012. To achieve these targets, countries were allowed to use carbon credits to offset their emissions. This led to the creation of the carbon credit exchange as a mechanism for buying and selling carbon credits.
Types of Carbon Credit Exchange
There are two main types of carbon credit exchange: the voluntary market and the compliance market. The voluntary market is where companies or individuals voluntarily purchase carbon credits to offset their own emissions, often as part of their sustainability or corporate social responsibility (CSR) initiatives. The compliance market is where companies must purchase carbon credits to comply with government regulations, such as emissions trading schemes.
The Voluntary Carbon Credit Exchange
The voluntary carbon credit exchange began in the late 1990s, driven by a growing awareness of the need to address climate change. The voluntary market allows individuals, businesses, and governments to offset their emissions by purchasing carbon credits from GHG reduction projects. These projects can include renewable energy initiatives, such as wind or solar power, or forestry projects that sequester carbon from the atmosphere. The voluntary market has grown rapidly in recent years, with increasing numbers of companies and individuals choosing to offset their emissions in this way.
The Compliance Carbon Credit Exchange
The compliance carbon credit exchange is a government-mandated market that aims to reduce GHG emissions by setting caps on the amount of emissions that companies are allowed to produce. Companies that exceed their emissions limits must purchase carbon credits to offset their excess emissions. This type of market is often used in emissions trading schemes, such as the European Union Emissions Trading System (EU ETS). The compliance market has been criticized for allowing companies to continue polluting as long as they can afford to purchase enough carbon credits to offset their emissions.
The Future of Carbon Credit Exchange
The carbon credit exchange is likely to play an increasingly important role in the fight against climate change. The Paris Agreement, signed in 2015, aims to limit global warming to well below 2 degrees Celsius above pre-industrial levels, and to pursue efforts to limit the temperature increase to 1.5 degrees Celsius. The Paris Agreement includes a mechanism for carbon credits, called the Sustainable Development Mechanism (SDM), which is intended to replace the CDM. The SDM will allow countries to trade carbon credits and use them to meet their emissions reduction targets.