As global temperatures continue to shatter records, the urgency for industries to curb their greenhouse gas emissions has never been greater. This pressure has led to the proliferation of carbon credit and carbon offset schemes, which are now common tools in the fight against climate change. Understanding these terms and their effectiveness is crucial for consumers who wish to make informed choices about the environmental impact of their actions.
Carbon credits are a tradable permit that allows the holder to emit a specific amount of carbon dioxide or other greenhouse gases. These credits are issued by regulatory bodies or certification organizations, and one credit typically represents the right to emit one metric ton of CO2. The goal is to cap total emissions while allowing companies to buy and sell credits based on their emissions levels. This market-based approach provides economic incentives for reducing emissions, as companies that exceed their limits must purchase credits from those that have reduced their emissions below their allotted cap.
Carbon offset schemes, on the other hand, involve investing in projects that reduce or remove greenhouse gases from the atmosphere to compensate for emissions produced elsewhere. These projects can include reforestation, renewable energy installations, or methane capture initiatives. By purchasing carbon offsets, individuals or companies effectively balance out their emissions by supporting activities that achieve measurable reductions in greenhouse gases.
While these mechanisms offer a way for industries to address their carbon footprints, their effectiveness can vary. The credibility of carbon credits and offsets depends on rigorous verification processes and transparency. Projects must demonstrate that their emissions reductions are real, additional (i.e., they would not have happened without the offset funding), and permanent. Unfortunately, some schemes have faced criticism for failing to meet these standards, resulting in dubious claims of environmental benefits.
For consumers, understanding these terms and their implications is essential. While carbon credits and offsets can play a role in reducing global emissions, they should not be viewed as a substitute for direct emission reductions. Instead, they should complement broader efforts to reduce one’s carbon footprint, such as adopting energy-efficient practices, reducing consumption, and supporting renewable energy sources. Informed consumer choices, combined with robust regulatory frameworks and transparent practices, can enhance the effectiveness of these tools in mitigating climate change.
With the Paris 2024 Games now concluded and the Paralympics underway, the Olympic board and the French government are hoping to pave the way for greener sporting events in the future. According to the official Olympic website, this year has seen a structural transformation in the way that carbon emissions are addressed, from a “post-games assessment” to a “pre-games target.” As well as committing to reducing emissions at the source, Paris 2024 has purchased 1.3 million voluntary carbon credits for offset projects “that collectively protect more than 400,000 hectares of threatened forest.”
For many people, the increasing emergence of terms like carbon credits and carbon offsets will be a new and confusing phenomenon, despite them having existed since the 1990s. As climate change becomes a focal point in the media and activists increasingly demand for commercial transparency, carbon reduction schemes are the primary method for companies to adopt a green side. It is important, then, to explain the main differences between carbon offsets and carbon credits, and how companies use them.
The Need to Offset Emissions
The first instance of carbon offsetting began in 1989 when US company AES approached the World Resources Institute (WRI) looking for help to mitigate the carbon emitted from their coal-fired power plants. In response, the WRI came up with carbon offsetting, a process in which a company can compensate for their carbon emissions by funding a project that aims to capture carbon. As a company emits greenhouse gases, their offset projects draw equivalent gases back in to create balance.
AES funded an agroforestry project with CARE, an international relief and development organisation, in Guatemala. WRI recommended that AES and CARE help “40,000 smallholder farmers in Guatemala plant more than 52 million trees over a ten-year period,” with the goal of sequestering 19 million tonnes of carbon over 40 years.
The initial response to the first carbon offset scheme was mixed: some praised AES for their progressive thinking while others saw it as a way of pushing their own environmental responsibilities onto others. Mark Trexler, the WRI correspondent in charge of the first carbon offset initiative, has described it as a pure example of “environmental philanthropy.” However, Mark also notes that carbon offsetting was just a way of “getting the conversation [on carbon emissions] started,” adding that “no one then thought we would be doing offsets 35 years later.”
As carbon offsetting began to take shape in the 1990s, by 1997, the Kyoto Protocol – an international treaty calling for industrialized countries to reduce their emissions – finalized the concept of carbon credit. From this, compliance markets and voluntary markets grew in response to the legally-binding goals set out in the Kyoto Protocol.
