Carbon Offsets vs. Carbon Allowances

The Difference Between Carbon Offsets and Carbon Credit

Some of the terminology used in the world of climate change and carbon offsetting can be pretty confusing for non-specialists.

For example, the terms ‘carbon offset’ and ‘carbon allowance’ are sometimes used interchangeably, but they really shouldn’t be, as they are quite different things.

So what is the difference between offsets and allowances, and does it matter which you buy?

Differences Between Carbon Offsets and Carbon Allowances

Carbon allowance is a term used for a certificate or permit that represents the legal right to emit one tonne (metric ton) of carbon dioxide or equivalent greenhouse gas. Such certificates or permits are issued to companies and organizations participating in a mandatory national or international carbon market.

Depending on the specific market or trading scheme, carbon allowances are either purchased by regulated emitters, often by auction, or allocated free of charge based on forecast carbon emissions.

If a participant emits fewer tonnes of carbon than forecast, they may offer their excess carbon allowances for sale to others whose emissions have exceeded their targets, thus creating a market for carbon allowances.

Carbon allowances are not generated by projects designed to specifically cut greenhouse gas emissions. They are the result of an organization reducing their emissions below the forecast. But this may be due to any number of reasons including going out of business, downsizing, or moving operations overseas (and therefore out of a scheme’s regulatory jurisdiction).

Carbon allowances can be sold privately or in the international market. These trade and settle internationally and hence permit allowances to be transferred between countries. Climate exchanges provide a spot market in allowances, as well as futures and options market.

While a carbon offset also represents one tonne of carbon dioxide or equivalent greenhouse gas, it is generated by a reduction in emissions made by a voluntary project designed specifically for that purpose.

Carbon offsets are generated by projects with clearly defined objectives, usually outside the confines of a company’s own operational sites. Typical carbon offset projects include building wind turbines or solar farms, supporting methane reduction projects, planting trees or preserving forests.

A carbon offset is therefore additional to any reduction in emissions that would have been achieved due to regulatory compliance or participation in a mandatory scheme. Each project passes strict verification and validation checks before the offsets can be officially certified as genuine. This allows them to be traded anywhere in the world.

So Which One Should You Buy – Carbon Allowances or Carbon Offsets?

Both carbon allowances and carbon offsets represent the same amount – one tonne – of avoided carbon emissions and, in theory, can offer the same benefit in terms of global climate change. Purchasing a carbon allowance can take away an emitter’s right to emit a tonne, while purchasing a carbon offset supports a prior reduction of a tonne.

However, because carbon offset projects can take place anywhere in the world, they have the potential to reduce greenhouse gas emissions more cost-effectively than carbon allowances.

Mandated participants in current carbon trading schemes are large, technologically advanced businesses in developed economies. The cost of reducing one tonne of carbon emissions in a state-of-the-art manufacturing plant can be very high, driving up carbon allowance prices. But an offset project can achieve the same reduction at a much lower cost by targeting less expensive ways to reduce emissions.

Carbon offset projects can also achieve much more than just cutting greenhouse gas emissions. They can support technology transfer, create jobs and educational opportunities, and bring social, economic and environmental benefits to communities worldwide.

What Are The Benefits of Buying Carbon Offsets?

Mandated participants in emissions trading schemes gain little sustainability or CSR value from buying and surrendering carbon allowances due to the legally compulsory nature of their actions.

However, no one is required to buy carbon offsets, do doing so is a voluntary undertaking to offset their own greenhouse gas emissions.

Organizations who invest in carbon offsets can demonstrate their commitment to tackling global climate change and minimizing their own environmental impact, and are often perceived more favorably by green-minded consumers.

Furthermore, by choosing progressive offsets, such as NativeEnergy Help Build™ projects, companies can hit social, environmental and other CSR goals at the same time, and make a real difference to the communities involved.

To learn more about the benefits of buying genuine, certified carbon offsets, contact us today.