Carbopedia

Introduction to Carbon Credits

What are Carbon Credits?

A carbon credit (often called a carbon offset) is a financial instrument that represents a tonne of CO2 (carbon dioxide) or CO2e (carbon dioxide equivalent gases) removed or reduced from the atmosphere from an emission reduction project, which can be used, by governments, industry or private individuals to offset damaging carbon emissions that they are generating.

How are Carbon Credits used?

Carbon credits are associated with either removing existing CO2 or CO2e emissions from the atmosphere in the case of carbon sequestration from forests and planting of trees or the reduction of future CO2 or CO2e emissions from renewable energy and energy efficiency projects that displace fossil fuel power generation production or industrial processes.

Where do Carbon Credits come from?

Carbon credits originate from a range of emission reduction activities associated with the removal of existing emissions from the atmosphere and the reduction of future emissions. These are commonly called "methodologies".

Afforestation and reforestation activities are a key means by which existing emissions can be removed from the atmosphere and carbon credits created while construction of a wind farm rather than a coal-fired power station may create carbon credits through reducing future emissions.

Carbon credits originated through these emission reduction activities can be created under a variety of voluntary and compliance market mechanisms, schemes and standards. Some of these instruments have been established so countries can comply with their mandatory Kyoto targets and others provide avenues for voluntary offsetting purposes.

Some schemes around the world clearly deliver more environmental benefits than others. Developing parts of the world produce the most carbon credits by far, often these locations are essentially considered environmental 'hot spots' as they lack the appropriate laws, regulations and funding that usually exist in developed regions. Due to these reasons they have the most room for improvement and therefore offer the most environmental benefits if worthy improvements are introduced.

Consistent with all forms of Climate Change mitigation, either in the form of internal abatement, the improved efficiency within businesses, project based reductions or Emissions Trading Schemes, the aim is to achieve reductions based on the lowest cost and in line with this theory the Developing World is seen as 'low hanging fruit'. Projects within these schemes and locations must be 'additional' meaning that the people behind a project need to demonstrate that the emission reductions would not have occurred without the combined incentives that carbon credits provide. Due to financial, political or other barriers, the project must prove it goes beyond a "business as usual" scenario and that greenhouse gas emissions are lower with the project than without it.

Compliance v Voluntary markets

The compliance market comprises several legally-binding mandatory emission-trading schemes largely established under the Kyoto Protocol linked to the United Nations Framework on Climate Change (UNFCCC), but also includes some regional compliance markets in the USA and Australia.

The Voluntary Carbon Offset Market functions outside of the compliance market and enables companies and individuals to purchase carbon credits on a voluntary basis to satisfy personal or Corporate Social Responsibility (CSR) objectives.