Carbon Credit
AdvancedA carbon credit is a tradable permit or certificate representing the right to emit, or the reduction or removal of, one tonne of carbon dioxide or an equivalent amount of another greenhouse gas.
Carbon credits are used in two main types of markets. In compliance markets, governments set a cap on total emissions for certain industries and issue or auction allowances. Companies that emit less than their allowance can sell the surplus, while those that emit more must buy additional allowances. The European Union Emissions Trading System is the largest example.
In voluntary markets, companies and individuals buy credits generated by projects that reduce or remove emissions, such as renewable energy, forest protection or methane capture, to offset their own emissions.
For example, a manufacturer covered by an emissions trading scheme that cuts its emissions by investing in efficient equipment could sell its unused allowances to another company.
Carbon credits put a price on emissions, encouraging reductions where they are cheapest. However, voluntary credits have faced criticism over quality, with concerns that some projects overstate their benefits or would have happened anyway. Standards and verification bodies aim to improve integrity. Carbon allowances and futures are also traded as financial instruments.
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