Are carbon allowances the same as carbon credits?
Summary
Carbon allowances in the EU ETS are regulated instruments for capping emissions, while carbon credits are voluntary offsets from various projects. The EU ETS is a much larger market with unique, standardized allowances, whereas carbon credits vary in price and verification. Both contribute to carbon accounting and emissions reduction, but operate under different frameworks.
Carbon allowances and carbon credits are fundamentally different. European Union Allowances (EUAs) operate in a massive, regulated compliance market. In contrast, carbon credits can take all sorts of shapes and sizes - they belong to a voluntary market and are often used for corporate carbon accounting purposes.
Carbon Allowances: The Backbone of Emissions Trading Systems (ETS)
The definition of a carbon allowance
Carbon allowances are the financial instrument from the Emissions Trading Systems (ETS), a regulated market designed to cap and reduce emissions. Every EUA represents the right to emit one tonne of CO2. The European Commission issues these allowances, and their total number is capped and gradually decreased to limit overall emissions.
A highly regulated market
The EU ETS is a compliance market. Once an installation falls under its scope, it must account for its carbon emissions and purchase and surrender a corresponding number of EUAs each year. Failure to do so results in a fee of EUR 100 plus the cost of the carbon allowances in question.
The singular nature of carbon allowances
Carbon allowances issued by the European Commission are unique physical contracts and are kept in a dedicated carbon registry within the EU database. For compliance installations, there is no choice between various products within the EU ETS; there is only one type of EUA with a uniform price at a given point in time.
The massive size of the carbon allowance market
The EU ETS is the largest carbon allowance market - 2023, the market was valued at approximately $835 billion, compared to $105.2 billion for other carbon markets worldwide and between $984 million and $1.312 billion for voluntary carbon markets.
Carbon Credits: Voluntary Market for Offsetting Emissions
The definition of a carbon credit
Carbon credits or carbon offsets, are certificates representing the reduction or removal of one tonne of CO2 from the atmosphere. These credits can be generated by various projects aimed at reducing or capturing emissions, such as reforestation or methane capture.
A voluntary participation
The carbon credit market is voluntary. Companies and individuals can purchase credits to offset their emissions, often as part of corporate social responsibility initiatives or personal climate commitments.
There is no unique standard for carbon credits
Carbon credits can be generated through various activities aiming at reducing GHG emissions or increasing carbon sequestration. These projects might involve developing renewable energy, capturing high-potency gases, avoiding deforestation…
After their issuance, a verification process is needed to ensure these credits' legitimacy. Project developers provide evidence of their carbon reduction efforts (through monitoring data and reports) which is then reviewed by a third-party verifier.
The carbon credit price variability
The cost of carbon credits varies widely depending on the type and location of the project. They can range from a few dollars per tonne to higher prices for projects that are estimated to be better verified or impactful. In 2023, the average price of voluntary carbon credits ranged from $6 to $8 per tonne.
Carbon allowances, as part of the regulated ETS, operate in a large-scale, transparent, and economically driven approach to reducing emissions. Carbon credits, issued through voluntary carbon offset or removal projects, can contribute to an individual’s or corporation’s carbon accounting objectives.
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