Carbon offsets and credits help businesses balance out their greenhouse gas emissions and are crucial to tackling the climate crisis.

The two terms are often used interchangeably, so what is the difference? Let’s take a closer look at each phrase and compare the meaning of a carbon offset vs carbon credit.

Carbon offset

Carbon offsetting is when an individual, business or country compensates for its greenhouse gas emissions by paying to reduce or remove carbon elsewhere in the world. This act can help organisations achieve carbon neutrality in the short term without reducing their emissions.

Carbon offsets come from projects that remove, store or prevent carbon being released into the atmosphere. Each carbon offset equals 1 metric tonne of CO2 or CO2e removed or avoided. Examples of carbon offset projects include:

·    Regenerating forests that store carbon in their biomass

·    Improving the energy efficiency of cooking equipment

·    Investing in renewable energy to prevent the use of fossil fuels

These projects must meet stringent requirements and be certified by independent organisations to ensure they are legitimate and additional (meaning they wouldn’t have existed without the sale of carbon offsets). At Trace, we favour projects approved by Gold Standard or Verra Verified Carbon Standard (VCS).

By financially supporting these projects – which are often located in developing countries somewhere else in the world – businesses can compensate for their carbon footprint and balance out their impact on the climate, becoming carbon neutral. To go one step further and achieve net zero, companies must actively reduce most of their emissions.

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Carbon credits

Carbon offset projects generate carbon credits (also known as carbon offset credits). A carbon credit is a tradable permit that allows a business to emit a certain amount of carbon dioxide or equivalent gas (CO2e). Generally, one carbon credit equals 1 metric tonne of CO2 or CO2e.

Some carbon credits are part of a cap-and-trade system, where the amount of carbon dioxide businesses can emit is monitored and limited. Governments are responsible for setting this emissions cap, depending on the business industry and their share of that industry. They also regulate and penalise companies that exceed their emission limits. Examples of cap-and-trade systems exist in the European Union, China and California.

Businesses redeem carbon credits towards their emissions allowance. Companies can also buy, sell and trade credits on carbon markets. They may sell excess credits to others if they purchase more than they need to compensate for their emissions.

Some businesses use carbon credits purely to participate in the regulated economic trading system, rather than to become more sustainable. However, carbon credits aim to incentivise organisations to reduce their emissions so they can spend less on credits.

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Carbon offset vs carbon credit

The terms carbon offset and carbon credit are often used interchangeably. They are both measured in tonnes of CO2e and allow companies to compensate for a certain amount of their greenhouse gas emissions. So, what is the difference between a carbon offset and credit?

Carbon offsetting is the act of compensating for emissions by paying to reduce or remove carbon elsewhere in the world. Carbon offsetting projects create carbon credits, also known as carbon offsets or carbon offset credits. A carbon credit is a certified permit that can be purchased and retired to offset your carbon footprint.

As you can see, the difference between these terms is nuanced, and in many instances, they can be used interchangeably. You buy a carbon credit or offset to offset your emissions. The exception is when we talk about a carbon offset in terms of the action, ‘carbon offsetting’. We cannot do the same with a carbon credit – ‘carbon crediting’ does not exist.

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Renewable energy credit

A renewable energy credit (REC) is a tradable certificate representing 1 MWh of electricity generated from a renewable energy resource (such as wind or solar) and returned to the shared grid that transports energy. Companies can purchase these credits when they buy their electricity to prove it came from a renewable source.

The advantage to businesses is that they can show their investors and customers that they are using renewable energy without installing expensive technology, such as solar panels, at their operating locations.

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