How Do Carbon Credits Work?

Carbon credits, commonly called carbon allowances, are often described as a type of measurement, however they do include the “tradeable” part. Carbon credits are not the identical to carbon offsets.

Carbon credits can only be found in areas that are controlled by the “Cap and Trade” system (such as the California Cap-and-Trade Program, which is managed by the California Air Resources Board).

Carbon credits are a product of the governing entity and distributed to companies that fall within the region. One credit equals 1 ton of CO2e (or carbon dioxide equivalent) which the company is permitted to emit.

Key Highlights

A carbon credit is one tonne of CO2e an entity is allowed to emit.
Carbon credits can only be found only in markets that have Cap & Trade regulations.
Teams of management who emit less than their limit can sell carbon credits on the carbon market that is corresponding to their emission.
Carbon credits are not the same as carbon offsets.

How do Carbon Credits work?

The amount of credits granted to a specific company or organisation represents its emission limitation (or “cap” in the context of Cap & Trade).

If a team of managers is able to keep the emissions of their company below the limit and the company has an excess of carbon credits. They might decide to keep them to use in the future (or for sale) in the alternative they can sell them right away to the market for compliance carbon, which is monitored by the regulatory agency.

If a team of managers is unable to reduce company emissions to a limit, they’re in violation and must compensate for the gap. Over-emitters go to the carbon market to buy carbon credits through the “under-emitter” in the Cap & Trade network.

Do Carbon credits count as the same as offsets?

They’re not. Carbon offsets and carbon credits are determined as tonnes of CO2e which could be confusing to people since offsets and credits are not the same thing.

In contrast to carbon credits, offsets aren’t formulated and distributed through a certain regulatory agency. They also aren’t restricted to specific regulatory bodies (like carbon credit are) in actual fact, they can trade at any time on any number of “voluntary markets” all over the world.

Credits and. Offsets

Any organization (public, private, governmental, etc.) can elect to engage in carbon reduction projects – either because management/leadership believes it’s the right thing to do or because they wish to generate carbon offsets, which can, in turn, be monetized on the carbon markets.

Carbon reduction projects typically are classified into two categories, which are mechanical or natural. Nature-based initiatives consist of reforestation and wetland rejuvenation initiatives as well as methods that “naturally” absorb carbon into the earth. Mechanical solutions generally involve investing in cutting-edge technologies that lead to improved efficiency or less emission (like the renewable energy sector or directly carbon capture techniques).

Carbon credits are an indicator unit used that is used to “cap” emission levels (meaning permitted emissions) carbon offsets can be considered an indicator unit that can be used that “compensate” an organisation to invest in green projects or initiatives (whether technological or natural) that reduce emissions.

After an offset has been created and is subsequently reclaimed, it could be held by the company that carried out that project or trade on a carbon market.