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Carbon Credits vs Carbon Offsets: Which Is Right For You?

what are carbon credits

Carbon offsets and carbon credits are part of mechanisms to reduce greenhouse gas emissions, but they follow different paths and serve different purposes within the broader context of emissions reduction and climate change mitigation efforts. Let’s explore the differences between a carbon credit vs carbon offset.

What Is The Difference Between Carbon Credit And Carbon Offset?

Here’s a quick breakdown:

  • Carbon Offsets: These are generated from projects that remove or avoid greenhouse gas emissions. The process begins with the project’s development and the quantification of reduced emissions. Independent verification against standards like the Verified Carbon Standard (VCS) or the Gold Standard ensures the project’s emission reductions are real, additional, and verifiable. Once verified, these reductions are issued as carbon offsets. Individuals or organizations can purchase these offsets voluntarily to compensate for their own emissions. These are sometimes called carbon offset credits.
  • Carbon Credits: Primarily generated within regulatory cap-and-trade systems, carbon credits are allocated or auctioned to regulated entities, allowing them to emit up to a certain amount of CO2 or other greenhouse gasses. If an entity reduces its emissions below its allocation, it can sell the surplus credits (now an asset) to other entities that exceed their caps. The verification process ensures the integrity of emissions reporting, but the initial generation of carbon credits is not directly linked to specific emission reduction projects in the same way offsets are. Credits are also registered in a system or registry, facilitating trading among participants in the cap-and-trade program.

While carbon offsets are directly tied to specific projects removing emissions and are purchased voluntarily, carbon credits are part of a regulatory system designed to cap total emissions and encourage reductions through trading. Their generation, verification, and use are governed by different processes and objectives.

What Is A Carbon Credit?

A carbon credit is essentially a permit or certificate that represents the legal right to emit one metric tonne of carbon dioxide or an equivalent amount of other greenhouse gasses. One carbon credit represents one metric tonne of carbon dioxide emissions or its equivalent (tCO2e) in another greenhouse gas, including methane (CH4), nitrous oxide (N2O), and fluorinated gasses like the ozone layer harming hydrofluorocarbons.

These credits are part of cap-and-trade programs, where governments or regulatory bodies set a cap on the total amount of greenhouse gasses that can be emitted by all covered entities (like industries or companies). Entities that reduce their carbon emissions can sell their excess carbon credits to others who need them to comply with regulatory limits. This system aims to incentivize reductions in greenhouse gas emissions by assigning a financial value to the cost of polluting.

How do carbon credits work?

  • A government or regulatory body, such as the Environmental Protection Agency (EPA) in the United States or the European Commission in the EU, sets a maximum limit of greenhouse gas emissions for specific sectors or geographic areas, aiming to progressively reduce overall emissions.
  • Entities within the regulated area receive an initial allocation of carbon credits based on historical emission levels or through auctions. The European Union Emissions Trading System (EU ETS) is an example where allowances are auctioned.
  • To comply with regulations or reduce the cost of purchasing additional credits, entities implement projects to reduce their carbon emissions. This could involve upgrading to energy-efficient technologies, switching to renewable energy sources, or improving waste management practices.
  • Entities that successfully reduce their emissions below their allocated amount generate surplus carbon credits. These can be sold on carbon markets, providing a financial incentive for emissions reduction.
  • Third-party verification bodies, accredited by standards like the Verified Carbon Standard (VCS) or the Gold Standard, assess the emission reductions to ensure they are real, measurable, and permanent.
  • Once verified, the surplus carbon credits are registered with a regulatory body or a carbon registry, such as the Climate Action Reserve, to ensure proper tracking and to prevent double counting.
  • Surplus credits can be sold on carbon trading platforms or through direct transactions to other entities that need additional credits to comply with their emission caps. The European Energy Exchange (EEX) is an example of a marketplace for trading carbon credits.
  • At the end of a compliance period, entities must surrender enough carbon credits to cover all their emissions. Failure to do so results in penalties, ensuring entities have a strong incentive to either reduce emissions or purchase the necessary credits.

What Is A Carbon Offset?

