Carbon Offsets vs Carbon Credits: What’s the Difference?

Carbon Offsets vs Carbon Credits: What’s the Difference?

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Grace Smoot

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Carbon offsets and carbon credits are two terms that are often used in the same discussion, but in actuality they are different ways to reduce carbon emissions and mitigate climate change. To make informed decisions about global carbon reduction, we must identify the differences between the two. So we had to ask: What’s the difference between carbon offsets and carbon credits?

Carbon offsets are investments in environmental projects that reduce carbon emissions elsewhere to compensate for your carbon footprint. Carbon credits are tradable certificates or permits that set a maximum level of carbon emissions for industries, companies, or countries.

In the fight against climate change, how can we tell the difference between carbon offsets and carbon credits? Below we will define both terms, identify the key advantages and differences of each, explore how they operate and what impact they have on carbon emissions, and discuss why they are both important in the fight against climate change.

How Are Carbon Offsets and Carbon Credits Defined

Carbon offsets and carbon credits are two sustainability tools that can help individuals and organizations lower their carbon footprints. But although they are often used in the same conversation, they are not interchangeable terms. 

What Does the Dictionary Say About Carbon Offsets and Carbon Credits

Carbon offsets are a way to reduce carbon emissions beyond what we each can achieve through individual actions. They are measured in tons of carbon dioxide (CO2) equivalents and are bought and sold through international brokers, online retailers, and trading platforms. 

Carbon Offset: a way for a company or person to reduce the level of carbon dioxide for which they are responsible by paying money to a company that works to reduce the total amount produced in the world, for example by planting trees”

Oxford Dictionary

Carbon offsets play a crucial role in reducing our carbon footprint, the amount of CO2 emissions associated with an individual or an entity and one of the ways we measure the effects of human-induced global climate change. But offsets are not the only available tool. Carbon credits are another option to reduce carbon emissions. 

Carbon Credit: a unit used in carbon trading that represents the right of a business, factory, etc. to release 1000 kilograms of carbon dioxide into the environment”

Cambridge Dictionary

Carbon credits are tradable certificates or permits that give companies, industries, or countries the right to emit 1 tonne (1,000kg) of CO2 or the equivalent amount of a different greenhouse gas (GHG). They are a form of climate currency, meaning they are subject to supply and demand and can be bought and sold through a cap-and-trade market. This market limits how much total CO2 can be emitted. 

Cap-and-trade markets became established after the Kyoto Protocol, an international treaty, set a maximum amount of GHG emissions that could be released into the atmosphere, both globally and nationally. Each entity operating under a cap-and-trade program is issued a certain number of carbon credits each year. They can purchase more if their emissions exceed what was issued, and they can sell unused credits to other entities if their emissions are less than what was issued. 

What Are the Differences Between and Advantages of Carbon Offsets and Carbon Credits

Both carbon offsets and carbon credits represent ways in which we can mitigate carbon emissions and global warming. But they are also different methods of climate action with different environmental impacts, making it important to understand their differences.

The main difference between carbon offsets and carbon credits is that carbon offsets derived from verified projects generate carbon credits. But carbon credits are not limited to only carbon offset projects. Carbon offsets are also bought and sold on the voluntary market, whereas carbon credits are bought and traded on the mandatory (cap-and-trade) market.

The following are key advantages of carbon offsets:

  • They address both direct and indirect carbon emissions
  • They can be purchased from a variety of projects including direct CO2 capture, renewable energy, energy efficiency, and carbon sequestration
  • Additionality is guaranteed

The following are key advantages of carbon credits:

  • Caps on carbon emissions can be set strictly 
  • Unused credits can be traded to other companies
  • Incentivizes companies to invest in greener technologies 

How Do Carbon Offsets and Carbon Credits Impact Your Carbon Footprint

Knowing the similarities and differences between carbon offsets and carbon credits is important when making a decision of which one to use. 

Carbon Offsets Carbon Credits
How are carbon emissions reduced Purchasing carbon offsets funds carbon emission reduction projects, which either prevent CO2 from entering the atmosphere or remove it once it’s already there. Carbon credits cap how much CO2 can be emitted by an entity. This cap on emissions can be gradually reduced over time, leading to less and less overall emissions.
Impact on own carbon emissions Carbon offsets do not directly reduce your carbon footprint.  Carbon credits do not directly reduce your carbon footprint. 
Impact on global carbon emissions Carbon offsetting mitigates the problem, but it doesn’t work at the core issue of reducing overall CO2 emissions. Carbon credits mitigate the problem, but they do not work at the core issue of reducing overall CO2 emissions.
Environmental benefits Carbon offsets improve air quality and protect ecosystems. Carbon credits facilitate the switch to greener energy sources and promote energy independence. 
Overall effectiveness in reducing carbon emissions Carbon offsetting is effective if projects are additional, permanent, meet certain key criteria and project standards, and do not engage in greenwashing. Improper reporting and discrepancies in maximum GHG levels between countries limits carbon credit effectiveness on a global scale. 

