Using Carbon Credits: Issues and Considerations

Learn about what constitutes responsible use of carbon credits.

What is the lowest cost pathway theory?

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 facing a regulatory obligation to reduce emissions could “offset” their emissions by acquiring carbon credits rather than making 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 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 voluntarily commit to becoming “carbon neutral” not by fully eliminating its allocated inventory emissions, but instead by using carbon credits or offsets 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 emissions target. This model of voluntary offsetting, however, has faced criticism. As the Common Questions and Criticisms section describes, 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.

What is the mitigation hierarchy theory?

Multiple environmental groups and standard-setting organizations have argued that users of carbon credits should follow a “mitigation hierarchy”¹ under which they:

1. 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.
2. 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 in 2021 began to contemplate a role for carbon credits with the initiation of its Net Zero standard.

Under the most expansive version of the mitigation hierarchy – such as SBTi’s approach – carbon credits are not allowed to substitute for reductions that an actor is obliged to achieve in its allocated inventory emissions. However, SBTi and other initiatives have acknowledged that even the most aggressive scenarios for limiting global warming to 1.5⁰C allow for some ongoing emissions – in “hard to abate” sectors, for example – which at a global level will need to be “netted out” by efforts to remove CO₂ from the atmosphere. Under SBTi’s “net zero” standard, therefore, an explicit provision is made for offsetting (or “neutralizing”) residual emissions with enhanced removals – which could in principle be achieved using removal-based carbon credits. In this case, carbon credits would not substitute for targeted inventory reductions, but would instead be an additional requirement needed to achieve net zero emissions.³

What are the tensions between these two theories?

The tension between the two approaches of carbon credits acting as a 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 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 more costly to do so compared to purchasing carbon credits and using them to offset emissions. Using carbon credits to (nominally) achieve a goal defined with respect to a company’s allocated inventory 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 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.

Are enhanced removal credits “better” than avoided emission credits?

One consequence of SBTi and other “net zero” initiatives⁴ has been a growing perception that removal-based carbon credits are a more valid – or defensible – form of carbon credit. The idea is that “responsible use” of carbon credits means emphasizing removal-based credits over credits for avoided emissions, or perhaps excluding the use of avoided emission credits altogether. The underlying logic goes something like:

1. Globally, countries must reduce GHG emissions to “net zero” by around the middle of the century, with any residual emissions balanced by CO₂ removals.
2. Organizations setting “science-based” targets should follow a path for reducing their own emissions that mirrors what must occur globally.
3. This means organizations should aggressively reduce their own allocated emissions towards zero emissions and – if they have residual emissions that cannot practically be eliminated – they should balance them out by funding efforts to enhance removals.

This logic follows a formalistic interpretation of what individual companies should do to address climate change. One critique, for example, is that this approach based on a “fallacy of division,” which assumes that because net zero must be achieved globally, all sub-global actors must themselves achieve net zero emissions using removals.⁵ However, the notion has gained sufficient traction that demand for removal-based carbon credits has grown substantially in recent years, leading to scarcity and higher prices.⁶

A preference for removal credits might make sense if one accepts the premises listed above. A more questionable related development, however, has been a growing perception that removal-based credits are higher quality (as a class) than avoided emission credits. A common argument, for example, is that because removals can be directly observed (i.e., it is possible to directly measure either the flow of carbon into a reservoir, or the increase in carbon stocks in a reservoir), they are therefore more “reliable” than an avoided emission (which must be inferred by comparing actual emissions to a baseline). This argument is sometimes framed as a “math problem” – i.e., subtracting CO₂ from the atmosphere lowers atmospheric concentrations, whereas not adding CO₂ does not.

This misperception stems from a basic misunderstanding about GHG accounting for carbon credits. In short, regardless of the type of mitigation involved, carbon credits are always issued for mitigation achieved relative to a counterfactual baseline. In the case of removals, this means that a project must result in more (i.e., enhanced) removals than would have occurred in the project’s baseline scenario. As anyone who has tried to evaluate the additionality of a tree plantation can attest, the baseline for a removal activity can be just as uncertain as for an avoided emission project.

What distinguishes high quality projects from low quality is the degree of confidence one has in a project’s baseline scenario – regardless of whether enhanced removals or avoided emissions are involved.⁷

What are the differences between “offsetting” and “mitigation contribution” claims?

Another development in the responsible use debate is the question of whether – and under what circumstances – it is appropriate to claim that carbon credits have “offset” or “compensated” for an actor’s allocated inventory emissions. Carbon credits were originally designed to allow an actor facing an obligation to reduce its emissions to instead purchase and retire carbon credits and count them as an “offset.” The actor’s allocated emissions could remain above targeted levels, but this would be compensated for by avoiding emissions (or enhancing removals) at other sources or sinks, such that the global balance in emissions would be the same. Indeed, quality criteria for carbon credits are defined the way they are (see High Quality Credits) exactly because it is assumed that carbon credits will be used for compensation.

