Short Guide to Carbon Credits

Syona Gupta

5 min readFeb 6, 2024

Table of Contents:

Terminology — Overview of the Basics

1A. Carbon Credit: Avoidance vs Removal

1B. Carbon Market: Voluntary vs Government Controlled

1C. Carbon Registries

2. Key Innovations

3. Sources

Carbon credits, or carbon offsets, is a word that has seemed to overtake news headlines and companies’ ESG reports. While the name seems relatively simple, a credit that represents an arbitrary carbon emission, there is an underlying market filled with innovation and the potential to change how we can set goals to cut carbon emissions. This concept is not relatively new, dating back to the Kyoto Protocol, but has had a new resurgence as a next step to curb climate emissions by implementing sustainable practices and preventing a big disruption to the current economy.

Terminology: Overview of the Basics

Carbon Credits: Avoidance Vs. Removal

At its core, a carbon credit is described as a permit, representing 1 ton of CO2e (Carbon Dioxide Equivalence) emissions. Carbon credits can be purchased by either consumers or companies, the latter is more common. It allows the entity to emit a certain amount of CO2e based on the reduction of carbon emissions from that activity represented by the carbon credit value. These carbon credits are generated through a multitude of project activities by comparing the baseline carbon emissions to the final. These project activities fall into three main buckets:

Avoidance:

Hinted by its name, a carbon credit is awarded when a predicted project activity that is expected to emit a certain amount of CO2e is prevented.

An example of this is a forested area owned by an oil company that intends on logging the entire forested area, which plays an integral part in carbon sequestration for that ecosystem. Another land developer may end up purchasing this land from the oil company to maintain the current forested ecosystem, thereby preventing any harmful emissions that would have been released due to logging.

2. Reduction:

This can be often confused with avoidance credits as similar terminology is used. Reduction credits focus on implementing practices that will lessen the amount of CO2e produced by certain activities. A very common example is opting to use renewable energy, such as solar or wind, instead of fossil fuels to power a company’s manufacturing plant. Reduction practices are also common in agriculture, such as changing livestock feed to reduce the amount of methane released from livestock.

3. Removal:

Removal credits are obtained when a project activity removes emissions that have already been released. There are several types of carbon removal projects such as ecosystem restoration and direct carbon capture.

(What is the difference between avoidance and removal carbon credits | Riverse)

Removal credits are becoming more popular as it is harder to assess the effectiveness of avoidance credits due to their quality.

Carbon Markets: Voluntary vs Government Controlled

Both these credits can be purchased or sold on carbon markets (Carbon Markets: What They Are and How They Work). Two main types of markets regulate the sale of carbon credits:

Government Controlled: Government-controlled markets utilize a cap-and-trade system where a market sets a limit on the amount of CO2e emissions from a company and splits up those emissions into credits. Each company has a fixed amount of credits where it can either use up those carbon credits, sell excess credits, or buy extra credits. The ultimate goal is to continue to reduce this cap until there are zero emissions. The credits follow a system similar to an allowance (What is the Voluntary Carbon Market?).
Voluntary: Due to their lack of restriction geographically and industrially, the voluntary carbon market (VCM) is unregulated, thereby making it less rigid in policies. VCMs utilize a project-based system where credits can be generated by a project activity. Companies can participate in this market as an industry or individually (What is the Voluntary Carbon Market?).

Carbon Registries

Carbon registries play a role in regulating the carbon credits within the market. They set up guides and procedures to obtain carbon credits and track the sale of credits. In a way, registries act as a ledger for the trading of credits. Another important role for these registries is ensuring the quality of the carbon credit. If a low-quality carbon credit is purchased by a company, that company risks facing scrutiny in the public eye for greenwashing. The carbon registry’s job is to ensure transparency and traceability of the carbon credits on the market.

The four major voluntary offset project registries are the American Carbon Registry (ACR), Climate Action Reserve (CAR), Gold Standard, and Verra (VCS) (Voluntary Registry Offsets Database | Berkeley Carbon Trading Project | Projects | Center for Environmental Public Policy (CEPP)).

Real-World Carbon Markets

Canada

Canada is the world’s fourth-largest oil producer, which makes the carbon offset market a key opportunity in this space. Canada has implemented a Greenhouse Gas Pollution Pricing Act to set a minimum carbon pricing benchmark, where subnational governments retain the ability to determine how to implement this carbon benchmark (ex: carbon tax or emissions trading system) (Defining the role — Implementing Effective Emissions Trading Systems — Analysis — IEA). Canada has just made a huge step to ensure price certainty within their market with their first deal to backstop future carbon prices as the Canada Growth Fund has bought annually 1 million tonnes of carbon credits, setting the price to C$86.50 per ton (Canada strikes first deal to backstop carbon credit prices | Reuters).

2. Ghana

Ghana is the second largest global cocoa producer and has utilized carbon markets to implement sustainable farming practices to protect land from future deforestation and cocoa crops. Through this, Ghana has earned around $4.8 million for carbon emissions reduction caused by deforestation and forest degradation. Ghana utilized support through the World Bank and technology such as remote sensing and ground-based sampling to support the development of carbon markets, serving as a pioneer to compliance markets across the globe (In Ghana, Sustainable Cocoa-Forest Practices Yield Carbon Credits).

Carbon credits can play a crucial role in the green economy transition, turning one of the world’s biggest dilemmas into a commodity.