Carbon Credit

DEFINITION of 'Carbon Credit'

A permit that allows the holder to emit one ton of carbon dioxide. Credits are awarded to countries or groups that have reduced their green house gases below their emission quota. Carbon credits can be traded in the international market at their current market price.

BREAKING DOWN 'Carbon Credit'

The carbon credit system was ratified in conjunction with the Kyoto Protocol. Its goal is to stop the increase of carbon dioxide emissions.

For example, if an environmentalist group plants enough trees to reduce emissions by one ton, the group will be awarded a credit. If a steel producer has an emissions quota of 10 tons, but is expecting to produce 11 tons, it could purchase this carbon credit from the environmental group. The carbon credit system looks to reduce emissions by having countries honor their emission quotas and offer incentives for being below them.

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