What is a carbon credit? Voluntary and compliance markets

A carbon credit is a certificate representing one tonne of carbon dioxide equivalent whose release was prevented, or which was removed from the atmosphere. A company buys one to balance emissions it could not itself abate, and retires it on use so the same credit cannot be used twice.

Two different markets

The term is used in two separate systems, and they are not interchangeable.

Compliance markets are state-established emissions trading systems such as the EU ETS. Covered installations receive an emissions cap; those below it sell their allowances, those above must buy. The unit here is an allowance, created by the state.

The voluntary market arises from projects verified by private certification bodies: afforestation, renewable energy, efficient cookstove distribution, direct air capture. The unit here is a credit, generated by a project, bought at a company’s own discretion.

Four quality tests

Whether a credit represents a real climate benefit turns on four questions. Credits priced at a few dollars a tonne are typically weak on at least one of them.

• Additionality — would the project have happened without credit revenue? Selling credits for an already-profitable renewable plant creates no extra abatement.
• Permanence — how long does the stored carbon stay? Wildfire or felling risk is an uncertainty geological storage does not carry.
• Leakage — did the prevented activity simply move? Forest protected in one area and felled in the next nets to zero.
• Double counting — is the same reduction counted both in the host country’s national target and in your claim?

Avoidance versus removal

Credits come in two kinds, and the distinction is decisive for net zero claims. Avoidance credits stop an emission occurring — preventing deforestation, say. Removal credits draw carbon out of the atmosphere — afforestation, biochar, direct air capture. A net zero claim expects residual emissions to be balanced with permanent removals; an avoidance credit is not considered sufficient.

Not to be confused with CBAM

A CBAM certificate is not a carbon credit. It is not traded, has no secondary market, cannot be stockpiled speculatively and does not originate in a project. It is an instrument covering, for the importer, the cost that would have been paid in the EU for the good’s embedded emissions; its price is indexed to the EU ETS auction average.