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.