Carbon Credits Definition

A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or its equivalent of a different greenhouse gas.

They can be used by governments to cap and trade emissions, as well as by businesses as part of their voluntary emissions reduction programs. Credits can be bought and sold on international markets.

The most common type of carbon credit is called an emission allowance. Emission allowances are created under a cap-and-trade program. The total number of allowances issued is equal to the overall emissions target for the period covered by the program.

Each allowance gives the holder the right to emit one tonne of CO2, or its equivalent in other greenhouse gases. To meet their targets, companies and other entities that are subject to the cap must either reduce their emissions or buy allowances from those who have reduced their emissions more than required.

International carbon credits are generated through projects that help developing countries reduce their emissions. These projects can include planting trees, which absorb CO2 from the atmosphere, or investing in renewable energy sources like solar and wind power.

Credits earned from these projects can be sold on international markets to buyers looking to offset their own emissions. The proceeds from these sales are typically reinvested in further emission-reducing projects in developing countries