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Fossil fuels have been extensively used as the basic source of energy for many decades now in all types of industries as well as for personal use. However, fossil fuels give out hazardous greenhouse gases like methane and carbon dioxide, which cause great damage to the environment. High accumulation of these greenhouse gases in the air is leading to global warming, with serious damage to the planet.

With an aim of decreasing the emissions and safeguarding the planet, the concept of carbon credits was brought into existence. The famous Kyoto protocol witnessed over 170 participants agreeing to fix standard limits on greenhouse gas emissions in their respective nations in a phased manner. The nation’s administration then uses the set limits and prescribes quotas to manufacturing units, identifying the amount of emissions they are allowed to make.

In the carbon credits system, the manufacturing units that emit greenhouse gases more than the prescribed quota are penalized while those producing less are rewarded. One carbon credit is equal to one ton of carbon dioxide released into the environment. Under this concept, manufacturing companies have to buy an exact amount of carbon credits from the global trading market if their emissions are higher than the quota, while those firms that are under their emission quota can sell a corresponding amount of carbon credits.

Such carbon credits trading motivate lesser emissions and thereby decrease uncontrolled emissions of greenhouse gases in the environment. Companies are required to pay for their adverse impact on the environment under the carbon credits policy, and this now has a huge impact on their financial results. Therefore companies are striving to keep their emissions within prescribed limits and adopt eco-friendly industrial options.

Another financial instrument called carbon offset credit has also been created with almost the same objective in mind. One carbon offset stands for the reduction of one metric ton of carbon dioxide or a corresponding quantity in other greenhouse gases. The reduction is usually attained by using cleaner and renewable forms of energy such as tidal and wind energy.

A carbon offset is bought by companies or other organizations to offset the emissions that exceed their allocated quotas as per the defined regulations. Individuals, governments and companies can all buy it voluntarily as well to balance their carbon footprint. Hence, they are able to support and fund the decrease in greenhouse gases and to encourage sustainable forms of energy generation.