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What are Pollution Credits?

Mary McMahon
Updated Jun 04, 2024
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Pollution credits, also known as emissions trading, are a technique for dealing with pollution on an open market. In a system that uses a credits system, a government sets a cap on the total amount of emissions of a particular pollutant: for example, carbon dioxide. Credits are distributed to companies that emit carbon dioxide as part of their daily operations. If a company maximizes efficiency and does not use all of its credits, it can sell the credits to a company which is exceeding its number of credits. In this way, a total cap on emissions can be maintained, with heavily polluting companies essentially being fined while energy efficient ones are rewarded.

Many proponents of the free market economy point to pollution credits as an excellent way to deal with pollution, and in pilot programs all over the world, it has been shown to be very effective. It is also a more efficient system than one of government regulation; rather than trying to police every potentially polluting company, the government can focus on setting a cap and meeting that goal, hopefully reducing it over time as well. Periodic inspections of companies with pollution credits can ensure compliance, and many environmental organizations have volunteered to assist with this.

In addition to being used by manufacturers and large companies, pollution credits can also be used by consumers to offset their energy usage. Many consumers who are worried about climate change have chosen to buy credits in the form of carbon offsets. When consumers buy carbon offsets, they pay a company to use cleaner energy, plant trees, or invest in clean energy, offsetting their own generation of pollutants in cars and on aircraft. Essentially, a consumer can reduce his or her carbon emissions to “zero” by purchasing carbon offsets. Companies concerned about their environmental impact can also buy carbon offsets to reduce their net load of emissions.

Under the Kyoto Protocol, some nations are already engaging in trade of pollution credits all over the world. Unfortunately, since the United States is not a signatory, the trade of these credits is not nearly as effective as it could be, since the United States generates approximately 25% of pollution worldwide. Efforts within the United States to set and meet caps using pollution credits are currently only taking place on a small, local level, although there are signs that the idea is growing in popularity. In Europe, the trade of pollutions credits appears to be working in the short term, but critics are curious about long term trading, especially as the cap is lowered every year.

It is hoped that the use of pollution credits will help countries attain pollution goals. Once a nation manages to reach a regulated level of emissions, this level can be slowly reduced, encouraging companies to invest in cleaner energy and to decrease the amount of pollutants they create. While the process may be slow, it is hoped that the economic incentive provided by these credits will encourage companies to think ahead of the curve and reduce their energy usage now, as they will only become more profitable with time, when caps are lowered even further.

All Things Nature is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a All Things Nature researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By anon167346 — On Apr 12, 2011

If a company uses up all of its own credits, it purchases some from another company that doesn't use all of them.

Also, a company that uses a lot of credits will pay somebody to plant trees to offset some of their emissions. That is why they are called carbon offsets. Do something good for the environment to offset the bad.

By anon43956 — On Sep 03, 2009

What percent of the causes of global warming is attributable to man?

By ogclew — On Mar 18, 2008

Are there any loop holes, that companies can use to their advantage if they use up all their credits?

By anon2414 — On Jul 10, 2007

I wonder how individual investors can participate in pollution or emissions trading programs.

Are there funds in which one may buy shares?

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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