An Introduction to Carbon Credits.

Carbon credits, also known as carbon allowances, work like permission slips for emissions. When a company buys a carbon credit, usually from the government, they gain permission to generate one ton of CO2 emissions. With carbon credits, carbon revenue flows vertically from companies to regulators, though companies who end up with excess credits can sell them to other companies. Offsets flow horizontally, trading carbon revenue between companies. When one company removes a unit of carbon from the atmosphere as part of their normal business activity, they can generate a carbon offset. Other companies can then purchase that carbon offset to reduce their own carbon footprint. Note that the two terms are sometimes used interchangeably, and carbon offsets are often referred to as “offset credits”. Still, this distinction between regulatory compliance credits and voluntary offsets should be kept in mind.

Browse our FAQs to learn more about carbon credits , Types of Markets and more.

What are the types of Carbon Markets?

Two types of carbon market exist; The Regulatory Compliance and The Voluntary Markets.

● Regulatory Compliance Market

The compliance market is used by companies and governments that by law have to account for their GHG emissions. It is regulated by mandatory national, regional or international carbon reduction regimes.

● Voluntary Carbon Market

In this market , Carbon Credits are generated by projects that are accredited ti independent internation standards such as the Verified Carbon Standards ( VCS ). These credits are known as Verified Emissions Reductions( VERs ).

What is the Voluntary carbon market?

The Voluntary Carbon Market (VCM) is a market in which individuals, corporations and project developers purchase and sell carbon credits on a voluntary basis. These credits represent avoidance, removals or reductions of greenhouse gasses in the atmosphere. The VCM allows entities to offset unavoidable emissions by purchasing credits that represent projects which remove or reduce greenhouse gasses in the atmosphere. The VCM is growing rapidly, reaching over 608 million tons of CO2e emissions reductions or removals by 2019, the equivalent of taking more than 131 million cars off the road. The VCM was formed with the aim of driving finance to activities that reduce greenhouse gas emissions, and has evolved into a robust and effective means to tackle climate change by driving resources to projects which deliver independently verified and additional emissions reductions on a global scale.

How do carbon credits get created?

Carbon credits are generated from projects around the world that pull greenhouse gasses out of the atmosphere or keep emissions from being released. Each time an issuing registry verifies that a project has reduced, avoided or destroyed one metric tonne of GHG, one carbon credit is created.

What is a carbon credit project?

A carbon credit project is an environmental project, or set of deliberate activities, that reduces emissions in some way. In order to issue carbon credits, a project must prove it will reduce emissions. These projects must submit to rigorous auditing by regulatory bodies to ensure they are doing everything they claim.

Where are Carbon Credits held ?

Carbon credits are stored electronically in ‘registries’. Registries are essential for issuing , holding , and transferring carbon credits. Once a carbon project is issued with credits , the registry gives each one a unique serial number so that they can be tracked through their entire life-cycle. Registries also facilitate the retirement (surrendering) of credits for carbon neutrality purposes, ensuring credits are not resold at a later date.
The largest registry is the Markit Environmental Registry which is directly connected to Carbon Trade Exchange (CTX) and CTX is connected to various national registries in the EU via Climat’s Registry Electronic Interface (REI).