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What is a Carbon Credit?
A Carbon Credit is a tradable certificate that represents the reduction or removal of one metric ton of carbon dioxide (CO₂) or its equivalent greenhouse gases from the atmosphere. Organizations buy carbon credits to offset their emissions and comply with regulatory or voluntary climate targets.
Definition
A Carbon Credit is a unit that certifies the reduction or removal of one ton of CO₂-equivalent emissions, used for offsetting or trading in carbon markets.
Key Takeaways
- Each credit equals one metric ton of CO₂ reduced or removed.
- Used in compliance carbon markets and voluntary carbon markets.
- Supports climate mitigation by funding carbon reduction projects.
Understanding Carbon Credits
Carbon credits are generated by projects that measurably reduce, avoid, or remove greenhouse gas emissions. Examples include:
- Reforestation and afforestation projects
- Renewable energy projects (solar, wind)
- Methane capture initiatives
- Clean cookstove programs
- Soil carbon sequestration
Carbon credits are either:
- Compliance Credits: Issued under regulated systems like the EU Emissions Trading System (EU ETS).
- Voluntary Credits: Purchased voluntarily by businesses or individuals to offset emissions.
Credits can be traded on carbon markets, where prices fluctuate based on project quality, demand, and regulation.
Formula (If Applicable)
No single formula defines carbon credits, but they are quantified through:
Carbon Reduction = Baseline Emissions − Actual Emissions
Certified methodologies verify reductions before credits are issued.
Real-World Example
A renewable energy project in Kenya produces clean electricity, reducing reliance on diesel generators. Verified Emission Reductions (VERs) are issued as carbon credits. A multinational corporation purchases these credits to offset part of its supply chain emissions.
Tech companies, airlines, and manufacturing firms frequently buy credits to meet carbon neutrality commitments.
Importance in Business or Economics
Carbon credits play an essential role in:
- Corporate sustainability strategies
- Achieving carbon neutrality or net-zero goals
- Financing climate-positive projects
- Encouraging emission reductions globally
They also create market incentives for greener technologies and environmental innovation.
Types or Variations
- Removal Credits: Carbon removed from the atmosphere (e.g., direct air capture, reforestation).
- Avoidance Credits: Emissions prevented (e.g., renewable energy).
- Compliance Credits: For regulated industries.
- Voluntary Credits: For voluntary climate action.
Related Terms
- Carbon Offset
- Carbon Footprint
- Emissions Trading System (ETS)
Sources and Further Reading
- United Nations Carbon Offset Platform: https://offset.climateneutralnow.org
- Gold Standard: https://goldstandard.org
- Verra (VCS Program): https://verra.org
Quick Reference
- One carbon credit = 1 ton CO₂ reduced or removed.
- Used in carbon markets to offset emissions.
- Supports climate action and sustainability goals.
Frequently Asked Questions (FAQs)
Are carbon credits the same as carbon offsets?
Yes. Carbon credits are the units used for carbon offsetting.
Do carbon credits eliminate emissions?
They do not eliminate emissions directly but balance them through reduction or removal projects.
Why do companies buy carbon credits?
To meet regulatory requirements or voluntarily offset emissions as part of net‑zero commitments.