The terms carbon credit, carbon offset, and carbon credit schemes can be used interchangeably, often leading to confusion. Companies may use the Voluntary Carbon Market (VCM) to remove greenhouse gases from the atmosphere by purchasing carbon offset projects which are termed carbon “credits.” On the other hand, carbon credit schemes are an allowance for companies to emit a certain amount of greenhouse gases into the atmosphere. One credit equals one metric tonne of CO2 equivalents. If a company emits more than their allowance, they must buy more credits on the compliance carbon market; if they emit less, they can sell their remaining credits to another company in a carrot-and-stick approach to regulating CO2 emissions.
Carbon offsetting helps mitigate emissions, carbon credits help prevent them. Whereas carbon offsets are a voluntary act by a company, carbon credits are regulated and distributed by governments, meaning companies must adhere to it.
Below is a summary of the differences between carbon offset and carbon credit schemes:
| Carbon offset | Carbon credit |
| A method for companies to voluntarily balance their carbon emissions by funding projects that capture or reduce carbon, such as reforestation or renewable energy initiatives. | A regulated system where companies must adhere to a set carbon emissions allowance determined by governing bodies. |
| Credits are purchased on the Voluntary Carbon Market. | Credits are traded on compliance markets, allowing companies to buy or sell credits based on whether they have reduced emissions below their allowance or exceeded their limit. |
| These offsets remove or reduce carbon from the atmosphere to compensate for the emissions produced by the purchasing company. | Credits aim to reduce carbon emissions through a system of rewards for exceeding targets and penalties for exceeding allowance. |
More on the topic: The Pros and Cons of Offsetting Carbon Emissions
Carbon Markets Today
Today, carbon markets have exploded in popularity. In 2023, compliance markets were valued at around US$950 billion with 12.5 billion metric tonnes of carbon credits being traded; putting a price on carbon remains the most prevalent method in reducing industry emissions. According to Ruben Lubowski, an environmental economist, compliance markets currently cover around 25% of global emissions, “‘raising climate ambition worldwide.” Meanwhile, World Bank data indicates that in 2023, revenues made from carbon pricing reached US$104 billion, half of which were used to fund climate and nature-related programs.
Senior MD Alex van Trotsenburg believes “carbon pricing can be one of the most powerful tools to help countries reduce emissions.” The operative word here is “can”; the growing coverage of compliance markets does not mean we are approaching our climate goals.
According to the World Bank’s recent report, ‘State and Trends of Carbon Pricing 2024’, “less than 1% of global greenhouse emissions are covered by a direct carbon price at or above the range recommended by the High-level Commission on Carbon Prices to limit temperature rise to well below 2ºC.” Monetising carbon might be an effective way to reduce industrial emissions, but only if it is valued correctly.
The Voluntary Carbon Market, where companies purchase carbon offset projects to mitigate their own emissions, was valued at US$2 billion in 2022, though some estimates suggest that by 2030, the market could be valued at as much as $40 billion.
Carbon offsetting has the potential to make a huge impact on the climate, but the system has been accused of allowing greenwashing for companies that care more about their PR. A Guardian report from 2023 found that 90% of rainforest carbon offset projects led by Verra, one of the biggest certifiers and used by the likes of Disney, Shell, and Gucci, were “worthless” and only amount to “phantom credits.” From the 94.9 million carbon credits claimed, with each credit equal to one metric tonne of C02 equivalent, only 5.5 million metric tonnes had been reduced.
While a carbon-neutral stamp on your favourite brand might give you reassurance, the truth of the matter is far more complex. Companies can embellish their products with offsetting goals, but they do not have to mention how successful these projects have ultimately been. As the offsetting market continues to grow, some call for tighter regulation, while others call for it to be abandoned entirely. In response to negative reports on carbon offsetting, the market shrank to $723 million in 2023.
Final Thoughts
Carbon offsetting and credit schemes provide a capitalist approach to enhancing industrial responsibility in addressing the climate crisis. However, both compliance and voluntary markets are fraught with challenges. While it is promising that innovative solutions within polluting industries are being considered, the current methods lack sufficient regulation. Moreover, carbon offsetting and credits do not necessarily encourage companies to fundamentally transform their structures to become more sustainable.
A system that truly rewards those with sustainability at their core is needed; at the very least, the value of carbon must be significantly increased. With the lack of credibility to which carbon offset projects currently hold, the Paris 2024 Olympics have revoked their claim to being carbon-neutral. The compliance markets continue to surge in value, while the future of the voluntary market remains uncertain; whether either will be effective in mitigating climate change remains to be seen.
