Carbon Credit- Carbon Credits Trading, Carbon Market & Types | UPSC Notes

By Durga Prashanna Mishra|Updated : December 16th, 2022

Carbon Credit focuses on reducing greenhouse gas emissions into the environment. A Carbon Credit is a tradable certificate or tradable permit that allows the holder of the credit the right to emit 1 ton of carbon dioxide or other greenhouse gases of the same amount. It is an offset for producers of such greenhouse gases. The main goal of Carbon Credit is to reduce the emission of carbon dioxide and other greenhouse gases that contribute highly to global warming.

Having in-depth knowledge of Carbon Credit is definitely an advantage for all the UPSC aspirants out there. That is why we have created UPSC notes for Carbon Credit that would help aspirants immensely in their preparation. 

Table of Content

What is Carbon Credit?

A Carbon Credit is a tradeable certificate or permit that gives the holder power to emit carbon dioxide or other greenhouse gases over a certain period. 

  • These Carbon Credits are generated from projects around the world that keep the Greenhouse Gases (GHGs) altogether.
  • Carbon credits are basically market mechanisms for the reduction of greenhouse gas emissions and slowing down climate change.
  • Regulatory bodies or governments set caps on the emission of greenhouse gasses. But for some companies, a sudden reduction in emissions is not viable financially. therefore they can purchase the carbon.
  • Companies that are able to reduce the emission of greenhouse gases are usually credited with Carbon Credits.
  • The sale of credits surpluses may be used for subsidizing the projects that would help the reduction of greenhouse gas emissions.

How Carbon Credit Works?

The main motive of Carbon Credit is to reduce the emission of greenhouse gases so that the climate change can be slowed down.

  • Carbon Credit allows the emission of greenhouse gases equivalent to one ton of carbon dioxide.
  • With this process, the nations can allot a certain number of carbon credits, and they can trade them.
  • It would help to restore the balance of worldwide emissions of greenhouse gases.
  • The intention is to reduce the number of Carbon Credits with time. It would allow companies across the globe to figure out innovative ways to reduce greenhouse gases on their own.

Types of Carbon Credits

There are two types of Carbon Credits.

  • Voluntary emissions reduction (VER): A carbon offset that is exchanged involuntary market for credits.
  • Certified emissions reduction (CER): credits created through a regulatory framework with an aim of offsetting emissions from a project.

Carbon Trading (Carbon Credit Trading)

Carbon Credits can also be traded on both public and private markets. The current rules of training allow the international transfer of credits as well.

  • The prices of Carbon Credits depend on the levels of demand of supply in the markets. So the price fluctuates on the supply and demand in different countries.
  • Carbon Credits have proven beneficial to society. However, it is not easy for the average investor to start using credits as an investment vehicle.
  • Certified Emissions Reductions are the only product that can be used as investments in credits. However, the CERs(Certified Emissions Reductions) are sold by special carbon funds, which have been established by big financial institutions.
  • The carbon funds give an opportunity for small investors to enter the market.

Carbon Markets for Caron Credits

Carbon markets allow for the selling and buying of carbon emissions with the objective of reduction of global emissions of greenhouse gases. Let’s see how the process of buying Carbon Credit works.

  • Carbon markets can reduce the emissions reduction over and above what the countries are doing on their own. It can be explained with an example. The emission of greenhouse gases in a factory in India can be achieved in two ways.
  1.  A country that hasn’t been able to reduce emissions can provide technology or financial support to that factory in India to claim the reduction of emissions as its own.
  2.  on the other way, that factory in India can make investments and offer sales of emission reduction which is called Carbon Credits. So other parties that are struggling to meet their target can purchase these Carbon Credits and show these as their own.

Carbon Credit Initiatives Worldwide

In 1997, the UN came up with a Carbon Credit proposal to reduce carbon emissions into the atmosphere. It is also known as Kyoto Protocol. This agreement implemented a limit on emissions for the countries who signed it. The Kyoto Protocol divided the nations into two parts- Developing & industrialized economies. In 2012 the first commitment period of the Kyoto Protocol ended. 

Carbon Credit Market under the Paris Agreement

At first, the carbon markets existed under the Kyoto Protocol, but it was replaced by the Paris Agreement in 2020. However, there is a difference between the Kyto Protocol and Paris Agreement.

  • Article 6 of the Paris Agreement describes the provision related to setting up a new carbon market.
  • Article 6.2 allows bilateral arrangements for the transfer of emissions reductions.
  • Article 6.4 of the Paris Agreement is about a wider carbon market in which reductions can be bought and sold by anyone.
  • Article 6.8 talks about the non-market approaches available to countries to achieve targets.

Carbon Credit UPSC

As we have mentioned above, Carbon Credit is an important topic from the UPSC Exam perspective. There is a high chance that the questions from this topic will be asked in both UPSC Prelims and UPSC Mains exams. In that can, candidates must refer to the Carbon Credit UPSC notes that would help them during the preparation. Additionally, they must choose the right UPSC Books to level up their preparation. To make it easier, we have provided the PDF file of Carbon Credits UPSC notes as well.

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FAQs on Carbon Credit UPSC

  • Carbon Credits are tradable certificates that permit the right to emit one ton of greenhouse gas. Carbon Credits are also awarded to the countries that have successfully reduced their greenhouse gas below their given quota.

    Carbon Credit - Download Notes

  • The Carbon Credits are verifiable, measurable, emission reductions from the certified action projects for the climate. These projects aim to reduce greenhouse gas emissions.

  • Currently, most prices of Carbon Credits are below $40-80 per metric ton of CO2 emitted needed to keep global warming within 2-point degrees. It is provided under the Paris Agreement.

  • The Carbon Credits are bought on a voluntary basis by companies or countries interested in reducing their carbon footprint. The Kyoto Protocol divides the countries into two groups based on the level of economy-Developing and Industrialized.

  • India is one of the fastest-growing markets in the world, generating approximately 30 million Carbon Credits. This is the second-highest transacted volume in the world.

  • Carbon Credit limits the emission of one ton of carbon dioxide or other greenhouse gases with a carbon dioxide equivalent corresponding to 1 ton of carbon dioxide that is responsible for climate change. 

  • One Carbon Credit equals 1 ton of carbon dioxide or carbon dioxide equivalent gases. Or Carbon Credit represents the ownership of 1 metric ton of carbon dioxide or other greenhouse gases that can be sold or traded.

  • The Carbon Credit started in 1997 as a part of the 1997 UN Kyoto Protocol. It was the first international agreement that decided to cut the emission of CO2.

  • The Carbon Credits can be bought in various ways, such as buying Carbon Credits from the developers directly or purchasing them through a broker, or at a Carbon credit marketplace. 

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