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A Guide to the Different Types of Carbon Credits

Looking for information on the different types of carbon credits? Check out this guide! We break down the perks, benefits, and drawbacks of each type of credit and explain how they could benefit your business’s sustainability efforts.

Carbon credits are a powerful tool to help businesses and individuals mitigate their carbon footprint and promote sustainability. Whether you’re looking for direct offsets, voluntary credits, or emissions reduction and removal certificates, this guide will explain the types of carbon credits available and their associated pros and cons.

What is Carbon Credits?

Carbon credits are units of measurement used to represent the ability of a business or individual to offset its carbon footprint. Businesses and individuals can directly use or sell them on the open market to reduce their emissions and comply with government regulations. “Carbon credits have alternative names, including ’emission allowances,’ ‘carbon offsets,’ ‘greenhouse gas credits,’ and ‘climate change offsets.'”

Voluntary Carbon Credit Markets:

There is a growing trend of companies taking part in voluntary carbon credit markets. Entities can purchase, sell, and trade emissions credits without government regulation through this type of trading. Voluntary markets are ideal for businesses that have made commitments to lower their emissions as part of a sustainability initiative, but may not be required to do so by law. Engaging in such markets, companies publicly signal commitment to reduce their carbon footprint, gaining industry recognition and broader acknowledgment.

Compliance Carbon Credits:

Compliance carbon credits are those purchased for mandatory compliance in an emissions trading system. Companies can use these credits to offset their own emission limits, preventing them from exceeding mandated emissions caps. Government-backed compliance carbon credits have the potential to stabilize prices in cap-and-trade systems. Additionally, these credits offer traders regulatory certainty and guaranteed returns, making them a popular choice for businesses looking to offset their carbon emissions in a cost-efficient manner.

REDD+ Carbon Credits:

REDD+ carbon credits, a compliance type, earn ESG credentials through verified greenhouse gas reductions from reforestation and improved forest management. These credits are typically issued by national governments to international buyers in order to generate revenue for the country while providing emissions mitigation benefits  REDD+ units typically emphasize tropical forest land stewardship and rebalancing carbon, people, and nature, with some including avoided emissions. REDD+ credits have gained popularity because they benefit both people and the environment while providing economic opportunities for local communities.

OTC/Non-regulatory Carbon Credits:

OTC (over-the-counter) or non-regulatory carbon credits are those issued without a regulated market to back them. Third-party organizations, like VCS, CCB, or Plan Vivo, verify and guarantee this credit through auditing processes. These credits may be renounced in order to prevent double counting and other types of corruption. Businesses increasingly embrace OTC/non-regulatory carbon credits to showcase environmental commitment and build reputational value, despite lacking legal recognition.  

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