Carbon credits are financial incentives provided to industries/organizations that fulfill their commitment towards carbon emission reduction. This is a mechanism under CDM of Kyoto protocol.
Carbon credits are the means of mitigating the increase in concentration of greenhouse gases in the atmosphere. One carbon credit is equivalent to one ton of carbon dioxide or its equivalent gases. There are four types of carbon credits:
· CER - Certified Emission Reduction
· EUA – European Union Allowance
· ERU – Emission Reduction Units
· VER – Verified Emission ReductionCarbon credits can be traded on the spot markets like any other stocks, over the counter or privately as well. The largest spot market is European Climate Exchange (ECX) and the Chicago Climate Exchange (CCX) in the USA.