1/ What are carbon credits?
Carbon credits, in English, are referred to as ‘carbon credits’. They are licenses or certificates that permit their holders, such as companies, to emit CO2 or other greenhouse gases, with each credit restricting emissions to one tonne of CO2. The ultimate aim of carbon credits is to decrease greenhouse gas emissions into the atmosphere.
A carbon credit is essentially a permit issued by a government or regulatory agency that allows its holder to burn a specific amount of hydrocarbon fuel for a specified time period.
Each carbon credit is valued at one ton of hydrocarbon fuel. Companies or countries are allocated a certain number of credits and can exchange them to help balance total emissions worldwide. The United Nations notes that since CO2 is the primary greenhouse gas, individuals frequently refer to it as carbon trading.
2/ Why was the carbon credit born?
The goal of carbon certification is to reduce global pollution and halt global warming. To achieve this goal, the Intergovernmental Panel on Climate Change and other organizations have proposed a mechanism to make companies that emit a lot of greenhouse gases pay for their pollution. Vice versa, other facilities and companies that contribute to reducing pollution through ecological activities such as afforestation and clean technology development can profit from their work by proving that they have reduced their carbon footprint.
In 1997, the Kyoto Protocol was introduced, which set binding emission reduction targets for signatories. The protocol entered into force in 2005. Another agreement, the Marrakesh Agreement, lays out rules for system implementation. Countries are encouraged to achieve their targets through an emissions trading mechanism.
The first commitment period of the Kyoto Protocol ended in 2012, and the protocol was revised that year in an agreement known as the Doha Amendment, but it has yet to be ratified. Meanwhile, more than 170 countries have signed the 2015 Paris Agreement, which also sets emissions standards and allows for emissions trading.
The 2021 United Nations Climate Change Conference, better known by its abbreviation COP26, was held at the SEC Center in Glasgow. It reached major agreements on reducing polluting activities, restoring afforestation, and providing direct funding to developing countries to reduce polluting emissions. However, at this conference, the issue of carbon credits (CO2 Credits) was still only discussed in terms of encouraging and funding developing countries to take measures to reduce carbon emissions. There is no clear mechanism for how these countries will derive tangible benefits from reducing carbon emissions.
The reason carbon credits have not been widely adopted in developing countries is that currently, the main source of CO2 pollution still comes from large industries in major powers such as the US, Western Europe, and China. The market for carbon credits is developing rapidly in European and American countries, and trading of carbon credits is public.
Examples of buying and selling carbon credits can be as follows:
Assuming that Industry Corporation A has a limit of 10 tons but generates 12 tons of emissions, while Company B also has a 10-ton distribution limit but only emits 8 tons, resulting in a surplus of 2 credits. Company A can purchase additional credits only from Company B to comply with environmental regulations.
If it fails to purchase those carbon credits, company A will face penalties. However, if the price of the credits exceeds the government penalty, some companies may choose to accept the penalties and continue operating normally.
By increasing fines, regulators can make credit trading more attractive. They can also reduce the number of credits issued each year, making the credits more valuable in the emissions trading market and providing an incentive for companies to invest in clean technology, which becomes cheaper than buying carbon credits or paying fines.
To better understand why it is necessary to operate a carbon credit market (CO2 Credit) and how Vietnam can benefit from it, please refer to Part 2: The Future of the Global and Vietnamese Carbon Credit Market. How should Vietnam participate in this carbon market?
