What Are Carbon Credits, Carbon Offsets & Carbon Insets?

Climate change has pushed governments, businesses and individuals to all scrutinise their carbon footprints with a real urgency.

In recent years, carbon credits have become a solution used by many a private sector firm, especially those that struggle to decarbonise their operations.

As a tool in the fight against climate change, carbon credits are divisive. The entire concept is one of the most discussed, yet frequently misunderstood subjects in sustainability today, with staunch proponents and vehement detractors both.

For those new to the concept, the terminology can feel overwhelming, but understanding these mechanisms is important for anyone interested in the machinations of modern climate action.

What are carbon credits?

At its most fundamental level, a carbon credit represents one tonne of carbon dioxide that has either been prevented from entering the atmosphere or has been removed from it.

Think of it as a tradeable certificate that proves that an act of environmentalism has occurred somewhere in the world.

These credits are generated through various projects, from renewable energy installations that displace fossil fuel use to reforestation efforts that sequester carbon in growing trees.

The system operates on a fairly straightforward principle: when a wind farm generates clean electricity instead of coal-fired power, it prevents a certain amount of carbon emissions.

That prevention can then be calculated, verified and sold as carbon credits to companies or individuals looking to counterbalance their own emissions.

The same applies to projects that protect existing forests from being cleared or that capture methane from landfills before it escapes into the atmosphere.

"Carbon credits are essential financial mechanisms for incentivising emissions reductions, but their impact depends entirely on market integrity," says Harald Eltvedt, Board Director of Qatalyst and member of SC Ventures.

What is carbon offsetting?

Carbon offsetting is the practice of compensating for your own emissions by purchasing these credits and thereby funding emission reductions elsewhere.

Say a company produces 100 tonnes of carbon dioxide through its operations: they might purchase 100 carbon credits generated by a solar power project in India or a cookstove initiative in Kenya.

The logic suggests that while that company has added carbon to the atmosphere from their own emissions, they have also paid for an equivalent amount to be reduced or removed somewhere else. This, in essence, is the idea behind net zero.

This approach has gained considerable traction among those businesses that struggle to eliminate all their emissions. These are known as 'hard-to-abate' sectors.

Aviation is one of these industries. Airlines often offer passengers the option to offset their flight emissions, while corporations also use offsetting to work towards carbon neutrality targets, providing a way to address unavoidable emissions whilst longer-term solutions are developed and implemented.

The criticism of carbon offsets

Nevertheless, carbon offsetting does have a great many critics, especially from environmental advocates who argue that it can become a licence for polluters to continue to do business as usual.

H&M Group’s Head of Sustainability, Leyla Ertur, is one such critic. For Leyla, the notion of carbon offsets "weakens corporate climate pledges and makes real decarbonisation efforts within value chains less attractive.”

Instead, she believes that decarbonisation should focus more on a company's own actions.

“We firmly believe the priority for any climate strategy should be to take action within corporate value chains to reduce absolute greenhouse gas emissions," she says.

There is also the issue of carbon credit quality. The authenticity of carbon credits is often debated, even by proponents of the concept.

For Carbon Direct's Zara Ahmed, who works with companies including Amazon, finding carbon removal schemes with a high quality is an absolute imperative.

"Less than 4% of carbon credits are true removal credits and of those, less than 10% meet our quality criteria," she says. "We find those diamonds in the rough." 

The distinction between carbon offsetting and carbon insetting

This is where carbon insetting enters the conversation as a more integrated approach. Unlike offsetting, which typically involves purchasing credits from external projects unrelated to a company's operations, insetting focuses on reducing emissions within a company's own value chain.

Rather than looking outward for solutions, businesses using insetting invest in emission reductions throughout their supply chains and production processes.

A coffee company practicing insetting might work directly with its farmers to implement sustainable agricultural practices that sequester carbon in the soil, improve water management and reduce the need for synthetic fertilisers.

A clothing manufacturer might invest in renewable energy for its fabric suppliers or support regenerative cotton farming among its growers. The key difference lies in the direct connection between the business and the emission reduction project.

Insetting proponents argue this approach creates more tangible benefits because companies are incentivised to improve their actual operations rather than simply purchasing credits to neutralise their footprint.

It often brings additional co-benefits such as improved resilience for suppliers, better product quality and stronger relationships throughout the supply chain.

Both approaches have their place in the transition to a low-carbon economy.

While insetting addresses emissions more directly within business operations, offsetting provides flexibility for tackling emissions that cannot yet be eliminated. Understanding these tools empowers us all to make more informed decisions about climate action.