Carbon credits and carbon offsets are two key mechanisms designed to manage, reduce and or remove greenhouse gas (GHG) emissions. Although these terms are often used interchangeably, they operate in different ways and serve different purposes. Understanding the differences between carbon credits vs. carbon offsets can be helpful for organizations and individuals who are committed to advancing sustainability and achieving meaningful environmental impact.

What is a Carbon Credit?

A carbon credit is often a permit that allows an organization to emit a specific amount of greenhouse gases (GHGs), usually one metric ton of carbon dioxide (CO2) or the equivalent in other GHGs. These credits are typically created by governments and regulatory bodies, which set limits on the amount of emissions a company can produce. If a company emits less than its allotted amount, it can sell its surplus credits to other companies that are struggling to meet their emission reduction targets.

In the Voluntary Carbon Market, Carbon Credits are also generated by Carbon Offset Projects which target to reduce or remove carbon dioxide from the atmosphere. These programs range from nature based solutions such as reforestation to high-tech developments such as direct air capture. 

What is a Carbon Offset?

A carbon offset represents the reduction, removal, or sequestration of GHGs from the atmosphere to compensate for emissions produced elsewhere. This can be achieved through various carbon offset projects such as reforestation, renewable energy installations, or technological solutions like biochar and direct air capture.

Unlike carbon credits, which are often part of regulatory compliance markets, carbon offsets are often purchased on the voluntary carbon market by companies or individuals that aim to neutralize their carbon footprint.

Carbon Credits vs. Carbon Offsets: The Differences

Now that we’ve defined carbon credits and carbon offsets, let’s take a more detailed look at what differentiates the two.

• Carbon Credits: They are often part of regulatory compliance schemes, allowing organizations to emit a certain amount of GHGs within a cap-and-trade system. Companies that emit less than their allocated limit can sell their excess credits to other companies that need them. In the space of Voluntary Carbon Market, Carbon Credits can generated by Carbon Offset Projects (eg. reforestation) which is designed to reduce or removal carbon dioxide from the atmosphere. Carbon Credits are tradeable, and generally one Carbon Credit equals to one metric tonne of carbon dioxide (or CO2 equivalent).‍
• Carbon Offsets: They are often voluntary actions taken by companies or individuals to compensate for their emissions by funding projects that remove or reduce emissions elsewhere. Typically they are not part of mandatory regulatory systems but are used to achieve corporate social responsibility goals or personal carbon neutrality. Carbon Offset projects generates tradable Carbon Credits.

Carbon Credits vs. Carbon Offsets: The Similarities

Despite their differences, carbon credits and carbon offsets share some common attributes.

• Emission Equivalence: A carbon credit and a carbon offset both represent the reduction or removal of one metric ton of CO2 or its equivalent.‍
• Retirement Upon Use: Once a carbon credit or offset is purchased and used, it is retired and cannot be reused. This ensures that each ton of CO2 is only accounted for once, maintaining the integrity of emission reduction efforts.

Carbon Credits vs. Carbon Offsets: What Works Best for SMEs?

Large corporations often need both carbon credits and carbon offsets to manage and reduce their greenhouse gas (GHG) emissions effectively. Carbon credits help them comply with regulatory emission caps, while carbon offsets support broader sustainability goals, such as achieving net-zero emissions.

However, for small and medium-sized enterprises (SMEs), Carbon Offsets are typically more relevant and accessible.

Why SMEs and Individuals Use Carbon Offsets

Here are the main reasons why carbon offsets are particularly appealing for SMEs and individuals:

Accessibility and Simplicity: Carbon offsets are more accessible for SMEs and individuals than carbon credits because smaller companies are usually not subject to the same regulatory emission caps as larger corporations. Offsets can be purchased easily through various platforms and do not require complex trading systems.

Voluntary Environmental Impact: SMEs and individuals often use carbon offsets to voluntarily reduce their carbon footprint. This can be part of a corporate social responsibility (CSR) strategy for businesses or a personal commitment to sustainability for individuals. By investing in projects that reduce or remove CO2 from the atmosphere, such as reforestation or renewable energy projects, companies can compensate for their emissions.

Cost-Effectiveness: For SMEs, managing emissions through carbon offsets can be more cost-effective than trying to meet stringent regulatory requirements directly. Offsets allow them to invest in environmental projects without the need for significant operational changes or capital expenditure.

Enhancing Brand Reputation: Using carbon offsets can also enhance the reputation of SMEs. Demonstrating a commitment to reducing their carbon footprint can attract eco-conscious customers and partners, providing a competitive edge in the market. It also helps build a positive brand image and align with global sustainability trends.

