The Mechanics of Carbon Credits

The Mechanics of Carbon Credits

Carbon Credits vs. Carbon Offsets: Understanding the Difference

Carbon credits and offsets, though often conflated, play distinct roles in curbing an organization's carbon footprint. While credits authorize emitting one tonne of CO2e, offsets represent removed emissions, aiding further reductions beyond decarbonization efforts. The key difference lies in trading: offsets are voluntary, traded via brokers and platforms, while credits operate in both voluntary and mandatory cap-and-trade markets, governed by policy-driven emission limits. This enables companies to exchange permits for emissions reductions.

Understanding Carbon Credits' Operation

Mandatory and voluntary carbon credits share the common purpose of allowing entities to emit one tonne of CO2e. The distinction lies in their timing and purpose. Mandatory credits are retroactively purchased for emissions surpassing or falling below an emissions cap, while voluntary carbon credits are acquired in anticipation of future carbon reductions, with the expectation of their removal and emission.

How to Purchase Carbon Credits?

The process of procuring carbon credits varies depending on whether it is a voluntary or compliance-based carbon credit market:

In Voluntary Markets:

• Companies obtain credits through brokers, project developers collaborating with farmers and landowners on credit projects, or by participating in carbon credit marketplaces.

In Compliance Markets:

• Companies purchase credits from other companies holding surplus allowances due to emissions falling below the cap.

• Alternatively, they may acquire credits from local government authorities.

How to Sell Carbon Credits?

The sale of carbon credits is influenced by the nature of the carbon credit market, whether it is voluntary or compliance-based:

In Voluntary Markets:

• Individuals who reduce or eliminate carbon emissions can have their carbon credits generated by third-party organizations like Verra, Gold Standard, or ISO.

• Once verified, these individuals can proceed to sell their credits to brokers or through marketplaces.

In Compliance Markets:

• Companies with emissions below the emissions cap can trade or sell their excess allowances to other companies operating within the same carbon credit market.

Conclusion

Distinguishing between carbon credits and offsets is vital for effective carbon management. Credits permit emissions while offsets signify removed emissions, boosting reduction efforts. Credits are used in both voluntary and mandatory markets, while offsets are voluntary. Understanding their operation is essential for navigating carbon mitigation and promoting sustainability.