A carbon offset is a reduction in emissions of carbon dioxide or other greenhouse gasses made in order to compensate for emissions made elsewhere. Carbon offsets are measured in metric tonnes of carbon dioxide-equivalent (CO2e) and can be bought by individuals or companies to mitigate their own greenhouse gas emissions from transportation, electricity use, and other sources. These offsets are typically achieved through funding renewable energy projects, forest conservation, or clean water projects that avoid emissions or absorb carbon dioxide from the atmosphere. Unlike carbon credits, which are tied to regulatory schemes, offsets can be purchased voluntarily by anyone looking to reduce their environmental impact. They are sometimes called carbon offset credits.

How do carbon offsets work?

  • Projects designed to reduce, avoid, or sequester carbon emissions are developed around the world. Examples include reforestation projects, wind and solar energy farms, and methane capture from landfills.
  • The project’s impact on emissions is carefully quantified, establishing the baseline emissions (what emissions would have been without the project) and the reduced emissions due to the project.
  • Projects are validated and verified by independent bodies to ensure they meet high standards for environmental integrity. Organizations such as Verra (which manages the VCS) and the Gold Standard are prominent in this space, providing frameworks for validation and verification.
  • Following successful verification, the project is certified, and a corresponding number of carbon offsets are issued. Each carbon offset represents a metric tonne of CO2 (or equivalent) emissions reduced or avoided.
  • The offsets are then registered in databases such as the VCS Project Database or the Gold Standard Registry, ensuring transparent and unique identification of each offset to prevent double counting.
  • The certified offsets are made available for purchase through various platforms and brokers, targeting businesses, governments, and individuals looking to compensate for their carbon footprint. South Pole and Terrapass are examples of companies that offer carbon offsets for sale.
  • Buyers can then “retire” the offsets to claim the reduction against their own emissions. The retirement of offsets is recorded in the registry, ensuring that each carbon offset is only used once, thereby guaranteeing the integrity of the emission reduction claimed.

Want to know where your business stands? Get your sustainability scorecard with our quiz:

The Carbon Market

The carbon market encompasses both regulatory and voluntary mechanisms that allow individuals, companies, and governments to invest in environmental projects around the world to compensate for their own greenhouse gas emissions. This market is driven by the demand for carbon neutrality, with projects ranging from renewable energy and forest conservation to methane capture and reforestation. 

Key to its operation are the processes of quantification, verification, and certification of carbon offsets, ensuring that each offset represents a real, additional, and verifiable reduction in emissions. With a growing emphasis on sustainability, this market has become a critical tool for entities aiming to mitigate their environmental impact, bolstered by the transparency and integrity provided through stringent verification standards and public registries.

Voluntary Carbon Market

The voluntary carbon offsets market enables companies, governments, and individuals to purchase carbon offsets on a voluntary basis, aiming to achieve carbon neutrality or to meet corporate social responsibility goals. Unlike the compliance markets, participation is not mandated by regulation but driven by environmental commitments. 

Participants invest in a variety of carbon offset projects, including renewable energy, forestation, and community-based development initiatives that offer measurable environmental benefits beyond emission reductions, such as biodiversity conservation and socioeconomic improvements. 

This voluntary market is characterized by its flexibility, innovation, and the diversity of projects it encompasses, providing a broad array of options for buyers to align their sustainability goals with their carbon offsetting efforts. Carbon offsetting projects are verified by entities like Verra and the Gold Standard, ensuring the credibility of offsets through rigorous standards and verification processes.

Compliance Carbon Credit Markets

The compliance carbon offset market is a regulatory-driven segment where entities are legally required to offset a portion of their emissions through the purchase of carbon offsets, as part of a broader effort to meet emissions reduction targets set by government policies or international agreements. 

This market is often integrated into broader cap-and-trade or emissions trading schemes, such as the EU ETS, where fixed emission caps are set, and entities must either reduce their emissions to stay within these limits or purchase offsets to cover any excess. 

The compliance market is critical for enforcing greenhouse gas reduction targets, with strict verification and reporting requirements ensuring the integrity and environmental effectiveness of the offsets used. Through this regulated approach, the compliance carbon market plays a pivotal role in the global strategy to combat climate change, pushing industries towards cleaner practices and supporting the transition to a low-carbon economy.

Allow Customers To Purchase Carbon Offsets At Checkout

If you want your ecommerce business to participate in the voluntary carbon market by offsetting emissions produced by running business, then reach out to EcoCart today. Our climate contribution checkout widget makes it easy for your customers to purchase carbon offsets at checkout. Our Sustainability Dashboard lets your business showcase your carbon offsetting efforts.

Request a demo to learn how you can painlessly integrate carbon offsets into your ecommerce business.

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