About Carbon Credit

Although the terms "carbon credits" and "carbon offsets" are often used interchangeably, they actually operate on different mechanisms. Carbon credits, also known as carbon allowances, function as permits for emissions. Essentially, when a company buys a carbon credit, they obtain permission to generate one ton of CO2 emissions. This creates a vertical flow of carbon revenue from companies to regulators. However, if a company ends up with excess credits, they can sell them to other companies. On the other hand, carbon offsets work through a horizontal flow of carbon revenue between companies. When a company removes a unit of carbon from the atmosphere as part of their normal business activities, they can generate a carbon offset. Other companies can then purchase this offset to reduce their own carbon footprint.