As global warming becomes more and more of an increasingly important issue around the world, institutions have responded by allowing for carbon credits designed to encourage companies to reduce their carbon footprint. Just as in tax write offs or business grants, carbon credits work to repay companies for their carbon reduction efforts. These credits are intended to slow down global emissions growth and, presumably, global warming.

How Carbon Credits Work

Many countries in the world have limits to the amount of carbon they can emit in any given year. Other countries, such as the United States, do not have such limits and defining how much carbon a company can emit is left to organizations such as the Chicago Climate Exchange. If a company does not reach their carbon emission limit, they are left with a credit on these emissions, for example, 15 million metric tons.

On the other hand, if a company exceeds their carbon emission limit, they are left with a negative difference. If the company that exceeded their carbon emission limit purchases the 15 million metric tons from the company that came in under it, they can remain within the guidelines of their governing organization.

Why do Carbon Credits Matter?

In countries that do not cap carbon emissions, it might seem confusing why carbon emission credits are an issue. However, most analysts consider legislature in the United States, for example, to be inevitable. By setting voluntary caps now, companies will be more likely to be prepared to adhere to legal carbon emission caps in the future.