A carbon credit is a generic term for the right to emit one tonne of carbon dioxide or another similar greenhouse gas with a carbon dioxide equivalent (tCO2e) into the atmosphere. It has a monetary value, enabling emission reduction projects to be created as a result of the carbon credit market.
There are many companies that sell carbon credits to commercial and individual customers in a voluntary basis. These companies purchase credits from an investment fund or a carbon development company that has aggregated the credits from individual projects.
Voluntary Emission Reduction (VER) carbon credits are generated by projects verified by a third party company. So in this scheme individuals and companies can reduce their emissions in a more efficient and cost effective way. VER’s are subject to a high standard and emission reductions must be:
- Permanent and
- Independently verified
The following illustration clearly explains the mechanism of carbon credit trading market.
Here buyers and sellers can also use an exchange platform to trade, such as the Carbon Trade Exchange, which is like a stock exchange for carbon credits. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project.