Commercial and personal use of fossil fuels to create energy has been prevalent for many decades around the world. However, release of greenhouse gases like methane and CO2 is caused by fossil fuels, which is quite hazardous for the environment. High accumulation of these greenhouse gases in the air is causing the phenomenon of global warming, with serious repercussions for the planet.

With an aim of decreasing the emissions and protecting the environment, the concept of carbon credits was introduced. More than 170 nations had decided through the Kyoto protocol to set limits on greenhouse gas emissions across the globe in a pact four years back. The set limits are then utilized by the country’s government for allocating quotas to different industrial and commercial units of how much emission they are permitted.

In order to reward industries and other entities for emitting lower than the quota and to penalize those who emit more, the idea of carbon credits was brought into the picture. One carbon credit is equal to one ton of carbon dioxide emission into the environment. Under the arrangement, the units which emit more have to purchase an equal amount of carbon credits for excess emissions from the global trading market and entities that are under the prescribed emission levels can sell a corresponding amount of carbon credits for the disparity between their allotments and there emissions.

Such global trading of carbon credits is aimed at regulating the overall amount of emissions of greenhouse gases in the atmosphere by incentivizing lesser emissions by industrial entities. The market of carbon credits has made companies make good their emissions, and it now has a direct impact on the firm’s financial statement. Companies have therefore woken up to the necessity of cutting down their emissions and find environment friendly business options.

Another financial tool called carbon offset credit has also been created with a similar objective in mind. A carbon offset credit is equal to one metric ton of CO2 or corresponding greenhouse gas reduction in the air. The reduction is most of the times achieved by making use of cleaner and renewable forms of energy such as solar and wind energy.

Like carbon credits, a carbon offset is purchased to make up for the emissions that are beyond the prescribed limits for a company so that it is able to conform to the emission regulations. Individuals, governments and companies can all purchase it voluntarily as well to balance their carbon footprint. This helps in promoting and funding reduction in emissions and furthering eco-friendly efforts of generation of energy.

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