Skip to content
Introduction to Carbon Markets

Types of Carbon Credits

Introduction

Carbon credits represent one ton of carbon not emitted, or removed from the atmosphere. There are  the central component of carbon markets, allowing organizations and individuals to offset their greenhouse gas emissions by investing in emission reduction or removal projects. However, not all carbon credits are the same. This article explores the various types of carbon credits available in both compliance and voluntary markets, shedding light on the distinctions that influence their use and impact.

 

1. Compliance Carbon Credits

Offset Credits in Regional Compliance Markets

Compliance markets function under a cap and trade system, whereby a (increasingly strict) ceiling is determined for carbon emissions, and companies trade their “allowances'' under that cap. Some buy, and some sell carbon emissions.  The countries or regions in charge auction off certificates which enable companies to purchase additional carbon offset rights, effectively setting a carbon price for the whole region. The EU ETS allowance price has neared $100 per ton in recent years.  The California Cap-and-Trade Program uses California Carbon Offsets, and the Northeast U.S. states have the Regional Greenhouse Gas Initiative (RGGI) allowances. Many other countries have recently announced that they will be setting up a carbon market for their key emitting industries in order to speed up the rate of decarbonisation  Funds earned from this market system are typically used for consumer or industry based low carbon transportation, heating, and other incentives.

2. Voluntary Carbon Credits

Voluntary Emission Reductions (VERs)

Voluntary Emission Reductions, or VERs, are carbon credits generated through projects in voluntary markets. In 2022 the voluntary carbon market reached $2 billion—four times its value in 2020. By 2030, the market is expected to reach between $10 billion and $40 billion. VERs can originate from projects  located anywhere globally and vary widely in terms of the technologies and nature-based solutions they use. VERs allow individuals, companies, and organizations to voluntarily offset their carbon footprint by investing in emission reduction initiatives. The tons of carbon avoided or removed must meet strict Scientific standards and are verified and registered on official registries.

Companies that wish to offset their greenhouse gas emissions can purchase two types of credits in the voluntary market: avoidance credits for external projects that avoid or reduce emissions production, such as building a wind farm, and removal credits for projects that lower existing emissions. Removal projects deploy either nature-based solutions such as afforestation (introducing trees to a previously unforested area) or technology-based solutions such as renewable energy generation.

In 2022 the voluntary carbon market reached $2 billion—four times its value in 2020. By 2030, the market is expected to reach between $10 billion and $40 billion.

There is no overarching regulatory agency for the voluntary market, but several well-know organizations dominate the registration process for carbon credits and ensure a level of transparency and oversight. Still lack of transparency continues to concern buyers and increasingly, privately held “rating” companies are attempting to determine the quality, impact and risk of carbon projects. Other AI-driven processes seek to establish on the ground oversight and quantification of the tons of carbon produced. This is a growing sector which should bring more trust and liquidity to the markets as they grow.

 

Conclusion

Understanding the types of carbon credits is essential when considering carbon offsetting or investing in emission reduction projects. Whether operating within a compliance market with specific regulatory requirements or participating in a voluntary market driven by sustainability goals, a ton of carbon saved is the same around the world. However, the availability and nature of carbon credits can vary significantly. Many projects and carbon reduction companies also contribute significantly to the fulfillment of the Sustainable Development Goals. New technologies and scientific insights are expanding the limits of how carbon emissions can be reduced, which make the carbon markets very dynamic and innovative. By choosing the right type of credit, individuals and organizations can align their carbon reduction efforts with their objectives and values.