To be fair, this is not a question we commonly receive from donors or those interested in reducing greenhouse gas emissions, but when people do ask about the different between carbon offsets and carbon credits, and sometimes carbon dioxide equivalents, it shows an intense interest in the subject and usually a strong commitment to fighting climate change.
Let’s start with a carbon credit. A carbon credit is an instrument that represents ownership of one metric tonne of carbon dioxide equivalent that can be traded, sold, retired, etc. If a company is regulated under a cap-and-trade system, they most likely have an allowance of credits they can use toward their cap. If they use fewer emissions (credits) than they are allocated, they can trade, sell, hold, or do whatever they like with the credit. If it is sold, it is their allowance of emissions being sold to someone else. (Likewise, if they use more than they have allocated, they must purchase a credit to be in compliance). So a credit becomes tradable, like an offset, because of a very real reduction in emissions, but often times the reduction is from an activity you may not have thought of, like changing a business practice, flying less, turning off equipment at night, and so on.
A carbon offset, on the other hand, is also a very real reduction of carbon dioxide emissions, and results in the generation of a carbon credit, but from a project with clear boundaries, title, project documents and a verification plan. Carbon offsets generate reductions outside the ‘four walls’ of a company in most cases. Projects like building a wind farm, supporting truck stop electrification projects, planting trees or preserving forests are very common carbon offset projects. These reductions occur outside the companies’ four walls but more importantly, outside any regulatory requirement. They are in addition to what is being mandated.
So a carbon offset derived from a third-party certified project usually generates a carbon credit. But a carbon credit need not be from a carbon offset project. Because carbon dioxide is a global impact gas, meaning it does not affect us locally through increased smog or acid rain, both offsets and credits have the exact same reduction in carbon dioxide emissions and have the exact same benefit to the planet in terms of climate change.
We get excited about carbon offsets because they have the opportunity to reduce global climate change at a fraction of the cost than if every entity were forced to reduce their emissions only internally. Imagine how expensive it is for an already state-of-the-art factory to reduce its emissions by 30% versus a dirty coal plant in the Ukraine to reduce a similar amount of emissions by installing upgraded, new equipment. Carbon offsets enable capital to reduce emissions in the most efficient manner possible. Carbon offsets support technology transfer, international development, jobs and exports for developed countries and so forth.
And this is why we ask people to [cue shameless plug] ‘reduce what you can and offset what you can’t’.