What Is The Difference Between Carbon Credits And Certificates?

Carbon credits and certificates are relatively new tools used to help businesses and governments reduce their greenhouse gas emissions.

Carbon credits represent permits that allow companies to emit a certain amount of carbon dioxide or other greenhouse gases. Companies can purchase carbon credits from organizations and projects that have reduced their own emissions, effectively offsetting the buyer’s emissions. Each credit represents one tonne of carbon dioxide equivalent. Carbon credits can be purchased voluntarily or to comply with carbon cap and trade programs like the EU Emissions Trading System.

Carbon certificates, also known as carbon offsets, are created when an individual or company pays to support a project that reduces greenhouse gas emissions. Common projects include renewable energy, reforestation, or methane capture. For each tonne of emissions reduced by the project, one carbon certificate can be sold. Carbon certificates are voluntary and let buyers offset or reduce their carbon footprint through certified third-party projects.

While related, carbon credits and certificates have some key differences in their purpose, pricing, regulation, and how they are transacted. We will explore these distinctions in more detail throughout this article.

Table of Contents

Definitions

Carbon credits and carbon certificates are two mechanisms aimed at reducing greenhouse gas emissions. Both operate on a “cap and trade” principle. Governments or international bodies set an emissions cap, limiting how much companies can emit. Companies that emit more than their share must buy carbon credits. Those that emit less can sell or trade their remaining carbon credits.

A carbon credit represents a permit or certificate allowing the holder to emit a set amount of carbon dioxide or other greenhouse gases. Typically one credit permits the emission of one ton of carbon dioxide or an equivalent amount of another greenhouse gas. Carbon credits can be purchased by companies to offset their emissions over the cap set by regulators. Credits are traded on carbon markets.

Carbon certificates represent ownership of carbon credits. They are a digital certificate documenting ownership of a certain number of carbon credits. Certificates make carbon credits easily tradable on exchanges. The certificate can be sold and transferred between owners without the underlying credits moving until retirement.

In summary, a carbon credit is a permit to emit greenhouse gases, while a carbon certificate documents ownership rights of carbon credits.

Origins

The concept of carbon credits first emerged in the 1990s as a way to reduce greenhouse gas emissions under the United Nations Framework Convention on Climate Change (UNFCCC). The 1997 Kyoto Protocol established carbon credits as a mechanism for countries to meet their emission reduction targets. Under the protocol, countries were assigned caps on their carbon emissions. If a country produced less emissions than its cap, it could sell the unused portion as carbon credits to other countries unable to meet their caps. This allowed carbon emissions to be treated as a commodity that could be traded on international markets.

The first large-scale carbon credit trading system was the European Union Emissions Trading System (EU ETS) which launched in 2005. The EU ETS enabled companies to buy and sell carbon credits in order to comply with their emission caps. Other carbon markets soon emerged such as the Chicago Climate Exchange (CCX) which allowed voluntary trading of carbon credits. Over time, the carbon credit concept expanded beyond caps and regulatory compliance. Third-party certification bodies like Verra now issue carbon credits for voluntary emission reduction projects like renewable energy or reforestation. So while carbon credits originated from a regulatory concept, they are now widely used in voluntary markets as well.

Purpose

The main purpose of both carbon credits and certificates is to reduce greenhouse gas emissions and mitigate climate change. They aim to put a price on carbon emissions to incentivize companies and organizations to pollute less (Carbon Certificates on Blockchain). By creating a market and attaching an economic cost to emissions, it encourages the adoption of cleaner technologies and more sustainable practices.

Specifically, carbon credits allow companies to offset their emissions by investing in certified emissions reduction projects, like renewable energy or reforestation. The credits are generated from these projects and represent tonnes of CO2 avoided or removed. Companies can buy the credits to compensate for their own emissions. This gives businesses an alternative to simply reducing their own emissions, providing flexibility while still supporting sustainability (Voluntary Carbon Credits).

Carbon certificates also help drive emission reductions by putting a limit on allowable emissions, requiring companies to obtain certificates for each tonne of CO2 they emit. Companies must buy certificates to cover their emissions or face penalties. This cap on emissions motivates companies to pollute less so they don’t have to purchase as many certificates.

Function

Both carbon credits and certificates aim to reduce carbon emissions by setting a cap on the amount companies can emit. Companies can either reduce their emissions to meet the cap or purchase offsets from carbon reduction projects to compensate for their excess emissions. The key differences in how they work are:

Carbon credits represent a reduction of one metric ton of carbon dioxide or an equivalent amount of other greenhouse gases. They are generated from projects that reduce emissions, like renewable energy, reforestation, or methane capture. Each credit is assigned a unique serial number to track it. Companies can buy these credits to offset their emissions over the cap. The credits are retired once used so they cannot be double counted.

