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Carbon Credit Trading

CarbonEmissionMap_2009Carbon credits or Certified Emission Reductions (CERs) are certificates issued to an agent that has reduced its emission of greenhouse gases (GHGs).

By convention, a ton of carbon dioxide (CO2) corresponds to a carbon credit. This credit can be traded in the international market. Reducing the emission of other gases, also generators of greenhouse gases, can also be converted into carbon credits, using the concept of Carbon Equivalent.

Buy carbon credits on the market roughly corresponds to a buy permission to emit greenhouse gases. The price of this permission, traded on the market, must necessarily be less than the penalty that the issuer should pay to the government, issued by GHGs. For the issuer, buy carbon credits on the market means, in practice, get a discount on the fine due.

International agreements like the Kyoto Protocol determinate a maximum quota of greenhouse gases that developed countries can emit. The countries, in turn, create laws to restrict greenhouse gas emissions. Thus, those countries or industries that fail to achieve the goals of emission reductions, they become buyers of carbon credits. On the other hand, those industries that have successfully lowered their emissions below certain quotas, can sell at market prices, the surplus "emission reduction" or "permission issue" in national or international market.

Developed countries can encourage the reduction of emission of greenhouse gases (GHGs) in developing countries through the carbon market, when purchasing carbon credits from the latter.

Carbon trading and the Kyoto Protocol

Concern for the environment led the countries of the United Nations to sign an agreement establishing control over the human interventions in the climate. This agreement was born in December 1999 with the signing of the Kyoto Protocol. Thus, the Kyoto Protocol stipulates that developed country signatories reduce their emissions of greenhouse gases by 5.2% on average for the year 1990, between 2008 and 2012. This period is also known as the first commitment period. To avoid to jeopardizing the economies of those countries, the protocol established that some of this reduction can be done through negotiation with nations across the flexibility mechanisms.

One of the flexibility mechanisms is the Clean Development Mechanism (CDM). The carbon credits from CDM is called Certified Emission Reduction (CERs).

One CER represents one ton of carbon dioxide equivalent.

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