How Do Carbon Offsets and Carbon Credits Reduce Carbon Emissions

The goal of both carbon offsets and carbon credits is to reduce carbon emissions in order to mitigate climate change.

  • Carbon offsets: Offsets can represent direct or indirect emission reductions. Purchasing carbon offsets funds carbon emission reduction projects which either prevent CO2 from entering the atmosphere or remove it once it’s already there. 
  • Carbon credits: Credits represent indirect emission reductions. Putting a cap on emissions and decreasing this cap over time reduces carbon emissions over time, preventing CO2 from entering the atmosphere.

When you hear the words “carbon offset”, think about the term “compensation”. Offsets represent the reduction, avoidance, destruction or sequestration of the equivalent of a ton of carbon in one place to “offset” an emission taking place somewhere else. Carbon offsets are designed for situations where emissions are impossible to reduce because you can use the funds to reduce emissions in other areas. 

When you hear the words “carbon credit”, think about the term “allowance”. Carbon credits represent the maximum amount of CO2 an entity is allowed to emit. This cap on CO2 emissions slowly decreases over time, forcing entities to emit less and less CO2 in order to stay within the boundaries of the cap. Companies with high levels of emissions can still continue to operate, but only at an increased cost.

What Impact Do Carbon Offsets and Carbon Credits Have on our Own Carbon Emissions

One of the best ways we can aid in the fight against global climate change is to reduce our carbon footprint. And to do this we first have to reduce our own carbon emissions. 

  • Carbon offsets: Carbon offsets do not directly reduce your carbon footprint. 
  • Carbon credits: Carbon credits do not directly reduce your carbon footprint. 

Carbon offsets do not directly reduce your own carbon emissions, they only make others reduce their carbon footprint to compensate for your carbon footprint. 

Carbon credits do not directly reduce your own carbon emissions. Setting a limit on how much carbon emissions is allowed is an indirect method of emissions reduction because companies can continue to emit as long as they pay the price. 

Coupled with direct measures of emission reductions, such as reducing individual energy usage and consumption, carbon offsets and carbon credits can become more effective. 

What Impact Do Carbon Offsets and Carbon Credits Have on Global Carbon Emissions

Every year we pump over 36 billion tons of CO2 into the atmosphere, fueling climate change. This causes temperature and sea-level rise, melting of sea ice, changing precipitation patterns, and ocean acidification. Carbon offsets and carbon credits aim to reduce global emissions and mitigate these negative environmental effects.

  • Carbon offsets: Carbon offsetting mitigates the problem, but it doesn’t work at the core issue of reducing overall CO2 emissions. 
  • Carbon credits: Carbon credits mitigate the problem, but they don’t work at the core issue of reducing overall CO2 emissions. 

Carbon offsets do not have a significant impact on global carbon emissions because in comparison to our 36 billion tons of CO2 emissions, carbon offsets for only ~1 billion tons of CO2 have been listed for sale on the voluntary market. Meaning that only about 0.8-1% of our annual CO2 emissions are offset.

Carbon credits do not have a significant impact on global carbon emissions. Although they may incentivize companies to reduce their CO2 emissions, the immediate effect of reducing emissions under the cap-and-trade system is to benefit a company’s bottom line. The direct goal of carbon permits is not to reduce greenhouse emissions or support sustainable energy projects, but rather for companies to make money. 

The COVID-19 pandemic triggered the largest decrease in energy-related carbon emissions since World War II, a decrease of 2 billion tons. However, emissions rebounded quickly at the end of 2020, with levels in December ending 60 million tons higher than those in December 2019. This indicates that the earth is still warming at an accelerated rate, and not enough is being done to implement clean energy practices. 

Illustration of annual CO2 emissions globally
Our World in Data: Annual total CO2 emissions

What Are the Environmental Benefits of Carbon Offsets and Carbon Credits

Using carbon offsets and carbon credits can reduce our consumption of and reliance on fossil fuels (i.e., coal, oil, and natural gas) which can reduce the effects of global warming by limiting global GHGs. But they also come with various environmental benefits.

Carbon offsets generate environmental benefits because they can help reduce overall CO2 emissions, leading to improved public health and healthier ecosystems. Offsets can reduce the instances of asthma, respiratory allergies, airway diseases, and lung cancer caused by carbon emissions. And healthy ecosystems have been linked with cleaner air, water, and food

Carbon credits incentivize companies to switch to greener energy sources including solar, wind, hydro, and geothermal energy. They do not emit CO2, nitrogen oxides, sulfur dioxides, or mercury into the atmosphere, soil, or water. And these pollutants are known to contribute to the thinning of the ozone layer, global sea-level rise, and the melting of our world’s glaciers.

