What are Carbon Credits, Carbon Allowances, Carbon Offsets, and Carbon Removals?

A carbon credit refers to greenhouse gas (GHG) emission reductions from carbon allowances and carbon offsets. Emission reductions are measured using tonnes of carbon dioxide equivalent (1 tCO2e), which reflects the combined impact of multiple greenhouse gases (carbon dioxide, methane, nitrous oxide, flourocarbons), by converting their warming impact to an amount of carbon dioxide with equal warming impact.

The terms ‘allowance’ and ‘offset’ are often used interchangeably, but they describe two distinct elements within carbon markets.

Simple definition of allowances and offsets:

1. Carbon Allowance: A right to emit 1 tCO2e within a compliance carbon market
2. Carbon Offset: A reduction of 1 tCO2e from the global emission pool

Carbon offsets can be further divide based on how the 1 tCO2e reduction is generated

• Avoidance: Preventing an activity which will generate GHG emissions
• Reduction: Modifying an activity so that it generates fewer GHG emissions
• Removal: Capturing and Storing GHG emissions which have already been released to the atmosphere

What is a carbon allowance?

A carbon allowance is the right to emit greenhouse gases within a compliance market. The European Emission Trading Scheme is an example of a compliance carbon market where there is a cap on the total emissions allowed from certain industries. Participants (emitters and individuals) can buy carbon allowances (allowances act as a carbon tax in this case) if they surpass the cap or sell the remaining allowances under the cap to other participants that need more allowances. Over time, the total amount of emissions allowed is lowered, which raises the price of carbon allowances and incentivizes the adoption of business activities that do not generate carbon emissions.

What is a carbon offset?

A carbon offset is the reduction of GHG emissions from the global GHG emission pool within the Voluntary Carbon Market (VCM). The VCM enables GHG emitters to claim GHG emission reductions from outside of their organization through the purchase of carbon offsets. The VCM serves as a path to compensate for emissions that are not regulated under the compliance market. In 2021, society emitted approximately 33 billion tonnes of CO2e, of which more than 20 billion tonnes of CO2e were not regulated under a compliance market system.

Carbon offsets are used by businesses with emissions that cannot be reduced immediately – in industries like air travel, large-scale energy, and construction – to fulfill environmental objectives while maintaining business activities. Carbon projects sell carbon offsets to support activities they would not have been able to fund otherwise.

What is carbon removal?

Carbon Removal, or Carbon Dioxide Removal (CDR), is the process of collecting CO2 already in earth’s short carbon cycle (plants or the atmosphere) and storing it for the long-term. CDR is a broad category that covers both nature based and engineered approaches. Nature-based CDR includes activities like reforestation and afforestation which use plants to capture and store carbon dioxide. Engineered CDR includes activities like Direct Air Capture and Storage (DACS) and Enhanced Rock Weathering (ERW). Carbon Removal projects may look to generate carbon credits to finance their activities but CDR projects are different from avoidance and reduction projects because there is typically a higher certainty that the carbon benefits are real and can be attributed to the carbon offsets – warranting higher prices.

How are carbon offsets made?

Carbon projects generate carbon offsets by performing activities that fall under one of the three categories below. Project activities commonly include the protection, monitoring, and rehabilitation of ecosystems as well as social activities in communities connected to the project including training, education, and employment in ecosystem conservation.

Reduced emissions

Projects that reduce the GHG emission intensity of current operating processes. For example, the implementation of renewables into power consumption such as biodiesel, wind, and solar.

Avoided emissions

Projects that avoid future GHG emissions. For example, projects that conserve existing forests avoid the emissions created by removing and destroying trees. REDD+ projects specifically look to avoid emissions from the various types of degradation that occur within forests.

Removed emissions

Projects that capture and store greenhouse gases from the atmosphere. There are many types of carbon removal projects; some examples include planting new forests, increasing carbon capture in soil, and direct air capture – which extracts carbon dioxide directly from air.

Do carbon offsets make real progress towards environmental goals?

The Voluntary Carbon Market contains offsets from a wide range of projects that claim emission reductions, but many offsets available lack credibility, meaning they lack the evidence needed to ensure real carbon and other benefits. In order to be considered credible, it is important that offsets come from projects that address the certain key principles. While the names differ between organizations, the core concepts remain consistent and are summarized below.

Additional (Real) The project must demonstrate; the necessity for carbon finance to enable the project, it is not required by laws/policies/regulations, is not common practice, and the baseline scenario is credible.

Verifiable (Measurable)