Understanding Carbon Credits and Offsets

What are Carbon Credits?

Carbon credits are marketable permits that each reflect one metric ton of carbon dioxide (CO₂) emissions (or other greenhouse gases) that a business is allowed to emit. Carbon credits are commonly used in the context of emissions trading in which companies are given a fixed amount of credits depending on their emissions. They can later purchase more credits or sell their extra.

What are Carbon Offsets?

Carbon offsets are typically created when companies or individuals finance projects that reduce greenhouse gas emissions elsewhere. Projects to reduce carbon often fall into one of two categories: mechanical or natural. Reforestation and wetland restoration activities are examples of solutions that "naturally" collect carbon in the environment. Mechanical solutions include investments in new technology that result in higher efficiency or lower emissions, like renewable energy projects or direct carbon capture technologies.

What's the Difference?

Carbon offsets can be considered a measurement unit to "compensate" a business for investing in green projects or initiatives (whether natural or mechanical) that eliminate emissions. Carbon credits are a measurement unit to "cap" emissions (meaning permitted emissions).

Once an offset has been produced, it can either be kept by the company that carried out the project or traded on a voluntary carbon market.

How are Carbon Credits Bought and Sold?

These credits only exist where a "cap-and-trade" system is used. A cap-and-trade system establishes a cap on maximum emissions in order to reduce aggregate emissions from a group of emitters. This market-based approach promotes lower pollutant emissions and promote investment in energy efficiency and fossil fuel alternatives.

How are Carbon Offsets Bought and Sold?

As compared to carbon credits that are bought and sold via a cap-and-trade system, carbon offsets are traded on a voluntary market. It includes all businesses and people who aim to decrease their carbon footprint. There are no regulations governing voluntary market participation. Participants purchase carbon offsets to achieve internal carbon emission goals.

However, this absence of control does not imply that offsets bought via this market do not adhere to specific requirements. Organizations are encouraged to invest in approved programs in order to demonstrate their environmental credentials and avoid charges of "greenwashing," which involves making false environmental claims to promote brand image.

Programs like the Verified Carbon Standard or the Gold Standard set industry standards. These programs outline criteria that offsets should achieve in order to get certification. Projects are then examined and accredited in accordance with their standards.

Conclusion

Overall, carbon credits and carbon offsets are both important tools for reducing emissions. Businesses can use these tools to reduce their emissions while also receiving a financial benefit in return.