Climate change is one of the most pressing issues facing our planet today. One of the ways to address it is by reducing our greenhouse gas emissions. One way to do this is by using carbon offsets, carbon credits, and carbon allowances. But what exactly do these terms mean, and how do they differ? In this post, we will explore the differences between carbon offset, carbon credit, and carbon allowance, and how they can help mitigate climate change’s effects.
Carbon pricing
Carbon pricing is a mechanism that calculates the external costs of greenhouse gas (GHG) emissions, such as harm to crops, increased healthcare expenses from heat waves and droughts, and property loss from flooding and rising sea levels, and assigns a cost to these emissions. This is typically done through a price on carbon dioxide (CO2) emissions.
By placing a price on carbon, the responsibility for the damage caused by GHG emissions is shifted back to those who are responsible for and capable of reducing them. Rather than mandating specific emissions reductions, carbon pricing provides an economic incentive for emitters to either reduce their emissions or pay for them. In this way, environmental goals can be achieved in the most cost-effective and flexible manner for society.
The main types of carbon pricing are listed below:
- Carbon Credits – as part of an emissions trading system (ETS) baseline-and-credit systems, where baseline emissions levels are defined.
- Carbon Allowances – Cap-and-trade systems, which apply a cap or absolute limit on the emissions within the ETS and emissions allowances are distributed.
- Carbon Taxes – A Carbon Tax sets a clear price on carbon emissions by implementing a tax rate on Greenhouse Gas (GHG) emissions or, more frequently, on the carbon content of fossil fuels, expressed as a price per metric ton of CO2 equivalent (tCO2e). Unlike an Emissions Trading System (ETS), the goal of reducing emissions is not predetermined, but the carbon price is.
- Carbon Offsets –
- Carbon Removals – Carbon removal is the process of removing carbon dioxide from the atmosphere and locking it away for decades, centuries, or millennia.
Carbon offsets
Carbon offsetting is the process of reducing or eliminating carbon emissions by investing in projects or activities that remove or reduce greenhouse gases from the atmosphere. This can include things like renewable energy projects, reforestation, and energy efficiency programs. Carbon offsets are intended to be a way for individuals and companies to compensate for their own emissions by supporting emissions-reducing activities elsewhere. For example, a company that produces a lot of emissions from its manufacturing operations might invest in a wind farm to offset those emissions.
Carbon Credits
Carbon credits, on the other hand, are a way to financially trade emissions. They represent the right to emit one metric ton of CO2, and they can be bought and sold on carbon markets, such as the European Union Emissions Trading System (EU ETS). Carbon credits can be used by companies to meet emissions reduction targets. For example, a company that is required to reduce its emissions by a certain amount can purchase carbon credits from another company that has already reduced its emissions by more than that amount. This allows the buyer to emit more carbon.
Carbon allowance
Lastly, Carbon allowances, also known as emission allowances, are permits that allow companies to emit a certain amount of greenhouse gases, as determined by a government or regulatory body. These allowances are often distributed or auctioned off by the government, and companies must hold enough allowances to cover their emissions. If a company emits more greenhouse gases than it holds allowances for, it can be subject to fines or penalties. Carbon allowances are often used in conjunction with carbon trading systems, like the EU ETS, which we mentioned earlier.
So what is best, Carbon offsets, credits, or allowances?
All three of these approaches to carbon reduction have their own benefits and drawbacks. Offsets can be a relatively simple way for companies and individuals to take action on climate change, and they can support a variety of different projects and activities. Carbon credits, meanwhile, can help create a financial incentive for companies to reduce their emissions and invest in clean energy. Carbon allowances can also play an essential role in setting targets and ensuring that companies are held accountable for their emissions.
In conclusion, carbon offsets, credits, and allowances are three different tools.
- Carbon offsetting is a way to reduce emissions by investing in projects or activities that remove or reduce greenhouse gases.
- Carbon credits are a way to financially trade emissions.
- Carbon allowances are permits that allow companies to emit a certain amount of greenhouse gases.
Each of these approaches has its own benefits and drawbacks. They can be used together to create a comprehensive strategy for addressing climate change. As individuals, it is important to understand the difference between these terms and how they can be used to help mitigate the effects of climate change and help make a real impact in the world.
One should prioritize other tools, such as the reduction or avoidance of emissions.
Resources:
- World Bank – Carbon Pricing
- EU ETS – European Commission
- IPCC – Intergovernmental Panel on Climate Change, Special Report, Global Warming of 1.5oC (Link)
- World Bank – State and Trends of Carbon Pricing 2022 (Link)
- Integrity Council for the Voluntary Carbon Market (Link)