Switching from fossil fuels to green energy also promotes energy independence. Being able to produce your electricity without the aid of foreign countries is an important step in becoming more self-sufficient. 

How Effective Are Carbon Offsets and Carbon Credits in Reducing Carbon Emissions

Carbon offsets and carbon credits can be effective at reducing carbon emissions under certain conditions.

The overall effectiveness of carbon offsets depends on various factors. Direct CO2 removal is the most effective category of offsets followed by renewable energy, energy efficiency, and carbon sequestration. But most importantly, carbon offsets must be realized in order to be effective. When offsets do not get realized they do not offset any carbon, and we don’t reduce any emissions. A main problem with carbon offsets is that the number of sellers on the voluntary carbon market exceeds the buyers by about 600-700 million tons. Meaning that only about 300-400 million tons of CO2 offsets actually get realized. 

Carbon credits have faced criticism because most industries lack the technology that monitors and determines their amount of CO2 emissions. This makes it easier for companies to cheat on their emissions reports and say they are emitting less than they actually are. Also, different countries have different standards and caps for CO2 emissions. If the cap is set too high, then companies are not incentivized to reduce emissions. But set the cap too low, and companies will be overly burdened to reduce emissions. And the extra cost will be passed down to consumers as a result.

Why Are Both Carbon Offsets and Carbon Credits Important to Fight Climate Change

Carbon offsets and carbon credits are important to fight climate change because they can reduce global carbon emissions. Reducing emissions mitigates the effects of climate change, which has a positive cascade effect on public health and plant and animal diversity. In addition, this boosts the global economy and leads to innovative, more environmentally-friendly solutions.

What are Better Alternatives to Carbon Offsetting and Carbon Credits

If used correctly, carbon offsets and carbon credits can provide environmental, economic, and social benefits that go beyond reducing carbon emissions. They have the potential to instigate meaningful environmental change and begin to reverse some of the effects of climate change. 

However, we can’t let these two methods be a guilt-free way to reduce carbon emissions. Carbon offsets and carbon credits must be used in conjunction with direct carbon reduction measures until the industry has time to invest, develop, and refine more sustainable innovations. 

These reduction measures don’t have to involve drastic changes either. Actions that may seem small can have a big impact because those small changes add up! You can reduce your carbon footprint in three main areas of your life: household, travel, and lifestyle. 

Reduce your household footprint:

Reduce your travel footprint:

  • Walk or bike when possible: The most efficient ways of traveling are walking, bicycling, or taking the train. Using a bike instead of a car can reduce carbon emissions by 75%. These forms of transportation also provide lower levels of air pollution.

Reduce your lifestyle footprint:

  • Switch to Renewable Energy Sources: The six most common types of renewable energy are solar, wind, hydro, tidal, geothermal, and biomass energy. They are a substitute for fossil fuels that can reduce the effects of global warming by limiting global carbon emissions and other pollutants.
  • Recycle: Recycling uses less energy and deposits less waste in landfills. Less manufacturing and transportation energy costs means less carbon emissions generated. Less waste in landfills means less CH4 is generated.
  • Eat less meat and dairy: Meat and dairy account for 14.5% of global greenhouse gas emissions, with beef and lamb being the most carbon-intensive. Globally, we consume much more meat than is considered sustainable, and switching to a vegan or vegetarian diet could reduce emissions. 
  • Take shorter showers: Approximately 1.2 trillion gallons of water are used each year in the United States just for showering purposes, and showering takes up about 17% of residential water usage. The amount of water consumed and the energy cost of that consumption are directly related. The less water we use the less energy we use. And the less energy we use, the less of a negative impact we have on the environment.

Final Thoughts

In short, carbon offsets are not the same thing as carbon credits. Carbon offsets represent the avoidance or removal of CO2 from the atmosphere via verified projects. Carbon credits are tradable certificates or permits that give companies, industries, or countries the right to emit 1 tonne of CO2. Carbon offsets derived from verified projects generate carbon credits, but carbon credits are not limited to only carbon offset projects.

Both are tools in our sustainability toolbox that can be used to reduce carbon emissions and mitigate climate change. But we should not rely on either or both to be a cure-all for our environmental problems. Direct measures of carbon emission reduction are much more effective in reducing emissions both in the short term and the long term.

Stay impactful,

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Grace Smoot

Grace loves to research and write about all things related to climate action and sustainability. She holds a Bachelor’s of Science degree in Environmental Biology and works as an environmental Survey Technician. Outside of work, she loves to work out, play soccer, and take her dog for long walks.

Did you know that the internet is a huge polluter of the environment? But fortunately not this site. This site is powered by renewable energy and all hosting-related CO2 emissions are offset by three times as many renewable energy certificates. Find out all about it here.

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