Primarily four:

1.EUAs – European Union Allowances are issued freely by the EU for several years at one go, for use within the Emission Trading Scheme (EU ETS). The ETS second phase began Jan 1 2008 and ends Dec 31 2012. All second phase EUA must be used within that period.

2.CERs – Certified Emission Reductions are issued by the UNFCCC for demonstrable reductions of greenhouse gas emissions in Clean Development Mechanism (CDM) Projects under Article 12 of the Kyoto Protocol.

3.ERUs – Emission Reduction Units are credits created under Article 6 of the Kyoto Protocol, Joint Implementation (JI).

4.VERs – Verified Emission Reductions are issued by independent bodies for demonstrable reductions of greenhouse gas emissions in projects that, for what ever reason, fall outside of the CDM. Their standards may be just as strict (such as with the Voluntary Carbon Standard (VCS) Gold Standard), or not as stringent. However the market will generally reflect a poorer price for a VER that has been issued to a low or difficult to verify standard.

The Kyoto Protocol established that as each country produces CO2, it must be must be able to contain that output by planting trees or other methods of CO2 absorption (changing farming practices). Trees naturally absorb the greenhouse gas, so more trees means less pollution in our atmosphere. If a country cannot plant more trees, then it must reduce the amount of emissions in the first place. However, if a nation cannot perform any of these mitigating measures it can purchase “absorption ability” from other nations – which is where the Carbon Credits come in.

A carbon credit is a new currency equal to one Tonne of CO2 (measurements called CO2 equivalents or CO2e). A nation might have trouble absorbing a million Tonnes of CO2, so they must purchase these from another nation that has been planting trees, etc. The cost of credits can range from $10-$40 US. (Ironically, the US did not enter the Kyoto Protocol because of relations with China and India. However, California, Illinois and certain businesses have sought personal involvement in Carbon Credits). Theoretically, this model would set a limit for all emissions produced worldly and nations would have to buy or sell Carbon Credits to justify that limit.

The advantages of Carbon Credits are that they level the playing field for many nations. In some locations, limiting the amount of emissions can be very expensive and unrealistic. Rather than putting their country in debt, they can purchase credits from a nation that hasn’t reached their quota yet. This can also be a disadvantage in that it promotes a mentality of buying credits rather than fixing the pollution problem.

Lacking regulations also proves to be a problem for carbon credits. Since there is no governmental regulation that defines “carbon neutral”, many companies can claim that title without actually being neutral. This also lets some companies claim to invest in “environmentally-sound” projects, which may have questionable practices.
 

Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. Emissions become an internal cost of doing business and are visible on the balance sheet alongside raw materials and other liabilities or assets.

For example, consider a business that owns a factory putting out 100,000 tonnes of greenhouse gas emissions in a year. Its government is an Annex I country that enacts a law to limit the emissions that the business can produce. So the factory is given a quota of say 80,000 tonnes per year. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess. After costing up alternatives the business may decide that it is uneconomical or infeasible to invest in new machinery for that year. Instead it may choose to buy carbon credits on the open market from organizations that have been approved as being able to sell legitimate carbon credits.

We should consider the impact of manufacturing alternative energy sources. For example, the energy consumed and the Carbon emitted in the manufacture and transportation of a large wind turbine would prohibit a credit being issued for a predetermined period of time.

One seller might be a company that will offer to offset emissions through a project in the developing world, such as recovering methane from a swine farm to feed a power station that previously would use fossil fuel. So although the factory continues to emit gases, it would pay another group to reduce the equivalent of 20,000 tonnes of carbon dioxide emissions from the atmosphere for that year.

Another seller may have already invested in new low-emission machinery and have a surplus of allowances as a result. The factory could make up for its emissions by buying 20,000 tonnes of allowances from them. The cost of the seller’s new machinery would be subsidized by the sale of allowances. Both the buyer and the seller would submit accounts for their emissions to prove that their allowances were met correctly.
 

A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or carbon dioxide equivalent (CO2-e).

Carbon credits and carbon markets are a component of national and international attempts to mitigate the growth in concentrations of greenhouse gases (GHGs). One carbon credit is equal to one ton of carbon dioxide, or in some markets, carbon dioxide equivalent gases. Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources. The goal is to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is no cost to emitting carbon dioxide and other GHGs into the atmosphere. Since GHG mitigation projects generate credits, this approach can be used to finance carbon reduction schemes between trading partners and around the world.

There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously validated Clean Development Mechanism.