Carbon offsets and credits
A carbon credit is a tradable instrument that conveys a claim to avoided GHG emissions or to the enhanced removal of greenhouse gas from the atmosphere. One carbon credit represents the avoided or enhanced removal of one metric ton of carbon dioxide or its carbon dioxide-equivalent.
Carbon offsetting is the practice of using carbon credits to offset or counter an entity's greenhouse gas inventory emissions in line with reporting programs or institutional emissions targets/goals. Carbon credit trading mechanisms, enable project developers to implement projects that mitigate GHGs and receive carbon credits which can be sold to interested buyers who may use the credits to claim they have offset their inventory GHG emissions. Similar to "offsetting", carbon credits that are permitted as compliance instruments within regulatory compliance markets can be used by regulated entities to report lower emissions and achieve compliance status. Aside from "offsetting", carbon credits can also be used to . It is an individual buyer's choice how to use, or "retire", the carbon credit.
Projects entail mitigation actions that avoid or enhance the removal of GHG emissions. Projects are implemented in line with the standards of , including their methodologies, rules, and requirements. Methodologies are approved for each specific project type. Provided a project fulfills all of the requirements and provisions of a crediting program, it will be issued credits that can be sold to buyers. Each crediting program typically has its own carbon credit 'label' such as CDM's Certified Emission Reductions, Article 6.4 Mechanism Emission Reductions, VCS' Verified Emission Reductions, ACR's Emission Reduction Tonnes, Climate Action Reserves' Climate Reserve Tonnes, etc.
Hundreds of GHG mitigation project types exist and have approved methodologies with established crediting programs. The program that defined the first phase of carbon market development, the Clean Development Mechanism provides a . But each crediting program has its own list of approved methodologies, for example unless explicitly stated, an approved methodology could not be used by someone trying to work through Verra's Verified Carbon Standard. Carbon credits are a form of carbon pricing, along with carbon taxes, and Carbon Border Adjustment Mechanisms. Carbon credits are intended to be fungible across different markets, but some compliance markets and reporting programs limit eligibility to specified carbon credit types or characteristics.
Credit quality
"The originating idea behind a carbon credit is that it can substitute for reductions that a buyer could have made to their own emissions. For this to be true, the world must be at least as well off when a carbon credit is used as it would have been if the buyer had reduced their own carbon footprint. The "quality" of a carbon credit refers to the level of confidence that the use of the credit will fulfill this basic principle."Carbon credits and crediting programs have come under increased scrutiny following the rigorous assessment of credit quality and many investigative journalism articles, which have identified significant quality, or environmental integrity, concerns related to credit's avoided emissions or enhanced removals claims. The Australia Institute highlights 23 instances where carbon crediting programs were found to have significant shortcomings. These include claims of overestimated carbon sequestration, double-counting of credits, and the failure of projects to provide "additional" environmental benefits beyond what would have occurred in the absence of the project. Many enhanced removal projects have received criticism as greenwashing because they overstated their ability to sequester carbon, with some projects being shown to actually increase overall emissions.
