'Carbon credits' are traded in carbon markets in the global effort to reduce world pollution. Each carbon credit represents 1 tonne of CO2 which has been avoided or sequestered. It is bought by an entity wanting to reduce its carbon footprint, and it is sold to them by an entity implementing a project somewhere else that will reduce or capture carbon dioxide emissions.
Talking about carbon involves us in a complicated mix of science, economics, politics, business and the simple desire for a cleaner world. The important thing to know is that the mandatory and voluntary buying and selling of carbon credits collectively bring about the development and use of greener technology and the creation or preservation of native forests and other natural resources.
Forest Carbon develops voluntary woodland carbon sequestration schemes. When our clients pay for the planting of a certain area of new woodland they are in fact paying for the removal from the atmosphere of a certain number of 1-tonne units of CO2 (or in effect therefore buying a certain number of 'carbon credits'). These 'credits' are not traded further by our buyers, they are instead ‘retired’ (ie cancelled against the emissions the buyer was seeking to capture) and serve only to register the amount of CO2 removal a buyer has sponsored.
These are the mandatory credits. They are needed where the governments cap the carbon dioxide emissions of a particular group of carbon-heavy industries (e.g. oil refiners, paper mills,electricity generators, etc.) by allocating each company a set number of carbon credits to redeem against their emissions (sort of like a license). The number of credits they are allocated will be less than their expected need for those credits, and this will force them to reduce emissions and allow them to sell any leftover credits to those who have gone over their limits, or force them to buy credits if they go over their allocation. The idea is that the group of companies together meet the target of reducing emissions (because the whole group is issued fewer credits than the expected pooled emissions of the group), without anybody having to specify which individual businesses meet what targets. (See Glossary : 'Cap and Trade'.). In the explanation above we talk about companies, but this sort of carbon credit trading also applies to countries (those that signed up to the Kyoto Protocol).
It is also possible to generate compliance credits from outside the group of companies trading allocated credits, and sell them to these businesses or countries. In this case the project will go through a certification process that checks that it meets the standards for the particular compliance regime.
These are what Forest Carbon deal in and they're on the rise. Companies who aren't (yet) obliged by law to account for their CO2 emissions and don't have emissions reduction targets to meet will often go about reducing their emissions and 'offsetting' the balance anyway, motivated by a genuine collective concern for the environment. The credits that are traded here represent carbon captured from the atmosphere by new woodlands, and they are set against the emissions of a business.
Good quality voluntary credits will also go through independent verification of their claims (as Forest Carbon's do), and in reality many voluntary credits will be of as good a quality as compliance ones.