A carbon credit is a tradable instrument (typically a virtual certificate) that conveys a claim to avoided GHG emissions or to the enhanced removal of GHG from the atmosphere. Credits allow claims to be transferred from an entity that generated the avoided emissions or enhanced removals to a buyer. The buyer of a carbon credit can then “retire” it to count the avoided emissions or enhanced removals towards a climate change mitigation goal.
Carbon credits are certified by either governments or independent certification bodies (aka “carbon crediting programs”). A single credit is typically denominated to represent the equivalent of one metric tonne of CO2 avoided or removed (see Box 1). The terms carbon offset credits, carbon offsets, offset credits or simply offsets may be used interchangeably, though carbon credits are the preferred technical term as the credit is what is used for compliance or voluntary reporting purposes, and carbon credits, as opposed to offset credits, are not readily confused with the verb “to offset” and the practice of offsetting.
Box 1: Establishing a common denomination for different greenhouse gases
CO2 is the most abundant GHG produced by human activities, and the most important pollutant to address for limiting dangerous climate change. However, human beings create and emit numerous other GHGs, most of which have a far greater heat-trapping effect, pound for pound, than CO2. The most prevalent of these gases are methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), nitrogen trifluoride (NF3), and sulfur hexafluoride (SF6). Fully addressing climate change will require reducing emissions of all GHGs. Scientists and policymakers have established “global warming potentials” (GWPs) to express the heat-trapping effects of all GHGs in terms of CO2-equivalents (annotated as “CO2e”). GWPs are defined for different time horizons, to account for differences in the residence time of different gases in the atmosphere. By convention, all carbon credits certified under established standards are denominated using 100-year GWPs. This makes is easier to compare the effects of different GHGs and to denominate carbon credits in units of CO2-equivalent avoided emissions or enhanced removals.
Traditionally, carbon credits have been used for the purpose of carbon offsetting. Carbon offsetting is the practice of using avoided emissions or enhanced removals to compensate for GHG emissions. In carbon markets, for example, a buyer can secure and retire a carbon credit in lieu of directly reducing their own emissions. This works because, for the purpose of mitigating climate change, it does not matter where avoided emissions or enhanced removals occur – the effects are the same if an organization: (a) ceases an emission-causing activity; or (b) enables emissions to be avoided somewhere else in the world. Carbon credits were designed to make it easier and more cost-effective for organizations to pursue the second option.
Carbon credits are not always used to compensate for emissions. In recent years, some parties have proposed using carbon credits simply to contribute to climate change mitigation, without any express compensation or offsetting claim. This way of using carbon credits is further discussed in High Quality Carbon Offset Credits.
Offsetting claims are only defensible if carbon credits are issued under a set of rigorous conditions. The degree to which these conditions are met defines the “quality” of the carbon credit. We define and explain these conditions – or “quality criteria” – in High Quality Carbon Offset Credits.
Although organizations sometimes use other kinds of instruments besides carbon credits to make GHG mitigation claims – such as “renewable energy credits” – these other instruments usually do not meet effective quality criteria. Click here to learn more about other instruments that may be used to claim avoided emissions like RECs, PPAs, Allowances, and EECs.