What are carbon credits?

Compliance vs Voluntary Markets 

Carbon credit markets are broadly categorised into two types: compliance markets and voluntary markets. 

Compliance carbon markets are established and regulated by governments to reduce carbon emissions for companies and organisations that produce over a threshold of greenhouse gases. Participation in these markets is mandatory and such organisations are obligated to meet the carbon reduction targets set for them. 

Participants are provided a number of carbon credits at the beginning of each calendar year equal to their carbon emission targets for that year. This number is reduced each year to incentivise emissions reduction. They may buy credits to reach their target for each year from other participants that are exceeding their target. By the end of each calendar year, the participants are required to surrender a number of credits equal to their emissions for the past year. If they do not have enough credits to surrender, they are fined for each excess tonne of CO2e. 

Some industries have a minimum cap as their nature involves an inevitable production of greenhouse gases; this minimum is established by independent consultants. Examples of compliance markets include the UK and EU Emissions Trading Schemes (UK/EU ETS). 

In contrast, voluntary carbon markets operate on a decentralised basis, allowing individuals and organisations to voluntarily purchase carbon credits to offset their carbon footprint. Participants in these markets are motivated by their own sustainability goals or a desire to demonstrate their commitment to reducing carbon emissions. Unlike compliance markets, participation in voluntary markets is not enforced by regulatory mandates. 

Generation of Carbon Credits

Several registries oversee the generation and verification of carbon credits in the voluntary markets, ensuring their legitimacy and adherence to established standards. Some of the prominent registries include: 

• Verra’s Verified Carbon Standard (VCS)
• The Gold Standard (GS)
• Climate Action Reserve
• American Carbon Registry

These services have created complex sets of rules and doctrines to monitor carbon emissions and generate carbon credits. Their credibility and reputation hinge on the transparency and integrity of their processes, as well as their accountability to stakeholders and the public

VCS – Housing Decarbonisation in the United Kingdom 

Retrofit Credits is a partnership of PNZ Carbon (Ex Artica Partners) and HACT (a charity for social housing), which helps parties that own or control technologies, measures, or processes that, when applied to homes, could result in greenhouse gas emission reductions. PNZ’s methodology complies with Verra’s VCS to originate Verified Carbon Units (VCUs) for greenhouse gas emission reductions within housing in the United Kingdom. On a large scale, this can help housing associations recover some cost of retrofit works performed on their housing stock. 

Carbon credits play a pivotal role in driving emissions reduction efforts and promoting sustainable practices across industries. Whether through compliance markets mandated by governments or voluntary initiatives undertaken by individuals and organisations, carbon credits offer a flexible and effective mechanism for mitigating climate change. By fostering innovation, accountability, and collaboration, carbon credit markets contribute to the global transition towards a low-carbon economy and a more sustainable future. 

Gareth Richardson is a technology consultant at Sava