What is a carbon credit?

A carbon "credit" is a tradable certificate that represents one tonne (one metric tonne) of CO2e, defined as either one tonne of CO₂ or an equivalent amount of other greenhouse gases.

Credit certificates may be generated by a wide range of activities that either remove a measurable amount of CO2e from the atmosphere or reduce the amount of CO2e being emitted.

Credits generated by emissions reductions can be an effective mechanism to subsidise and accelerate decarbonisation. The buyer offsets their own CO2e emissions by paying for the supplier to take measurable action to emit less greenhouse gases. So, for each credit, 1 tonne of CO2e gases is emitted instead of 2.

Credits generated by CO₂ removal are based on CO₂ being removed from the atmosphere and stored for timescales ranging from hundreds to thousands of years. The credits are transferred from the supplier (the entity removing GHGs) to the buyer. For each credit used by the buyer, one tonne of CO2e is removed from the atmosphere to balance out one tonne of the buyer's CO2e emissions. This equals a net zero increase in atmospheric greenhouse gases.

Both types of credit can also be purchased by individuals or organisations that do not need to reduce their emissions. Buyers may also purchase more offsets than their emissions require. This is called a climate positive approach.

What are the Carbon Markets?

Carbon credits are traded on carbon markets. There are two types: compliance and voluntary.

Compliance markets may be national or international government-regulated programs. The Clean Development Mechanism or CDM, recently renamed the Sustainable Development Mechanism or SDM, is a well-known example. Compliance markets on a national level are also known as cap and trade systems.

Voluntary markets trade internationally and supply offsets to companies and individuals seeking to reduce their carbon footprints outside any compliance program.

Are carbon markets regulated?

While there is no single set of rules regulating carbon markets, there are bodies that provide recommendations and set best practices.

For the voluntary carbon market, organisations such as The International Carbon Reduction and Offset Alliance (ICROA) seek to establish regulation and oversight to ensure the highest level of environmental integrity.

The Article 6 Rulebook established by the UNFCCC COP26 introduces a centralized management system and recording structure for international carbon trading under the SDM and allows for a selected exchange of credits between voluntary and compliance programs.

More detailed information on Article 6 and Nationally Determined Contributions (NDCs) can be found here.