What is a carbon credit ?

A carbon credit is the environmental commodity exchanged in the carbon market.

What is a commodity? This financial term is used because it refers to a product whose value fluctuates over time depending on the standard of quality, according to the market trends. The commodities are generally traded on the spot or in a long term deal.  

 

Carbon credits are created by GHG emission reduction projects implemented by a company. Following the implementation of the project to reduce greenhouse gas emissions, the company must proceed to quantification.

The quantification is based on a recognized methodology and consists of comparing GHG emissions after the implementation of the project to the baseline scenario which represents the practice before the project existed. The difference in GHG emissions then represents the number of carbon credits.

Contrary to its name, carbon credits do not consider only carbon dioxide.

The Kyoto Protocol identifies six gases that are largely responsible for global warming. Each greenhouse gas emission is rated according to a conversion factor, also called index of global warming, to represent the potential of damaging the atmosphere, or carbon dioxide equivalence.

CO2 conversion table

Co2 conversio table

But there are other industrial gases harmful to the environment. For example, sulfur dioxide, responsible for acid rain gases is controlled outside of the carbon market.

Thus, each GHG is reported to the index of global warming :

1 ton of CO2e reduction. = 1 ton of carbon credit

A carbon credit is a unit equivalent to one tonne of CO2 equivalent.