Flexibility: Carbon offsets offer flexibility for SMEs and individuals. They can choose the type and scale of offset projects that best fit their needs, budget and aspirations. This flexibility allows for tailored approaches to sustainability, making it easier to integrate offsets into existing business practices or personal lifestyles.

‍Practical Steps for SMEs to Use Carbon Offsets

Implementing carbon offsets effectively requires a strategic approach. For SMEs, this involves several key steps to ensure that the offsets genuinely contribute to reducing their carbon footprint and promoting sustainability.

• Calculate Your Carbon Footprint: Use tools and calculators provided by environmental organizations to estimate your emissions.
• Choose Verified Offset Projects: Ensure the projects you invest in are verified by recognized standards, such as the Verified Carbon Standard (VCS) or the Gold Standard, to guarantee their effectiveness.
• Purchase Offsets: Buy the necessary amount of offsets to compensate for your emissions. This can often be done through online platforms that offer various offset options.‍
• Integrate Offsets into Your Sustainability Plan: Include carbon offsets as part of your company’s broader sustainability strategy and CSR initiatives.

Companies Investing in Carbon Credits

Many Small and Medium-Sized companies (SMEs) are stepping up their efforts to mitigate their environmental impact by investing in the carbon credits generated by carbon offset projects. This involves funding projects that reduce greenhouse gas emissions, thereby compensating for the carbon footprint of their operations.

Let’s consider several examples of companies that invest in carbon offsets to achieve carbon neutrality and promote a greener future.

Allbirds

New Zealand and American footwear company Allbirds prioritizes the responsible use of natural resources. Key materials such as wool, tree fibers, and sugarcane are integral to their products and are sourced from nature.

Allbirds maintains a close connection between its projects and business operations, emphasizing nature-based carbon removal initiatives that are directly linked to their value chain.

One such initiative is the Argentina Wool Improved Grazing Project, which aids wool growers in transitioning to regenerative farming practices. These practices allow fields to rest and regenerate, fostering grasses that are better for livestock and more effective at sequestering carbon dioxide. The project started in 2021 with 10,000 hectares and has since expanded to 200,000 hectares, with the goal of reaching 1,000,000 hectares by 2030.

Allbirds collaborates with trusted partners to support projects that meet internationally recognized offset standards, such as Gold Standard and Verified Carbon Standard. These projects are evaluated based on criteria including permanence, additionality, and leakage.

REI

In 2023, retail and outdoor recreation services company REI established a multiyear carbon partnership with BioLite, a company known for its outdoor cooking, lighting, and heating technologies. This partnership aims to support BioLite's mission of providing affordable clean energy solutions, such as improved cookstoves, to off-grid families worldwide.

REI provided upfront capital to BioLite for the manufacturing and distribution of clean cookstoves to 30,000 households across sub-Saharan Africa. These clean cookstoves replace more polluting wood- and charcoal-burning stoves, generating carbon credits from the reduction in emissions. These credits will help REI offset its operational emissions over the coming years

Boxed Water

Sustainable water company Boxed Water has been on a sustainability journey for 14 years, evolving from the first sustainable alternative to plastic water bottles to introducing plant-based caps. The company has now achieved CarbonNeutral product certification for its 500mL carton. This certification involves measuring and offsetting carbon emissions by financially supporting projects verified to reduce emissions according to the CarbonNeutral Protocol.

Boxed Water invests in renewable energy projects[7]  worldwide. Their carbon offsetting program aligns with global carbon neutrality goals, such as the UN's objective of achieving a net-zero world by 2050. By offsetting the emissions from its products, Boxed Water aims to improve sustainability and help consumers lower their carbon footprint.

Final Thoughts

Understanding the distinctions between carbon credits vs. carbon offsets is essential to achieve sustainability goals. Carbon credits, often part of regulatory schemes, allow companies to emit a certain amount of GHGs, with the option to trade excess credits. In the Voluntary Carbon Market space, Carbon Credits are generated by Carbon Offset Projects , and these credits can be used to support the project and offset one's carbon footprint.

In contrast, Carbon Offsets are voluntary and involve funding projects that reduce or remove emissions, helping organizations achieve broader sustainability goals. Both mechanisms are crucial in the fight against climate change, offering different tools to address emissions and promote environmental responsibility.

For small and medium-sized enterprises (SMEs), carbon credits from carbon offset projects are often more accessible and practical, providing a flexible and cost-effective way to mitigate their environmental impact while enhancing their brand reputation and aligning with global sustainability trends.