Carbon offsets and credits

A carbon credit is a tradable instrument (typically a virtual certificate) that conveys a claim to avoided GHG emissions or to the enhanced removal of greenhouse gas (GHG) from the atmosphere. One carbon credit represents the avoided or enhanced removal of one metric ton of carbon dioxide or its carbon dioxide-equivalent (CO₂e).

Carbon offsetting is the practice of using carbon credits to offset or counter an entity's greenhouse gas (GHG) inventory emissions in line with reporting programs or institutional emissions targets/goals. Carbon credit trading mechanisms (i.e., crediting programs), enable project developers to implement projects that mitigate GHGs and receive carbon credits which can be sold to interested buyers who may use the credits to claim they have offset their inventory GHG emissions. Similar to "offsetting", carbon credits that are permitted as compliance instruments within regulatory compliance markets (e.g., The European Union Emission Trading Scheme or the California Cap-n-Trade program) can be used by regulated entities to report lower emissions and achieve compliance status (with limitations around their use that vary by compliance program). Aside from "offsetting", carbon credits can also be used to make contributions toward global net zero GHG-level targets. It is an individual buyer's choice how to use, or "retire", the carbon credit.

Projects entail mitigation actions that avoid or enhance the removal of GHG emissions. Projects are implemented in line with the standards of crediting programs, including their methodologies, rules, and requirements. Methodologies are approved for each specific project type (e.g., tree planting, mangrove restoration, early retirement of coal powerplants). Provided a project fulfills all of the requirements and provisions of a crediting program, it will be issued credits that can be sold to buyers. Each crediting program typically has its own carbon credit 'label' such as CDM's Certified Emission Reductions (CERs), Article 6.4 Mechanism Emission Reductions (A6.4ERs), VCS' Verified Emission Reductions (VERs), ACR's Emission Reduction Tonnes, Climate Action Reserves' Climate Reserve Tonnes (CRTs), etc.

Hundreds of GHG mitigation project types exist and have approved methodologies with established crediting programs. The program that defined the first phase of carbon market development, the Clean Development Mechanism (CDM) provides a summary booklet of its many approved methodologies. But each crediting program has its own list of approved methodologies, for example unless explicitly stated, an ACR approved methodology could not be used by someone trying to work through Verra's VCS crediting program. Carbon credits are a form of carbon pricing, along with carbon taxes, and Carbon Border Adjustment Mechanisms (CBAM). Carbon credits are intended to be fungible across different markets, but some compliance markets and reporting programs limit eligibility to specified carbon credit types or characteristics (e.g., vintage, project origin, project type).

"The originating idea behind a carbon credit is that it can substitute for reductions that a buyer could have made to their own emissions (i.e., compensation use). For this to be true, the world must be at least as well off when a carbon credit is used as it would have been if the buyer had reduced their own carbon footprint. The "quality" of a carbon credit refers to the level of confidence that the use of the credit will fulfill this basic principle." Carbon credits and crediting programs have come under increased scrutiny following the rigorous assessment of credit quality and many investigative journalism articles, which have identified significant quality, or environmental integrity, concerns related to credit's avoided emissions or enhanced removals claims. The Australia Institute highlights 23 instances where carbon crediting programs were found to have significant shortcomings. These include claims of overestimated carbon sequestration, double-counting of credits, and the failure of projects to provide "additional" environmental benefits beyond what would have occurred in the absence of the project. Many enhanced removal projects have received criticism as greenwashing because they overstated their ability to sequester carbon, with some projects being shown to actually increase overall emissions.

The essential elements of carbon credit quality can be distilled to five criteria. Higher-quality carbon credits are those associated with avoided emissions or enhanced removals that are:

Carbon credit quality is possible to assess and in response to the growing concerns related to credit quality, many credit ratings initiatives began to form around 2020 to aid buyers and crediting programs in discerning high-quality from low-quality projects and to make improvements to crediting methodologies so that future credits will only be issued if they meet more rigorous requirements. These credit ratings initiatives have taken the form of open access resources like OffsetGuide.org, labeling initiatives like the Integrity Council for the Voluntary Carbon Market that works to assess methodologies and determine if they meet the threshold of quality (determined by applying an assessment framework) to receive the Core Carbon Principle (CCP) label or not, or the Carbon Credit Quality Initiative which conducts deep analysis (an exhaustive assessment framework) and assigns a score of 1-5 representing the holistic quality of a methodology. For profit credit ratings companies have also sprung up that provide quality ratings for individual projects by reviewing their project documents.

Through international climate negotiations led by the UNFCCC, the Paris Agreement was agreed to in 2015 and included provisions for carbon crediting to be a mechanism that could be used to aid countries in meeting their Nationally Determined Contributions (NDCs). At COP27, negotiators agreed to define credits issued under Article 6 of the Paris Agreement as "mitigation contributions" toward a country's NDC fulfillment. Article 6 of the Paris Agreement includes three mechanisms for "voluntary cooperation" between countries toward climate goals, including carbon credit markets. Article 6.2 enabled countries to directly trade carbon credits through the development of bilateral crediting mechanisms (i.e., bilateral crediting programs). Article 6.4 established a new international crediting program that supplants the CDM program. The third option is Article 6.8, which enables non-credit generating cooperation (and is not relevant to this article). These provisions allow for mechanisms (excluding Article 6.8) to be developed to enable carbon credits to aid countries in meeting their Nationally Determined Contributions (NDC) commitments to achieve the goals of the Paris Agreement. Article 6.4, also referred to as the Paris Agreement Crediting Mechanism (PACM), and is supplanting the CDM but seeks to respond to quality concerns raised by researchers and the media by enhancing the quality of credits and raise the standard of rigor for the entire market. CDM projects may transition to become PACM projects if they meet the eligibility requirements and the Article 6.4 Methodology Panel is reviewing CDM (and other submitted methodologies) to determine if they meet the more rigorous standards of the PACM standard documents to be adopted by PACM to guide project development.