What does carbon credit trading mean? It’s complicated, but here’s an example that might help you understand the process.

Let’s say it’s your job to cook dinner for your family. The last time you cooked, you used up every pot, pan, and dish in the kitchen, and it took more than an hour to wash up afterward. Because the whole process used lots more time and work than necessary, the next time you cook dinner, you decide to organize your time and equipment so that you don’t have to use as much energy. Maybe instead of using a different bowl for every step in the cooking process, you only use one. Maybe you tidy up as you go, so you don’t have a big mess at the end. This is called improving your efficiency, and it not only saves you time, but it also saves labor and even soap and water since you aren’t washing as many dishes.

Improving efficiency is a basic principle in carbon credit trading, except that it applies to businesses. In a larger sense, carbon credit trading encourages businesses to improve their efficiency so that they don’t use up as much energy or as many resources when they’re making products or providing services. This helps clean up the environment and even save money in the long-term.

Businesses of all sizes are beginning to recognize the importance of using environmentally friendly practices, also called “green” practices. In order to reduce the environmental damage that could be done by performing their standard business operations, some organizations opt to invest in carbon credits.

What are carbon credits?

Inefficient businesses – especially those in the travel, manufacturing, agricultural, and energy sectors – tend to release large amounts of carbon dioxide or CO2. CO2 is a “greenhouse gas,” meaning that it keeps the planet warmer and contributes to climate change.

Carbon credits are permits – or rules – that help organizations become more efficient by only allowing them to release certain amounts of CO2 in the atmosphere, and no more. The purpose of this solution is to encourage organizations, over time, to reduce their total volume of greenhouse gas emissions. Once organizations successfully reduce the number of emissions their operations produce to significantly below the amounts allowed by their carbon credits, they have the option of selling their carbon credits to other companies. This is commonly known as “cap-and-trade.”

Sometimes businesses want to be even more environmentally friendly. In addition to participating in carbon credit trading, they can also support organizations that clean up the environment, or protect wildlife, or preserve forests. If they choose to help protect forests, they are supporting for-profit forestry.

For-profit forestry, when used with carbon credit trading, is a program that pays people who own forest land to protect their forests instead of using them as land exclusively for developing buildings, or farms, or logging. Because large forests with lots of grown trees help to remove CO2 and purify the air and water through photosynthesis, businesses can pay the owners of these forests to preserve them, helping to reduce the effects of the CO2 those businesses release. This is what is known as “carbon offsets.”

There are three types of for-profit forestry carbon offsets:

1. Afforestation. This strategy produces carbon offsets by reestablishing forests (planting trees), so landowners who already have thriving forests simply plant more trees.
2. Avoided Conversion. Landowners who were going to use their land for agricultural or development purposes instead convert their land back to forests.
3. Improved Forest Management. Some forests are maintained specifically to cut down trees for wood. Landowners with established forests used for harvesting trees for wood can opt to harvest only some of the trees and preserve the rest of their property as natural forest land.

For private landowners, the opportunity to make money on their existing and emerging forest growth is a great opportunity. However, the program requirements can make it difficult for landowners to participate. The requirements include:

• Making sure that the property is managed in an environmentally friendly fashion and getting a certificate from a forestry association.
• Documenting the number of trees on the property and giving estimates of how many new trees can be produced on a yearly basis.
• Promising to keep operating in an environmentally friendly way for up to 15 years.
• Giving yearly updates about any changes to the land from natural disasters – fires or droughts, for example – that caused the loss of trees.
• Writing a final inventory of all the trees when the contract expires.