Carbon credits are tradable instruments that convey a claim to avoided greenhouse gas (GHG) emissions or enhanced GHG removals.
How carbon credits work
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 or as a contribution to global mitigation efforts.
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 carbon dioxide (CO2) avoided or removed (see Box 1).
Carbon credits can be produced by a variety of activities that avoid GHG emissions or enhance carbon removals. In most cases, these activities are undertaken as discrete “projects.” A carbon crediting project, for example, may involve:
- Renewable energy development (displacing fossil-fuel emissions from conventional power plants);
- The capture and destruction of high-potency GHGs like methane (CH4), nitrous oxide (N2O), or hydrofluorocarbons (HFCs); or
- Avoided deforestation (which can both avoid the emission of the carbon stored in trees, as well as enhance carbon removals as trees grow).
Box 1: Understanding CO2-equivalents
Carbon dioxide (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 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, nitrous oxide, 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 it easier to compare the effects of different GHGs and to denominate carbon credits of avoided emissions or enhanced removals using a single unit. Learn more about global warming potential.
Why use carbon credits?
Traditionally, carbon credits have been used for the purpose of carbon offsetting (the terms carbon offset credits, carbon offsets, offset credits, or simply offsets are often used interchangeably). Carbon offsetting is the practice of using avoided emissions or enhanced removals to compensate for GHG emissions. In carbon markets, for example, a buyer may secure and retire a carbon credit in lieu of directly reducing their own inventoried (i.e., reported) 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 facilitate easier and more cost-effective for organizations to pursue the second option.
However, carbon credits are not always used to compensate for or offset emissions. In recent years, some parties are using carbon credits to contribute to climate change mitigation, without any express compensation or offsetting claim. This way of using carbon credits is further discussed in Using Carbon Credits: Issues and Considerations.
Offsetting claims are only defensible if carbon credits issued adhere to a set of rigorous conditions. The degree of adherence to these conditions defines the “quality” of the carbon credit. Actors must be wary of low-quality credits to ensure the desired impact of purchases and avoid denouncement for greenwashing. We define and explain these conditions – or “quality criteria” – in What Makes High-Quality Carbon Credits.
Although organizations sometimes use other kinds of instruments besides carbon credits to make GHG mitigation claims – such as “renewable energy certificates” – these other instruments usually do not meet effective quality criteria. Learn more in the Clean Energy Purchasing FAQ.