The essential elements of carbon credit quality can be distilled to five criteria. Higher-quality carbon credits are those associated with avoided emissions or enhanced removals that are:
The Paris Agreement crediting mechanism
Through international climate negotiations led by the UNFCCC, the Paris Agreement was agreed to in 2015 and included provisions for carbon crediting to be a mechanism that could be used to aid countries in meeting their Nationally Determined Contributions. At COP27, negotiators agreed to define credits issued under Article 6 of the Paris Agreement as "mitigation contributions" toward a country's NDC fulfillment. Article 6 of the Paris Agreement includes three mechanisms for "voluntary cooperation" between countries toward climate goals, including carbon credit markets. Article 6.2 enabled countries to directly trade carbon credits through the development of bilateral crediting mechanisms. Article 6.4 established a new international crediting program that supplants the CDM program. The third option is Article 6.8, which enables non-credit generating cooperation. These provisions allow for mechanisms to be developed to enable carbon credits to aid countries in meeting their Nationally Determined Contributions commitments to achieve the goals of the Paris Agreement. Article 6.4, also referred to as the Paris Agreement Crediting Mechanism, and is supplanting the CDM but seeks to respond to quality concerns raised by researchers and the media by enhancing the quality of credits and raise the standard of rigor for the entire market. CDM projects may transition to become PACM projects if they meet the eligibility requirements and the Article 6.4 Methodology Panel is reviewing CDM to determine if they meet the more rigorous standards of the PACM standard documents to be adopted by PACM to guide project development.Project types
Some include forestry projects that avoid logging and plant saplings, renewable energy projects such as wind farms, biomass energy, biogas digesters, hydroelectric dams, as well as energy efficiency projects. Further projects include carbon dioxide removal projects, carbon capture and storage projects, and the elimination of methane emissions in various settings such as landfills.Common terms
Forward crediting, is typically regarded as a risky practice that leads to lower-quality credits. Forward crediting is a process where credits are issued for projected avoided emissions or enhanced removals, which can be claimed by buyers even before the reduction activities have occurred.The vintage of a carbon credit is the year in which a carbon credit was issued by a crediting program, which usually corresponds to the year in which a third party auditor reviews the project — generates the carbon offset credit is known as the vintage.
A registry is a core function of a carbon crediting program. Through a typically publicly accessible registry, carbon credits are tracked for their ownership and retirement. Registries may contain project information such as project status, project documents, credits generated, ownership, sale, and retirement.
History
In 1977, major amendments to the US Clean Air Act created one of the first tradable emission offset mechanisms, allowing permitted facilities to increase emissions in exchange for paying another company to reduce its emissions of the same pollutant by a greater amount. The 1990 amendments to that same law established the Acid Rain Trading Program, which introduced the concept of a cap and trade system, which allowed companies to buy and sell offsets created by other companies that invested in emission reduction projects subject to an overall limit on emissions. In the 1990s, regulatory frameworks for the US Clean Water Act enabled mitigation banking and wetlands offsetting, which set the procedural and conceptual precedent for carbon offsetting.In 1997, the original international compliance carbon markets emerged from the Kyoto Protocol, which established three mechanisms that enable countries or operators in developed countries to acquire offset credits. One mechanism was the Clean Development Mechanism, which expanded the concept of carbon emissions trading to a global scale, focusing on the major greenhouse gases that cause climate change: carbon dioxide, methane, nitrous oxide, perfluorocarbons, hydrofluorocarbons, and sulfur hexafluoride. The Kyoto Protocol was to expire in 2020, to be superseded by the Paris Agreement. Countries are still determining the role of carbon offsets in the Paris Agreement through international negotiations on the agreement's Article 6.
In November 2024, after years of deadlock, governments attending the COP29 conference in Baku, Azerbaijan agreed to rules on creating, trading and registering emission reductions and removals as carbon credits that higher-emission countries can buy, thus providing funding for low-emission technologies.
Economics
The economics behind programs such as the Kyoto Protocol was that the marginal cost of reducing emissions would differ among countries. Studies suggested that the flexibility mechanisms could reduce the overall cost of meeting the targets. Offset and credit programs have been identified as a way for countries to meet their NDC commitments and achieve the goals of the Paris agreement at a lower cost. They may also help close the emissions gap identified in annual UNEP reports.There is a diverse range of sources of supply and demand as well as trading frameworks that drive offset and credit markets. Demand for offsets and credits derives from a range of compliance obligations, arising from international agreements, national laws, as well as voluntary commitments that companies and governments have adopted. Voluntary carbon markets usually consist of private entities purchasing carbon offset credits to meet voluntary greenhouse gas reduction commitments. In some cases, non-covered participants in an ETS may purchase credits as an alternative to purchasing offsets in a voluntary market.
These programs also have other positive externalities, or co-benefits, which include better air quality, increased biodiversity, and water and soil protection; community employment opportunities, energy access, and gender equality; and job creation, education opportunities, and technology transfer. Some certification programs have tools and research products to help quantify these benefits.
Prices for offsets and credits vary widely, reflecting the uncertainty associated with verifying the indirect value of carbon offsets. At the same time, uncertainty has caused some companies to become more skeptical about buying offsets.