When first proposed in the late 1980s, carbon credits were conceived as a tool to reduce the cost of meeting a particular GHG inventory reduction goal. Actors who might face a regulatory obligation to reduce emissions – power plant owners in an emissions trading (or cap-and-trade) system, for example – could “offset” their emissions by acquiring carbon credits from emission sources not facing an obligation, rather than make more costly investments to reduce emissions at their own facilities. Since, to mitigate climate change, it does not matter where in the world GHG emissions are reduced, this arrangement (in principle) would allow for greater flexibility and lower overall costs. Lower compliance costs would, in turn, allow for setting more aggressive reduction targets – leading to higher ambition and more emission reductions globally.
When companies began voluntarily committing to reduce their emissions, the role of carbon credits was initially viewed in the same way. That is, a company could commit to becoming “carbon neutral” not by fully eliminating its allocated inventory emissions, but instead by using carbon credits to more cost-effectively achieve that goal. Theoretically, a company would reduce its own allocated emissions (e.g., scopes 1-3) if it could do so for less than the cost of a carbon credit, but otherwise would rely on carbon credits to achieve its target. This model of voluntary offsetting, however, has faced criticism. As the Common Criticisms section indicates, a prevalent concern about carbon credits is that companies may “over-rely” on them instead of achieving inventory emission reductions. That is, the temptation is for companies to use carbon credits to achieve a substantial portion of their GHG reduction goals, rather than make investments to mitigate emissions from their own operations. Multiple environmental groups and standard-setting organizations have argued that users of carbon credits should instead follow a “mitigation hierarchy”[1] under which they prioritize climate action as follows:
- Take steps to substantially reduce one’s own allocated inventory emissions – for example, reduce emissions in line with what would be required if, collectively, the world were to follow a pathway to net zero emissions by the middle of the century.
- Use carbon credits only to offset any remaining emissions.
When various actors speak of “responsible use” of carbon credits, they typically mean following some version of this mitigation hierarchy.[2] The Voluntary Carbon Market Integrity Initiative (VCMI), for example, was launched in 2021 with the express purpose of recognizing companies following this approach. The Science-Based Targets initiative (SBTi) has likewise, since its inception in 2013, focused on step 1 in the hierarchy, and only in 2021 began to contemplate a role for carbon credits with the initiation of its Net Zero standard.
The tension between these two approaches (least-cost achievement of a reduction goal vs. following a mitigation hierarchy) arises largely from different understandings about what companies claim to be doing – or what they should be doing – to address climate change.
For example, many stakeholders interpret a “carbon neutrality” claim as implying a focus on reducing one’s own allocated inventory emissions. Indeed, many consumers may interpret “neutrality” or “net zero” claims as equivalent to having an actual carbon footprint of zero. Using carbon credits as a primary (or even substantial) means to make such a claim may therefore be seen as misleading. A “carbon neutral” airplane flight is not the same as a “carbon free” flight (e.g., powered entirely by renewable fuels) – and companies could be criticized for implying such an equivalence. In other words, people often interpret a “neutrality” claim as something other than a simple least-cost mitigation exercise.
Similarly, under SBTi’s model, many stakeholders argue that the primary purpose of voluntary climate action (i.e., what they should be doing) is not to reduce emissions wherever they may occur (e.g., at the lowest cost), but to devote resources to decarbonizing a company’s own allocated inventory emissions, even if it is costly to do so. In that context, using carbon credits is not relevant or appropriate. Using carbon credits to (nominally) achieve a goal defined with respect to a company’s allocatedinventory emissions would again lead to misleading claims (“the company said it would do X, but instead it did Y”) – and would diverge from what a company should be doing. Under SBTi’s approach (and other “net zero” frameworks), carbon credits may only be used to fulfill ancillary objectives, such as “neutralizing” (with enhanced removals) any emissions that remain after targets are achieved, or to achieve mitigation above and beyond any targeted reductions in allocated emissions (i.e., what SBTi refers to as “beyond value chain mitigation”).
Debates about responsible use are far from resolved. For example, what happens if a company is unable to meet the targets defined for its own allocated emissions? Should it simply declare failure, or is using carbon credits to “make up the difference” still acceptable? If companies focus only on reducing their own allocated inventory emissions, which may be costly to mitigate, won’t that mean less overall climate action? How can we get companies to both decarbonize their own operations and provide sorely needed financing (e.g., through carbon credits) for broader climate change mitigation throughout the world?
Different initiatives are proposing different answers to these questions – or are still working through them. Meanwhile, the current emphasis on a mitigation hierarchy has engendered a parallel debate, on whether use of carbon credits should emphasize enhanced removals over avoided emissions.
Related pages:
Are enhanced removal credits better than avoided emission credits?
“Offsetting” vs. “mitigation contribution” claims
The Paris Agreement and corresponding adjustments
[1] The formal definition of a “mitigation hierarchy” was first introduced in the context of biodiversity conservation efforts – e.g., see https://doi.org/10.1093/biosci/biy029. The notion that users of carbon credits should reduce their own inventory emissions before offsetting has been a longstanding convention in voluntary carbon markets, but more recently has been given more formal expression as a “mitigation hierarchy.”
[2] “Responsible use” also involves using high-quality carbon credits, but the main principle is avoiding excessive use. Avoiding heavy reliance on carbon credits is sometimes seen as a way to mitigate the risk that carbon credits may be of low quality.