Carbon Credit

Definition

‘Also known as an "offset", this is a generic term used to assign a value to a reduction, avoidance or capture of GHG emissions achieved by a certified project. It is equivalent to one metric ton of carbon dioxide equivalent (CO2e). A carbon credit can be used by a business, organisation or individual to compensate for their carbon footprint by financially rewarding an activity that has reduced or sequestered GHGs and which also brings other sustainable development benefits.’

Source: UNFCCC

Explainer

Carbon credits are, simply put, permission slips for emissions. When a company buys a carbon credit they gain permission to generate one ton of CO2 emissions. Carbon credits are purchased voluntarily, usually to meet a public commitment to stakeholders such as a corporation’s journey to net zero. These purchases are done in Voluntary Carbon Markets (VCMs). Other purchases are made in Compliance Markets to meet a regulatory obligation. For instance, at the country-level, such obligations follow treaties, which are then translated into national law. Carbon credits in the context of VCMs are known as Voluntary Carbon Units (VCUs), while those purchased in the context of Compliance Markets are Known as ‘Carbon Permits’ or ‘Allowances’.