The Truth About Carbon Credits

Carbon emissionPhoto: Taras Kalapun

What’s a carbon credit? Well, to make a long story short, it’s Wall Street’s (and all the finance lords’) way of finally tackling the global warming dilemma.

Yup, that’s right, with the arrival of carbon credits, in just a few year’s time, greenhouse gas (GHG) emissions will cease to be a problem… Or at the very least, this is what they would have you believe.

But let’s take a closer look at the mechanisms at work here, and then it’s up to the readers to judge for themselves whether or not this is a reasonable way of dealing with excess CO2 emissions.

This mechanism first came into existence with the Kyoto Protocol, an international agreement signed by over 170 countries, both developing and industrialised.

The Protocol established a cap for the CO2 emissions each country can have. It’s up to each individual country to make sure they never go over the allowed limit and to distribute “CO2 allowances” among its “operators” (businesses, households, offices, etc.).

Simple enough right? But there’s a twist to this plot.

If a country doesn’t use all of its allowed CO2, and/or it offsets part of its emissions by having “projects” that transform/absorb CO2 or other GHGs, they can actually “sell” that CO2 compensation in the form of “Carbon Credits”.

Specifically, a Carbon Credit is a metric ton of CO2 (or CO2 equivalent of other GHGs). The way this works is: Anything that generates emissions of GHG, “costs” a certain amount of carbon credits, and any attempts to mitigate said GHG emissions “generate” carbon credits.

So what happens if I have carbon credits to spare? Well I could sell them. To whom? To people who, unlike me, have exceeded their CO2 emissions, and need to somehow compensate them.

Now you can add something new to your Christmas list
Santa and Carbon EmissionsPhoto: Nitrozac and Snaggy

So bottom line, CO2 emissions have now become a tradeable commodity just like any other asset out there. Businesses can purchase them, resell them, and even participate in projects that will contribute to reducing greenhouse gases around the globe (although determining whether a project is causing a real reduction on GHGs is a complex task at best).

Also notice that major contributors to GHG emissions like China, USA and Australia have thus far avoided mandatory caps, so if anything, business will just have to migrate to these countries in order to avoid the complex process of managing their GHG emissions and/or compensations.

It is evident that this Carbon Credit trading system might work on paper. However, there has been much criticism, like the point mentioned above. But even within countries that agreed to cap their emissions, there have been some inconsistencies.
What if countries allow currently established corporations enough carbon credits to continue business as usual? This would impose a heavy penalty on newcomers, as they would probably have an extremely low emission cap (since most of that country’s allowance is already taken by the top players).

Carbon Credit trading may lead to ridiculous situations, too
Carbon Credits jokePhoto: Nitrozac & Snaggy

And what about the aforementioned problem of the difficulties of accurately assessing a project’s contribution to reduction of CO2 and it’s equivalents? Not to mention that since CO2 emissions are now traded on the stock markets, they’re subject to speculation and derivative trading. Can you imagine that? The next-gen financial bubble could very well be tied to green initiatives.

Evidently, this “Cap and Trade” initiative (as is usually referred to) has its inconsistencies, but it also makes it profitable, at least on paper, to say, plant a tree.
These monetary incentives should never be overlooked. Ask the big banks that have already started to speculate on this if you don’t believe it.

Only time will tell if this market economics initiative will prove effective in reducing the actual amount of GHGs we release into the atmosphere. I would advice a safe degree of skepticism on this one.