Carbon credits are intended to help the environment by putting a number on the amount of pollution that is acceptable for a company to produce. This volume of pollution is considered to be a fungible credit, it is an abstract number that can be moved around wherever it needs to go. For example, if a company is given 10 carbon credits, but only generates 8 credits worth of pollution it can sell the remaining 2 credits to another polluter who is going to pollute more than their allowed amount of carbon credits. The idea is that if a company pollutes more than their allowed carbon credits they will be punished severely enough to keep them from continuing to pollute.
Ultimately the way carbon credits helps the environment is that the total number that are given out to industry is low enough so that if industry does restrict their output of green house gasses, the amount of carbon in the atmosphere would decrease. Forcing companies to pay for polluting beyond the credits available to them should also provide incentive for innovation in technology that can be used to prevent or reduce their environmental impact.
Carbon credits can, however, harm the environment. Critics say one of the biggest uses of credits, offsetting, is vulnerable to manipulation and fraud. Offesetting is when credits are given to polluters because they have paid for things that remove carbon from the atmosphere, such as forests, or to prevent projects that would increase the amount of green house gasses. The fear is that companies will be provided additional licence to pollute while what they claim to be offsets do not really compensate for the increased pollution.
Another problem with the carbon credit system currently under consideration in the US is that the market where credits would be traded between companies would also be vulnerable to market imperfections and manipulation by investors.
Finally, critics are also concerned that carbon credits leave the ultimate responsibility to reduce pollution up to the companies that pollute, potentially undermining the effectiveness of such a system.
Carbon credits are a major focus of current US climate legislation. If it does not achieve the goal of reducing green house gas emissions to levels which will mitigate the effects of climate change valuable time will have been lost reversing the harms which are occurring right now and will continue to increase in magnitude if we do not meet the challenge global warming represents.
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