In a voluntary context, however, the idea of “compensation” is sometimes viewed as problematic because carbon credits used as offsets could allow the actor to make potentially misleading claims and ignore the mitigation hierarchy.

For example, the “carbon neutrality” claim may be misleading to consumers. If consumers view a “carbon neutral” flight (i.e., one whose emissions have been offset with carbon credits) as equivalent to flying “emissions free,” they may feel free to take more flights than they would have otherwise.⁸ This could have the perverse effect of undermining global climate goals. Perhaps a better approach would be to portray carbon credits as a voluntary contribution to climate change mitigation efforts, without any implication that those credits have turned a GHG-emitting flight into a flight with zero emissions.

The obligation to follow a mitigation hierarchy also raises questions about whether compensation is an appropriate concept. If companies are obliged to meet emission targets exclusively by achieving reductions in their allocated inventory emissions, for example, then carbon credits cannot be used to “compensate” (in the original sense of substituting) for those inventory reductions. As with the potential for misleading claims, in this context it may be more appropriate to refer to carbon credits as voluntary contributions to climate change mitigation that are accomplished in addition to achieving targeted inventory reductions. This redefinition has at least been suggested – if not explicitly called for – by initiatives like the SBTi and Voluntary Carbon Markets Integrity Initiative (VCMI).⁹

A potential advantage of recognizing corporate “contributions” is that there is no limit to how much a company can be recognized for. Such a claim is akin to making a philanthropic donation, albeit one with a quantified impact in terms of avoided emissions or enhanced removals. However, it is feared by many that if companies cannot make compensatory claims, and so cannot then make claims that they have met their responsibility to address climate change (i.e., that they are net zero or carbon neutral) then demand for carbon credits will diminish and voluntary carbon market mechanisms will fail to achieve their potential. For carbon credit “contribution” claims to become widely embraced, a major shift would be required in what companies (and other actors) are expected to do: from reducing and then compensating for their allocated inventory emissions, to reducing their allocated emissions as well as contributing to additional mitigation in sources and sinks beyond their GHG inventory. The distinction may seem largely semantic, even if it is important to defining responsible use. However, there is another dimension to the compensation vs. contribution debate that relates more directly to carbon credit quality – i.e., whether the avoided emissions or enhanced removals associated with carbon credits are also being counted towards national mitigation commitments under the Paris Agreement.

The Paris Agreement and corresponding adjustments

Under the Paris Agreement, almost all countries have pledged to reduce emissions occurring in their territories over time through the implementation of ambitious national GHG mitigation actions and policies. Although current pledges are widely seen as insufficient to avoid dangerous climate change, they cover nearly 90% of global greenhouse gas emissions. For carbon credits, this framework of national commitments raises the question of double counting. Specifically, could the avoided emissions or enhanced removals associated with carbon credits be double claimed, once by the user of the carbon credits, and once by a national government towards its Paris commitment?¹⁰

Double counting must be avoided for carbon credits to maintain environmental integrity. If double counting occurs, there is no guarantee that the use of a carbon credit will be associated with lower global emissions, compared to a baseline scenario without carbon credits.¹¹ A crediting project could still avoid a quantity of emissions, and meet all criteria for additionality, avoiding overestimation, and permanence. However, if the project had not happened, the country may¹² have had to achieve an equivalent quantity of emission reductions to meet its target (because the emissions the project avoids would instead have shown up in its national inventory) – meaning there would be no difference in total emissions to the atmosphere. If total emissions would be the same either way, there is no basis for claiming that buying and retiring carbon credits has in any way “compensated” for the user’s own allocated inventory emissions.

Negotiators of the Paris Agreement recognized this issue when agreeing to rules for how international emissions trading should work. Under Article 6 of the Paris Agreement, if one country acquires a “mitigation outcome” (avoided emission or enhanced removal) from another, then both countries must apply what are called “corresponding adjustments” in the accounting ledgers they use to track progress towards their mitigation commitments. The selling country must adjust its ledger to reflect that it transferred a mitigation outcome, so that this mitigation may no longer be counted towards its commitment. The acquiring country may in turn adjust its own ledger to reflect that it has “received” the mitigation outcome, and therefore does not have to achieve as many reductions in its own national GHG inventory.

The “corresponding adjustment” applied by the selling country ensures that no double claiming will occur, and guards against a scenario where acquiring mitigation outcomes causes no decrease in the selling country’s total emissions. This is essential for preserving the environmental integrity of international emissions trading under the Paris Agreement.¹³ However, it is also – arguably – an essential requirement for any voluntary purchaser of carbon credits who wishes to sustain a compensation claim.¹⁴

Today, it’s quite difficult for voluntary purchasers of carbon credits – credits issued outside of any formal Article 6 trading framework – to obtain a corresponding adjustment from national governments. Widespread concern about how such a requirement could dampen credit supply and limit the market (perhaps severely curtailing urgently needed mitigation investments, especially in developing countries) has led to two responses.

