Carbon Credits vs. Carbon Offsets

Carbon Credits vs. Carbon Offsets

Basically, both carbon credits and carbon offsets are accounting mechanisms. They provide a balance in the pollution balance sheet. The big idea behind the credits and offsets is that since CO2 is the same gas anywhere in the world, it doesn't matter where the emissions reductions take place. It makes financial sense for consumers and companies alike to reduce emissions where it is cheapest and easiest, even if it does not affect their own operations.

At its simplest level, a carbon credit or offset is a reduction or elimination of greenhouse gas (GHG) emissions that compensates for CO2 emitted elsewhere.
The instruments have two main features in common:
  • One carbon credit or offset is equivalent to one tonne of carbon dioxide emissions.
  • Once a carbon credit or offset has been purchased and CO2 emissions have occurred, the credit is "retired" and cannot be sold or reused.

What Are Carbon Credits?

Carbon credits are used to allow, or redeem, carbon emissions or greenhouse gas emissions for the company holding the credit.  One credit corresponds to one tonne of carbon dioxide to be emitted or, in the case of other gases, to the mass equivalent of carbon dioxide. Companies hold many credits, as many as they buy or create to offset their emissions.

How can carbon credits be created? Credits are created when a project is judged to have eliminated 1 tonne of greenhouse gas emissions. Planting a forest that removes 1 tonne of carbon emissions would be sufficient to generate a credit. However, credits are used up over time, which means that companies have to keep coming up with new ideas to eliminate emissions.

Many companies also specialise in trading and investing in credits. They buy credits from large companies and resell them to anyone who might need them. As the price of carbon dioxide keeps rising, so does the value of the credits.

What is a Carbon Offset?

In recent years, global climate change has led to growing interest in carbon offsetting as a way to reduce greenhouse gas emissions. Carbon offsetting is a way of offsetting carbon emissions generated by investing in projects that reduce emissions elsewhere.

Buying carbon offsets or credits is the right thing to do to help protect the environment. Offsetting is not simply taking action against global warming, it is an opportunity to participate in projects that have been created to address the problem. Carbon offsets can also have co-benefits such as job creation, water conservation, flood protection, biodiversity conservation and technology improvements. These projects generate credits, with a record 223 million credits generated in 2020. 

Carbon offsets are generated by developing projects that reduce greenhouse gas emissions or remove carbon from the atmosphere. One of the most common ways carbon offsets are renewable energy projects, such as wind or solar power plant investments. When you invest in these projects, you help reduce the amount of greenhouse gases emitted into the atmosphere, which in turn can help mitigate climate change.

Other carbon offsetting projects may include reforestation efforts, methane capture from landfills or investments to improve energy efficiency, as this allows the same activity to be carried out with less electricity. Part of the offset spending can also be used to develop forward-looking technologies to capture carbon and reduce emissions.

There are 2 main categories of carbon offset projects:
  • Avoidance/mitigation projects, such as renewable energy and methane capture.
  • Removal/sequestration projects such as afforestation and direct carbon capture

The basics of carbon offsetting and carbon credits

Although the terms "carbon credit" and "carbon offset" are often used interchangeably, they refer to two different products that serve two different purposes. Before purchasing either, it is important to understand the difference between the two and which one can help you achieve your goals. Here is a general definition of the terms:
  •     Carbon offsetting: the removal of greenhouse gases from the atmosphere.
  •     Carbon credit: Reducing greenhouse gas emissions to the atmosphere.
To illustrate the difference, imagine a water supply contaminated by a nearby chemical plant. A "chemical offset" would mean that chemicals are removed from the water to help clean it up. 'Chemical offsets' would mean paying another chemical company to put less chemicals into the water so that the overall level of pollution does not change. Which gets us no closer to a solution. In this case, the aim is to reduce and sequester harmful substances released into the environment.

To create carbon offsets, we use the term "carbon sequestration".  Offsets involve CO2 emissions being removed from the atmosphere and sequestered for a period of time. There are an increasing number of ways to do this, such as planting forests, storing carbon in manufactured equipment, sequestering methane gas in a landfill, and the holy grail of carbon sequestration: using sophisticated technology to turn CO2 emissions into a usable product.

Carbon offsets are produced by independent companies that remove CO2 emissions from the atmosphere. The offsets are then sold to companies that emit (or have emitted) CO2. In a sense, the companies that produce the offsets are directly funded by the companies that emit greenhouse gases.

Carbon credits, on the other hand, are generally 'created' by government. Governments limit the amount of greenhouse gases that organisations can emit by setting a cap - a set number of tonnes of CO2 that a company can emit. Each tonne is called a carbon credit.

Companies comply with this cap by reducing emissions from their operations through improving energy efficiency or switching to renewable energy sources. An organisation that brings its total emissions below the legal limit can sell excess credits to businesses that cannot or will not reduce their own emissions to comply.