Using the carbon market to fuel the renewable energy sector
October 1, 2018
Significant controversy surrounds the practice of emissions trading and the global development of the carbon market.
In essence, the carbon market was developed as part of the global greenhouse gas reduction initiative. The market allows companies to purchase carbon credits to offset their emissions. If a company is exceeding its emissions limit, it has the option to purchase carbon credits to offset excess emissions and remain in accordance with government regulation.
Carbon credits are generated by renewable energy and other approved carbon-offsetting projects. Companies operating below maximum emissions may also convert their unused emissions to carbon credits.
The Creation of Carbon Credits
Carbon credits are generated by qualifying activities or ‘offsets’ that reduce or remove greenhouse gases from the atmosphere. Examples of such activities are solar power, wind power, hydroelectric power, fuel switching and afforestation (tree planting). One carbon credit is equal to the offset of one tonne of greenhouse gas emissions.
In order for a new project to be eligible to generate a carbon credit, it must have been developed with the specific purpose of offsetting other companies’ emissions. The project must have been primarily funded by the sale of carbon credits to its investors. Enforcing this strict policy ensures that the growing need for carbon offsets drives the continuous development of additional projects.
Carbon credits, both in circulation and retired, are tracked by independent registries.
The use of offsets provides an efficient means of reducing greenhouse gas emissions in the short-term. The revenue generated from the sale of offsets and carbon credits can be used to develop and implement new innovations and technologies that will achieve longer-term reductions.
Using Carbon Credits to Offset Emissions
After a company purchases a carbon credit, it has an allowance for the production of one additional tonne of greenhouse gases.
When it comes time to report emissions, carbon credits are applied or ‘retired’ against the excess tonnes of emissions produced by the company for the reporting period.
Once retired, carbon credits cannot be put back into circulation.
Dissolution of the Carbon Market
Supply and demand within the carbon market is created by government regulatory caps on emissions. The demand for carbon credits is driven by the need for over-consumption of fossil fuel as energy. The cap generally decreases each year with a coinciding decrease in the number of carbon credits available on the market.
After global achievement of net zero emissions, the new target will be set on absolute zero emissions, at which time the carbon market will naturally dissolve.