Permits & Offsets - A Carbon Markets 101
Carbon Permits & Offsets are often confused. Jon Hunt, founder of Carbonomic.com explains the difference
By Jon Hunt
Published 25/01/2022 12:39:11
For anyone new to the Carbon space, it can be a confusing subject. Carbon Permits, Carbon Offsets, Emission trading, Cap & trade, Nature-based offsets, Carbon Capture etc. the terminology seems endless, and certainly isn't helped by people using different terms interchangeably.
Carbon markets are divided into two parts. The Government Regulated Carbon Permit schemes, and Voluntary Carbon Offset schemes which are generally unregulated.
Carbon Permit Schemes
Carbon Permit Schemes operate on a cap and trade basis, where operators in certain high emitting industries, such as power generators, airlines, steel makers, concrete producers and such, are mandated by law to acquire sufficient permits to cover their CO2 they emit during their operations. If an operator emits more CO2 than they have permits for, they must purchase additional permits from the open market, or if they emit less CO2, they may retain their permits to cover future emissions, or can sell their permits into the market. If an entity is unable to acquire sufficient permits to cover their emissions they may have to pay a fine.
There are number of Emissions trading schemes in existence around the globe, such as:
- EU Emissions Trading Scheme
- UK Emissions Trading Scheme
- California Cap & Trade
Emissions trading schemes are a key tool for governments to reduce CO2 emissions to meet their climate goals. The schemes are a market based approach to controlling pollution. Under most schemes, permits are issued free to some entities, such as power utilities, to protect their competitiveness, with additional permits being auctioned off to the market.
As the schemes reduce the supply of permits over time, either issued to entities, or auctioned to the market, the price of permits increases, incentivising industry to invest in technologies to reduce emissions and therefore their financial carbon bill.
Carbon Offset Schemes
Carbon offset schemes are different, they operate on the basis that organisations or individuals pay money to fund projects that draw carbon dioxide from the atmosphere, therefore offsetting their own carbon emissions. If an individual calculates they have emitted 1 tonne of CO2, they may opt to buy an offset that removes 1 tonne of CO2 from the atmosphere. This is done on a voluntary basis and not mandated by law. However, increasingly companies are being driven to reduce their net carbon emissions by their customers.
There are a wide range of schemes in the market that remove carbon dioxide from the atmosphere, through for example, nature based solutions such as planting trees that draw carbon from the air as they grow, or other technological engineered solutions, such as direct air capture or enhanced weathering.
Crossover from Permits to Offsets
Whilst permits and offsets are very different, there can be crossover between the two markets. Some schemes such as the European Union Emissions Trading Scheme (EU ETS) do have provision to allow companies to fund qualifying carbon offset schemes in developing countries, which in turn could affect the voluntary carbon market.
As we move forward into the future, every decision that companies and organisations make will have a more and more important carbon consequence. We created Carbonomic.com to help organisations and individuals find the best carbon offset schemes and projects, to help them meet their carbon goals.
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