What is a carbon credit?
A carbon credit is a commercial term used to assign a value to a metric ton of greenhouse gas emissions. When you purchase a carbon credit from a third party you are helping to fund a project that will either reduce or sequester a metric tonne of carbon emissions from the atmosphere in another location.
As a result of purchasing a carbon credit from a third party you are effectively ‘offsetting’ some or all of your own carbon emissions.
What is the difference between credits, offsets, and permits?
The difference between carbon credits, offsets and permits can be confusing for newcomers to the industry. Fundamentally, carbon credits and offsets are the same thing, both being equal to one metric ton of GHG emissions. Some people argue differently, however. Most of the differences in their interpretation relate to the various scenarios in which the words are used, and for what purpose the credits or offsets are used. The carbon language everyone is using at the moment is still new and therefore changes regularly. We hope that for everyone’s sake it will develop over time and become clearer.
The simplest way to explain the differences is that a permit means that its holder has the right to pollute up to a certain level, whereas a carbon credit or offset is a certificate stating that someone else has made a commitment to reduce carbon emissions on behalf of the owner of the credit or offset. People, governments, and businesses can buy, sell and trade carbon credits, offsets, and permits in the various carbon markets. However, only credits and offsets actually help to reduce the effects of GHGs on the environment
What is the difference between compliance and voluntary credits?
At present the two main types of credits that are available in the market, compliance credits (such as CERs) and voluntary credits (such as VERs). Within these two main types are nearly two dozen different carbon standards and programs which are all currently competing for dominance in the market. The main difference between them is that compliance credits have usually gone through a much stricter or more controlled certification process, which should mean that they’re better, as such compliance credits usually cost more than voluntary credits.
Commercially, it is important to understand the different markets and mechanisms before getting involved in carbon trading or credits. When doing this, buyers should pay careful attention to the particular carbon market’s region and requirements that they are interested in.
How and why does someone retire carbon credits?
If you’ve purchased carbon credits to help offset your carbon footprint (or as part of a compliance program) it’s important to retire them so that you can make your claim in regard to carbon neutrality or legistlation. Carbon credits that are going to be retired should first be listed or registered on a recognized carbon register so that they can be traced. Once they’ve been registered they can then also be retired so that you can then make your claim.
Completing the process of retirement effectively renders them as used. This means they’ll no longer have any commercial value, as you’ve spent them, and you therefore can’t use them again or resell them to someone else. This is an important step that also addresses the issue of double counting in the industry.
Most reputable registries will be able to do the actual retiring of your carbon credits for you for a small fee, or if you bought them from a carbon broker or third party they should also be able to arrange this service for you.
If you would like more information on carbon credits and how it all works you might benefit from a copy of our ebook called ‘Carbon Markets 101: the Basics. Essentially it's a beginners guide to everything that is carbon.