Carbon credits. Man-made climate change advocates call them a way to make your green peace with the environment. Skeptics say they\'re a sop for wealthy, guilt-ridden greenies at best - and potentially fraudulent, at worst.

No matter what you think, these credits are probably here to stay. Read on as we cover this new market and what green investors should consider.

Paying for Pollution
Sometimes known as carbon "offsets", carbon credits are financial mechanisms that enable buyers to pay a third party to remove a quantity of carbon (in the form of a greenhouse gas) equivalent to what the buyer emits - in essence, neutralizing their own emissions.

Carbon credits are a burgeoning environmental and economic trend, particularly in the business world. In the U.S., carbon offset volumes, as measured by metric tonnage, grew by 100% from 2005 to 2006, and are expected to double again in 2007. An October 2006 study by the Conference Board reported that 75% of companies polled said they were "actively computing" their carbon footprints, while only 15% of the companies surveyed were actively engaged in carbon trading and 40% were considering it.

The Carbon Trading Markets
By and large, there are two types of carbon credit markets, one operating overseas and the other emerging in the United States.

Cap and Trade
In 1997, the U.S. Senate voted 97-0 to reject the Kyoto Protocol, which sets limits on the amount of greenhouse gases a country could release into the environment. Countries that did pass the Kyoto treaty now have set caps on greenhouse gas emissions. If a country emits less greenhouse gases than the cap calls for, it receives carbon credits that it can turn around and sell on worldwide carbon exchanges. If the country exceeds the Kyoto caps, it must buy credits to offset its extra energy use. The price of the carbon credits is set by the market.

Elective Carbon Credits
The U.S. has a voluntary carbon credit market, where companies and some individuals can buy carbon credits as offsets to the amount of energy they use. Thus, a well-traveled executive can offset the use of his gas-guzzling private jet by buying enough carbon credits to cover the environmental cost of the greenhouse gases emitted from his airborne travels, effectively making his impact on the environment negligible.

The Case for Carbon Credits
By paying a third party to remove a quantity of carbon from the environment, consumers can, in theory, achieve carbon "neutrality".

The very existence of the carbon offset market, its fast rate of growth and the amount of media attention the market has received, has raised the visibility of the climate change issue. In a politically-charged environment, carbon trading is the most prominent agent of change on the global warming landscape. Corporations are leading the charge. Companies like Expedia (Nasdaq:EXPE), Orbitz (NYSE:OWW), HSBC Bank (NYSE:HBC) and Google (Nasdaq:GOOG) all have carbon trading programs up and running. Many more are in the pipeline.

It\'s Good Business
In the corporate sector, where most of the carbon trading activity is taking place, carbon offsets can be an attractive option, both fiscally and socially. Through efforts to better manage their greenhouse gas emissions, corporations can be rewarded by reduced costs through energy efficiency, superior brand positioning and public relations through carbon neutrality, and energized employees who support climate change initiatives. (To learn more about how going green affects companies, read For Companies, Green Is The New Black and The Green Marketing Machine.)

The Case Against Carbon Credits
No Measurement Benchmarks
One issue that has yet to be resolved in the carbon offset world is benchmarking, or establishing a certification or monitoring process that quantifies the real value of carbon trading programs. International standards bodies like the United Nations and global warming advocacy groups are trying to set up a system in which carbon credit buyers know that their investments are producing measurable results. For now, there is no uniform way to see that carbon credit companies are doing what they promise.

Distraction - Or Worse?
On one hand, the increased visibility of climate change as an issue is a boon to carbon credit supporters. On the other, it could also be a serious distraction - or even an impediment - to fighting global warming. If consumers surmise that they can pollute all they want, and have their polluting ways "forgiven" through carbon offsets, emissions could become a larger problem. (For related reading, see What Does It Mean To Be Green?)

Class Warfare
Carbon trading may make sense for some consumers, but they\'d have to be deep-pocketed ones. Currently, most carbon offset programs are skewed to corporate interests and to the wealthy. If a dockworker in Philadelphia wants to plant a tree in Uganda, the paperwork alone runs into the hundreds, if not thousands, of dollars. For working families, that\'s generally not an option.

Carbon Sham
One major concern that has come out of carbon credits, especially on the elective side, is the advent of carbon scams in which carbon credits are sold but no carbon reducing action is actually made. While increased regulation in this area will help, it is the ultimate responsibility of the purchaser to ensure that what is being promised is actually delivered.

Carbon Credits - Guidelines
The environmental group Clean Air Cool Planet has published a A Consumer\'s Guide to Retail Carbon Offset Providers. Inside, the group lists key questions potential carbon credit buyers should ask a carbon credit provider:
  • Do your offsets result from specific projects?
  • Do you use an objective standard to ensure the additionality and quality of the offsets you sell?
  • How do you demonstrate that the projects in your portfolio would not have happened without the greenhouse gas offset market?
  • Have your offsets been validated against a third-party standard by a credible source?
  • Do you sell offsets that will actually accrue in the future? If so, how long into the future, and can you explain why you need to "forward sell" the offsets?
  • Can you demonstrate that your offsets are not sold to multiple buyers?
  • What are you doing to educate your buyers about climate change and the need for climate change policy?

While many experts agree that putting a price on the cost of carbon is good, the need for having consumers and corporations trade potentially harmful environmental practices for carbon offsets is debatable. However, whichever side you are on, carbon credits offer a way in which individuals and businesses can reduce their footprint on the environment.

Related Articles
  1. Economics

    What Countries Spend On Antiterrorism

    It would be an understatement to say that no country's anti-terrorism budget has decreased in the last two decades. Here are some hard numbers.
  2. Economics

    Don't Hide From The Reality Of How Terrorism Affects The Economy

    After major terror attacks, most people don't want to think about economics. But the post-terror economy affects the lives of the whole world, so it's important to be knowledgeable.
  3. Economics

    What is Deadweight Loss?

    Deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
  4. Stock Analysis

    In Focus: Water Scarcity

    After a discussion, sponsored by CDP, we share the importance of water disclosure as it relates to businesses operating amid increasing water scarcity.
  5. Active Trading Fundamentals

    Why Rational Ignorance About Your Investments Might Really Be OK

    It's impossible to know everything about the markets. Find out how ignorance affects your investments.
  6. Professionals

    Tim Cook Leads Apple Into A Record-Breaking 2015

    Understand the differences between Tim Cook and Steve Jobs. Learn if the perceived differences makes Cook a good or bad leader and CEO.
  7. Economics

    How Globalization Affects Developed Countries

    Globalization is the process of expanding business operations on a worldwide level. It’s easier than ever for companies to compete on the global market.
  8. Economics

    Explaining the Coase Theorem

    The Coase theorem states when there are competitive markets and no transaction costs, bargaining will lead to a mutually beneficial outcome.
  9. Stock Analysis

    Top 10 Companies Owned by Amazon

    Learn about what has made Amazon so successful over the years. Learn about 10 of the most important companies that Amazon has acquired.
  10. Economics

    4 Of the World’s Oldest Companies

    What enables a company to withstand the tests of time? Here’s a look at four of the world’s oldest businesses.
  1. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  2. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  3. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  4. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  5. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>
  6. What is a negative write-off?

    A negative write-off is a write-off conducted by a company or accountant after deciding not to pay back an individual or ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center