Zoe Chafe and Hilary French

In financial capitals across the world, brokers are hard at work trading a key commodity of the twenty-first century: carbon credits. These are allowances or offsets that represent a quantity of carbon dioxide (CO2) or other greenhouse gas (GHG) measured in tons of carbon dioxide equivalent.1

Regions, countries, and states are setting limits or caps on the amount of greenhouse gas that can be emitted each year—limits that are typically passed on to large emitters such as power plants and factories in certain industries. If these plants reduce their emissions— by installing low-carbon technologies or improving the energy efficiency of their production processes, for example—and emit less than their allowed limit under the cap, the companies can sell unused allowances to utilities or companies that are emitting more gas than legally allowed. The effect is to put a price tag on greenhouse gas emissions—and to create an economic incentive to look for ways to reduce them.

The platforms for exchanging such credits are part of a rapidly growing global carbon market. They take several forms, including cap-and-trade systems in countries meeting Kyoto Protocol emissions targets and credit exchanges for energy-related industries. Recent years have also seen the rapid growth of voluntary carbon markets, in which individuals, businesses, and communities invest in projects that offset their emissions.

There is little question that carbon markets are here to stay: some analysts project that they will constitute the world's largest commodity market in the years ahead. But carbon markets are in their infancy. There are major challenges, such as adequately addressing verification, certification, and monitoring. And these markets must be scaled up substantially if they are to significantly decrease the concentration of greenhouse gases in Earth's atmosphere. Despite the remaining hurdles, today's burgeoning efforts by businesses, governments, and individuals to reduce carbon emissions and exchange credits are critical first steps toward ensuring that future generations inherit something priceless: a stable climate.2


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