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Industrial and personal use of fossil fuels to create energy has been prevalent for several decades around the world. However, these fossil fuels release greenhouse gases like carbon dioxide and methane, which cause a lot of harm to the environment. High accumulation of these greenhouse gases in the atmosphere is leading to global warming, with serious damage to the planet.

With an aim of reducing the emissions and safeguarding the planet, the concept of carbon credits was brought into existence. Through the famous Kyoto protocol, an agreement reached by over 170 nations, it was decided to put limits on emissions of greenhouse gases by every participating nation. The nations’ government then uses the prescribed limits and assigns quotas to different manufacturing units, fixing the cap for emissions by them so that their business activities do not result in excessive emissions.

In order to encourage industries and other organizations for releasing lower than the quota and to penalize those who emit more, the concept of carbon credits was brought into the picture. By definition, one carbon credit amounts to a thousand kilos of CO2 released in the atmosphere. Under this concept, manufacturing companies have to buy an exact amount of carbon credits from the global trading market if their emissions are more than the quota, whereas those firms that are below their emission quota can sell a corresponding amount of carbon credits.

Such carbon credits trading encourage lower emissions and thereby help reduce uncontrolled emissions of greenhouse gases in the air. The market of carbon credits has made firms make good their emissions, and it now has a direct effect on the firm’s financial statement. This has led firms to actively seek ways to reduce their emissions and opt for cleaner methods of doing business.

Another financial instrument called carbon offset credit has also been created with a similar aim in mind. One carbon offset stands for the reduction of one metric ton of CO2 or an equivalent in other greenhouse gases. This CO2 reduction is obtained by using renewable and eco-friendly energy sources like tidal and wind energy.

A carbon offset is purchased by firms or other organizations to balance the emissions that exceed their prescribed quotas as per the defined regulations. Persons, governments and organizations can all buy it voluntarily as well to balance their carbon footprint. This helps in promoting and financing decrease in emissions and advancing eco-friendly efforts of generation of energy.

Discover more about carbon credits and carbon trading and get a deeper understanding on how you can help in saving the environment.

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