What Are Carbon Credits?

A jet vapour trail across a dark blue sky.
Mint Images / Getty Images

It seems that in every news story about an environmentally-conscious celebrity who enjoys the pollution-producing services of a private jet, and in every corporate sustainability report attempting to explain away high greenhouse gas emissions, there's a mention of them: carbon credits. Like magic, they seem to erase the effects of carbon-intensive activities. But what are carbon credits, and how do they really work?

Carbon credits are a highly regulated medium of exchange used to offset—or neutralize—carbon dioxide emissions. A single carbon credit generally represents the right to emit one metric ton of carbon dioxide or the equivalent mass of another greenhouse gas.

Voluntary vs. mandatory carbon credits

In the voluntary carbon offset market, individuals and businesses purchase carbon credits on a voluntary basis in order to lower their carbon footprint, or the total amount of carbon emissions that result from their activities. Carbon offsets can mitigate the environmental damage caused by emissions-producing activities like using electricity, driving a car or traveling by air. They are often offered as an add-on fee when purchasing flights, rental cars, hotel rooms and tickets to special events.

Larger companies, governments, and other entities may be required by law to purchase carbon credits in order to emit greenhouse gases. This 'compliance market' of carbon offsets is based on the cap and trade principle, which sets a limit on the amount of pollution a company is allowed to emit within a period of time. If the company stays under the limit, it can sell the remainder of its carbon credits to other companies.

How carbon credits mitigate emissions

When companies or individuals purchase carbon credits, where does the money go? In the voluntary market, carbon offsets are used to fund projects which absorb or eliminate an amount of carbon dioxide gas that is equal to the amount emitted. When consumers purchase carbon credits from reputable carbon offset providers, the money is used for specified projects like planting forests, which absorb carbon naturally, or diverting methane gas from livestock farms for conversion into electricity at a power plant.

Another type of offset, called renewable energy credits (RECs), supports renewable energy efforts like wind or solar power. While carbon offsets reduce a verifiable amount of carbon dioxide emissions from the atmosphere, RECs supply a certain amount of renewable energy power to the market, subsidizing the cost of developing these technologies.

In the case of mandatory carbon credits, the goal of placing a value on carbon emissions is to induce carbon credit purchases to choose less carbon-intensive activities. Companies that emit less enjoy higher profits by selling their rights to produce carbon dioxide emissions. This way, emissions become just as integral a cost of doing business as materials or labor.

Carbon credit controversy: does it work?

Essentially, carbon offsets work by allowing polluters to pay others to make their carbon reductions for them. Some critics of the carbon credit system argue that this method reduces personal responsibility for controlling greenhouse gas emissions, allowing purchasers to use excessive electricity at home or drive a fuel-intensive vehicle without guilt. Companies with a larger profit margin could use carbon credits as a license to pollute freely.

There are also issues with the validity of the carbon reductions promised by some carbon offset providers. Some companies claim to provide carbon offset services by funding tree-planting schemes that are not verified or regulated, so that verifiable carbon reduction numbers aren't available. Those wishing to purchase carbon offsets voluntarily should seek out providers like TerraPass and Carbon Fund, where emissions reductions are verified by independent third parties.

Of course, the mandatory carbon credit market and cap and trade system has its own complex set of pros and cons, frequently debated by governments, corporations, environmental experts, and the public. There is significant disagreement on whether cap and trade is superior to a carbon tax, which would be levied on the use of fossil fuels, and whether carbon trading schemes should be managed internationally or within individual nations.