Carbon certificates are credits that are assigned to companies by governments. The government sets an emissions cap for companies and issues free credits up to that level. Companies must measure and report their actual emissions annually. If they exceed their cap, they must purchase extra credits to cover the difference. Unlike credits from offset projects, these certificates can be banked for future use if a company emits less than their cap.

In summary, carbon credits are generated from emission reduction projects while carbon certificates are government regulated allowances to emit. Both provide flexibility for companies to meet emission targets through trading and offsets.

Issuers

Carbon credits are issued by various organizations that develop and verify carbon reduction projects around the world. Some of the major issuers of carbon credits include:

Gold Standard – A Swiss non-profit that has issued over 159 million carbon credits for renewable energy, energy efficiency, waste management and other projects worldwide (Source).

Verra – A non-profit that operates the Verified Carbon Standard program, which has issued over 417 million carbon credits (Source).

Carbon credits can also be issued by governments, companies, brokers and traders.

Carbon certificates represent the ownership rights to carbon credits. They are issued when a carbon credit is purchased and function as a receipt to show ownership. The issuer of the carbon credit also issues a corresponding carbon certificate to the buyer as proof of ownership (Source).

Buyers

The main buyers of carbon credits and certificates are companies that need to offset their greenhouse gas emissions. This includes large corporations in energy-intensive industries like oil and gas, transportation, manufacturing, and power generation. Many companies have made commitments to reduce their carbon footprints and buy credits to compensate for emissions they cannot otherwise eliminate from their operations and supply chains.

In addition to corporations, governments may purchase carbon credits to meet emissions reduction targets under climate agreements like the Kyoto Protocol and Paris Agreement. Speculators and traders may also buy credits as financial assets to resell at a higher price. Brokers or specialized firms often facilitate transactions between credit sellers and buyers.

Both credits and certificates can be purchased, though certificates represent emissions reductions that have already occurred while credits finance prospective mitigation projects. There are some key differences in who buys each one:

Carbon credits are attractive to companies offsetting hard-to-abate emissions, since they fund projects reducing emissions elsewhere.

Certified emissions reductions may appeal more to governments, speculators, and carbon-neutrality claims since they represent audited reductions that have already occurred.
Credits require more buyer due diligence to ensure real emissions reductions while certificates provide verified mitigation.

Overall the market for carbon credits and certificates has grown rapidly as more entities seek to mitigate their climate impacts. Voluntary offset markets alone were estimated at over $1 billion in 2021.

Pricing

Carbon credits and certificates are priced differently. Carbon credits are traded on exchanges and their price is determined by market supply and demand dynamics. As reported, if a company exceeds their emissions cap, they can purchase carbon credits to offset their emissions. Since carbon credits are traded commodities, their prices fluctuate based on factors like supply of credits, demand from buyers, market regulations, etc.

On the other hand, carbon certificates are issued by governments and their price is set at a fixed carbon tax rate. For example, the EU’s proposed CBAM certificate system will require importers to buy carbon certificates at prices corresponding to the EU Allowance carbon price, which is around €80 currently (source). So in summary, carbon credit pricing is flexible and market-driven while carbon certificate pricing is fixed by government policy.

Criticisms

There have been various criticisms of both carbon credits and certificates, with some arguing they may have limited effectiveness. Some key criticisms include:

Carbon offsets and credits allow companies to continue emitting CO2 rather than reducing their own emissions (https://news.mongabay.com/2023/10/indonesia-opens-carbon-trading-market-to-both-skepticism-and-hope/). There is a risk that companies may rely too heavily on buying credits rather than making meaningful changes.

The reversibility of land-based carbon sequestration is questionable, as natural disasters can release stored CO2 (https://www.iatp.org/twelve-problems-ec-crcf). This makes land-based carbon credits more risky.

Importers acquiring carbon certificates may not accurately reflect the emissions associated with imported goods (https://www.linkedin.com/pulse/dilemma-cbam-what-criticisms-how-impact-businesses-2bz2f?trk=organization_guest_main-feed-card_feed-article-content). More transparency is needed.

Additional concerns include potential overreporting of carbon reductions, misuse of funds from credit sales, challenges verifying and monitoring credits, and more. Overall the system needs strengthened standardization and oversight to maximize integrity and effectiveness.

Conclusion

In summary, while carbon credits and carbon certificates serve a similar purpose of offsetting carbon emissions, there are some key differences between the two. Carbon credits are generated from specific emission reduction projects and can be bought and sold on voluntary carbon markets. Carbon certificates represent government-issued allowances to emit a certain amount of carbon under cap-and-trade programs. While carbon credits provide flexibility for companies to offset emissions beyond regulation, carbon certificates are mandatory and designed to achieve overall emission reduction goals. Both carbon credits and certificates play an important role in addressing climate change, but have faced criticisms around accuracy and integrity. There is a need for stricter oversight and transparency to ensure the credibility of carbon markets. Though imperfect, carbon credits and certificates provide immediate emissions reductions and are an important part of the solution while the world transitions to a low-carbon economy.