The first response is that the voluntary carbon credit market should be viewed as separate from any accounting system maintained by national governments under the Paris Agreement. This is true in purely legal terms. However, it fails to acknowledge that the physical emissions avoided by voluntary market crediting projects can still show up in the inventories and accounting ledgers of national governments – and therefore could still be double counted. This means that compensation claims associated with these credits may still be on shaky ground.

A variant of this response is that the accounting architecture for countries under Article 6 is still a work in progress. National commitments vary in their scope and specification, and in some cases do not set explicit emission targets (e.g., they may set renewable energy goals, or commit to certain mitigation actions). It is not clear whether all countries will achieve their targets, and some countries may not have the systems in place yet to apply corresponding adjustments. Under this argument, corresponding adjustments are viewed as an accounting formality (a form of “double entry bookkeeping”) without direct implications for environmental integrity and, as such, should not be required for voluntary compensation claims. While this argument is grounded in practical realities (for the time being), it begs the question of why voluntary market compensation claims should be held to a different standard than equivalent claims made by national governments.

The second general response is that buyers of carbon credits could switch to a contribution claim. Under this approach, a credit buyer could secure an exclusive claim to enabling additional, robustly quantified, and permanent mitigation that avoids social and environmental harms in a particular country (assuming all these criteria are met). The difference would be that, rather than compensating for the buyer’s emissions, the mitigation would contribute to the achievement of the host country’s national commitments.

The challenge with this framing, of course, is that currently most buyers (explicitly or not) use carbon credits to make compensation claims. Many market actors are concerned that a switch to contribution claims would dampen demand for credits, and limit overall investment in the same way that requiring corresponding adjustments would.

Note that these two options are not mutually exclusive. In the future, it is possible that some credit buyers could seek recognition for making contribution claims, while others might demand credits – backed by corresponding adjustments – for making compensation claims. For now, however, the concerns and controversy surrounding either approach continue.

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. ↩︎
3. Other “net zero” standards and initiatives have adopted this same convention. The Oxford Principles for Net Zero Aligned Carbon Offsetting, for example, call for companies to first reduce emissions from within their own value chain “as much as possible,” and then offset remaining emissions using a portfolio of credits that – over time – increasingly emphasizes removals over avoided emissions, and removals with “durable” storage over shorter-duration removals (e.g., direct-air capture and storage in geologic reservoirs over tree planting). ↩︎
4. Other initiatives and standards endorsing some version of this approach include, for example, the UN Race to Zero campaign, the VCMI, and ISO. ↩︎
5. For elaboration of this critique, see here and here. ↩︎
6. See Figure 2 here, for example. ↩︎
7. For a full explanation of proper GHG accounting for removals and avoided emissions, see Möllersten, K., Dufour, M., Ahonen, H.-M. and Spalding-Fecher, R. (2024). Demystifying carbon removals in the context of offsetting for sub-global net-zero targets. Carbon Management, 15(1). 2390840. DOI:10.1080/17583004.2024.2390840. ↩︎
8. At least one study suggests such perverse outcomes are not merely hypothetical: Günther, S. A., Staake, T., Schöb, S. and Tiefenbeck, V. (2020). The behavioral response to a corporate carbon offset program: A field experiment on adverse effects and mitigation strategies. Global Environmental Change, 64. 102123. DOI:10.1016/j.gloenvcha.2020.102123. ↩︎
9. An initial version of the VCMI’s Claims Code of Practice expressly called for treating carbon credits as contributions to climate change mitigation, rather than compensation. Subsequent versions, however, dropped this guidance. ↩︎
10. Commitments are referred to as “nationally determined contributions,” or NDCs. ↩︎
11. Assuming all else remains equal – i.e., in either scenario, the carbon credit user’s own allocated inventory emissions remain the same. ↩︎
12. There are possible scenarios where a country would not have to achieve an equivalent quantity of emission reductions, e.g., if the country set a target for emissions that turns out to be above its actual emissions, because it was insufficiently ambitious. ↩︎
13. See, for example, Schneider, L., Duan, M., Stavins, R., Kizzier, K., Broekhoff, D., et al. (2019). Double counting and the Paris Agreement rulebook. Science, 366(6462). 180–83. DOI:10.1126/science.aay8750. ↩︎
14. To be clear, the argument is not that environmental integrity will be violated in all cases without a corresponding adjustment. There are many possible scenarios, including that a crediting project could avoid emissions or enhance removals that – for various reasons – are not claimed by the host country government, or that the government might simply fail to achieve its target, in which case crediting projects could still contribute to a lowering of national emissions (compared to their baseline scenarios). The argument is instead that the only way to guarantee that double claiming does not occur is through a corresponding adjustment (whereby the host country government formally relinquishes a claim to the avoided emissions or enhanced removals), and that such a guarantee is necessary to support a credible compensation claim. ↩︎