A: Carbon credits and carbon offsets are financial instruments that represent the reduction or removal of greenhouse gas emissions from the atmosphere. A carbon credit typically represents one metric ton of CO2, While a carbon offset refers to a project or action that facilitates emissions avoidance equivalent to one metric ton of CO2.

Carbon credits and offsets are created through various projects and activities aimed at reducing emissions. These projects can include renewable energy generation, energy efficiency improvements, reforestation, and methane capture from landfills. Each project undergoes a rigorous assessment process to ensure its legitimacy and the accuracy of emission reductions.

A: More than ever, the global economy has to shift to a low-carbon model. But global greenhouse gas (GHG) emissions are still increasing — and even with the most aggressive decarbonization plans, a significant amount of GHG emissions will remain unavoidable in the short term.

Carbon projects, and the credits they generate, can help mitigate these unavoidable emissions from our daily lives by avoiding or capturing CO₂ all over the world. Carbon offsetting is one of the tools in a patchwork of solutions that help us on the path to net zero.

A: The key distinction between carbon credits and carbon offsets lies in their voluntary or compulsory nature. Voluntary carbon credits are purchased willingly by individuals, organizations, or governments to support emission reduction projects beyond regulatory requirements. They allow entities to take proactive steps in addressing their carbon footprint and demonstrating environmental responsibility.

On the other hand, compulsory carbon offsets are typically part of compliance markets established under government-regulated cap-and-trade systems. In these markets, companies are legally obligated to offset a portion of their emissions by purchasing and retiring a specific number of carbon credits. Compliance markets provide a framework for meeting emission reduction targets set by regulatory authorities.

A: There are broadly two types of carbon markets: mandatory and voluntary.  

Mandatory carbon markets are established by governments as a means of achieving their carbon reduction targets. These markets operate on a mandatory basis, meaning that participating organizations are required by law to participate in the market and to meet certain carbon reduction targets. One example of a compliance carbon market is the European Union’s Emissions Trading System (EU ETS). Under the EU ETS, companies that emit large amounts of carbon dioxide (CO2) are required to purchase a certain number of carbon credits each year. 

Voluntary carbon markets are not established by governments and participation is voluntary. These markets allow companies, governments, and other organizations to offset their carbon emissions on a voluntary basis, either to meet their own sustainability goals or to demonstrate their commitment to reducing their carbon footprint. 

A: Companies that pollute are awarded credits that allow them to continue to pollute up to a specific limit, which is reduced periodically. Meanwhile, the company may sell any unneeded credits to another company that needs them.  Private companies are thus doubly incentivized to reduce greenhouse gas emissions. Firstly, they must spend money on extra credits if their emissions exceed the limit. Secondly, they can make money by reducing emissions and selling their excess allowances.   

For example, if a company generates 12 tons of emissions while the limit is 10 tons, they can redeem 2 credits from companies that generate emissions below the limit and have excess credit. This is verified by a third party and the credits awarded through these efforts can be traded on the carbon market. 

A: There are several compelling reasons to buy carbon credits. 

Environmental Impact: By purchasing carbon credits, you contribute to projects that actively reduce or remove greenhouse gas emissions. These projects can have a positive impact on the environment, such as promoting renewable energy, conserving forests, or improving energy efficiency.

Corporate Social Responsibility: Buying carbon credits demonstrates your commitment to sustainability and corporate social responsibility. It showcases your organization’s efforts to address climate change and can enhance your reputation among stakeholders, including customers, investors, and employees.

Mitigating Risks: Investing in carbon credits helps mitigate the risks associated with potential carbon pricing mechanisms and future regulatory requirements. By proactively reducing emissions and supporting sustainable projects, you position your organization to adapt to evolving climate policies.