What is a Carbon Credit?

The term carbon credit refers to the assigning of a monetary value to a reduction in greenhouse gas emissions as part of national and international attempts to mitigate the growth in concentrations of greenhouse gases.

Under the Kyoto Protocol, an international agreement linked to the United Nations Framework Convention on Climate Change which came into force in February 2005, states that countries like Brazil, Russia, India, China, Germany and the UK, to name but a few, are required to offset their carbon emissions to a set level.

As well as reducing emissions the amount of pollution emitted from a process or system can be offset through the purchase of carbon-generating items, such as wind, solar, hydroelectric power, or fuel energy.

These carbon credits can then be sold on a number of open markets and the purchaser of a credit has the right to emit one tonne of carbon dioxide. What has been happening is that there has been increased demand for carbon credits to offset these emissions. Investors can benefit from this trend by investing in the production of carbon credits which can then potentially be sold to the markets for a profit.

One of the results of the Kyoto Protocol has been to push the price of carbon credits higher through increased demand. Over the last 3 years the carbon credit market has trebled in value. This is sustainable growth and not a bubble.

Carbon offsetting is in its early stages but market growth is being driven by legislation and the backing of almost every country in the world. A recent New York Times article described carbon trading as one of the fastest-growing specialities in financial services and companies are scrambling to get a slice of a market now worth about $130 billion with reports indicating it could grow to $1 trillion by 2020.

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