🏭History of carbon credits
With no law or governing body restricting the industrialized countries on the amount of carbon dioxide emissions from their industries, it became critical for the developed countries in the fight against climate change to decarbonize and reduce the emission levels urgently. However, with time running out and with no advanced technology to do so quickly, the United Nations along with the EU came up with a solution - Kyoto Protocol.
Kyoto Protocol
The idea of applying a cap-and-trade solution to carbon emissions originated with the 'Kyoto Protocol', a United Nations treaty to mitigate climate change, adopted in Kyoto, Japan in 1997.
The Kyoto Protocol mandated that industrialized nations reduce their carbon emissions at a time when the threat of global warming was growing rapidly.
Countries that signed up for the Kyoto Protocol were assigned maximum carbon emission levels for specific periods and participated in carbon trading. If a country emitted more than its assigned limit, then it would be penalized by receiving a lower emissions limit in the following period.
Even though the 36 developed countries reduced their emissions, the global emissions increased by 32% from 1990 to 2010, according to The Emissions Gap Report 2012 United Nations Environment Programme.
Paris Climate Agreement
Paris Climate Agreement or COP21, an international treaty adopted in December 2015, aimed to improve upon and replace the Kyoto Protocol.
The Paris Agreement entered into force on November 4, 2016, and has been signed by 196 countries.
The Paris agreement resulted in the rapid growth of the carbon market as it binds all the 196 nations into a common cause to combat climate change.
In the more recent Paris Protocol, a target of Net-zero carbon emission was set for zero thus leading to a more active carbon credit market.
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