What are Carbon Credits?
With growing recognition of the impact of GHG on the climate and environment, we’ve seen increased efforts to control and mitigate emissions. Those regulations created a new economy around climate technology and emissions mitigation. Enter carbon credits.
A carbon credit represents one ton (or tonne) of CO₂ that an organization is permitted to emit. The exact definition varies depending on your source—and their motivations. For example, you can compare these two definitions:
- Choose.today says that carbon credits, “allow companies, governments, and other organizations to address their greenhouse gas emissions by funding projects that reduce or remove carbon dioxide or other harmful GHG emissions from the atmosphere.” Going further, they add, “the goal of carbon
credits is to create a financial incentive for businesses to reduce their carbon footprint and invest in cleaner, more sustainable business practices.”
- Meanwhile, Investopedia defines carbon credits as “permits that allow the owner to emit a certain amount of carbon dioxide or other greenhouse gasses.” This definition emphasizes that carbon credits can be used as “get out of jail free cards,” allowing companies to emit carbon without risk of penalty as long as they can fit the bill.
Carbon Credits vs Carbon Offsets
While “carbon credits” and “carbon offsets” are often used interchangeably, there is a distinct nuance between the two. Carbon credit is the more general term that encompasses various types of tradable units representing emissions reductions.
Carbon offsets, on the other hand, are a type of carbon credit. Typically carbon offsets refer to projects that are conducted somewhere else, which the buyer is helping fund, while keeping their own emissions the same or using other reduction methods.
Types of Carbon Credits
Carbon offsets are just one of many types of carbon credits, each representing a different approach to reducing or offsetting GHG emissions. These credits are often categorized based on the type of project or activity that generates them.
Here are a few common types of carbon credits and their definition:
- Energy Efficiency Credits: These credits reward energy-saving initiatives in buildings, transportation, and industrial processes.
- Renewable Energy Credits (RECs): These represent the environmental benefits of generating clean energy, such as wind or solar power.
- Agricultural and Forestry Credits: These offset emissions by promoting sustainable farming and forestry practices that sequester carbon.
- Industrial and Process Credits: These support emission reduction efforts in manufacturing and other industrial processes.
- Transportation Credits: These offset emissions from transportation-related activities, like fuel-efficient vehicle projects.
- Methane Reduction Credits: These credits focus on mitigating methane emissions, often from landfills or livestock operations.
Examining Carbon Credit Costs and Value
Like many of today’s hot new currencies—think crypto and NFTs—the lack of standardization about how to evaluate the value of carbon credits has created a gold-rush style, wild-west scenario. For example, some businesses are purchasing carbon credits for a whole year or multiple years, buying up credits for offsets that haven’t yet been produced. And without clear standards for value analysis, this market has a name-your-own-price system based on self-described claims of esoteric climate value.
Putting a price on emissions is a big undertaking, but that’s exactly what some folks are trying to do. The ecosystem around carbon credits is expanding and growing ever-more complex. As more vendors enter the market, the process of value verification and standardization is becoming more prevalent.