Ive seen them on the news recently but Im confused as to what they actually do. Is it like a tax?
In: Economics
If there were Garbage Credits, the idea would be I go out and pick up four pieces of garbage, then I sell you a certificate that says you can throw four pieces of garbage on the ground and still be “garbage neutral”, because -4 + 4 = 0.
Carbon credits are like that, but instead of garbage we’re talking about carbon dioxide in the atmosphere. 🙂
A government sets a total limit on the carbon emissions that the whole country or a single industry can produce, and gives out allowances for emissions to companies. Those companies can’t go over their allowance, but are free to buy and sell those allowances between each other. If one company can produce $1,000 of value from 1 ton of CO2, and another company can produce $500 while emitting 1 ton of CO2, company 1 might buy credits from company 2 for $750. Both make more money than they otherwise would, and the total value gained from that carbon emission is maximized.
Some governments don’t just give out credits at the start, but auction them off, the price of which averages to the same market value, and gives revenue to the government (usually used to pay for climate/pollution programs). Either way, the government imposes a cap on the total emissions, and ideally slowly reduces that cap every year. The buying & selling of credits doesn’t change the total emissions, it just makes their use more money-efficient.
Basically each carbon credit allows a company to emit a certain amount of carbon dioxide, which is created during manufacturing of things, producing electricity, etc. Every company gets a certain amount of them. If they need emit less carbon dioxide then they have carbon credits for, then they can make money by selling them to another company, which for whatever reason needs to emit more carbon dioxide.
They are sold like stocks on a market.
The idea behind is that you reduce the amount of carbon credits every year and therefore the amount of carbon dioxide, which contributes to climate change. Companies get an incentive to produce less carbon dioxide, as it rewards them with money (or punishes them with additional costs, when producing too much carbon dioxide).
Basically it tries to use market mechanisms to help reducing carbon dioxide, and climate change.
The concept of carbon credits is the same economies of scale thing.
Think of it this way: You run a sandwich shop. You bake your own bread and slice your own deli meats. But you don’t butcher your own cows — you just buy something processed at much larger scale that makes it more affordable.
Something done is similar with Carbon Neutrality. The concept of Carbon Neutrality is that you’re doing as much to reduce CO2 emissions as you’re producing. But rather than actually take actions to reduce CO2 at your own scale, another company does *a lot* to reduce CO2 emissions, and they sell that CO2 reduction as a product.
Of course, there’s a whole bunch of bullshit around it. For example, companies somehow “prevent” areas from being deforested, but those areas weren’t being planned for deforestation, or some logging company just chopped down a different forest instead.
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