What are carbon credits?

Carbon credits represent abatement of greenhouse gases which is achieved by:

  • Reducing or avoiding emissions, for example, through capture and destruction of methane emissions from landfill or livestock manure; or
  • Removing carbon from the atmosphere and storing it in soil or trees, for example, by growing a forest or reducing tillage on a farm in a way that increases soil carbon.

They are usually purchased and used by individuals or companies to cancel out or ‘offset’ the emissions they generate during their day-to-day life or normal course of business, for example, by consuming electricity or catching a plane.

Carbon credits can be used to offset emissions voluntarily or to meet regulatory requirements. Carbon credits or offsets are divided into two key markets in Australia which are the compliance market and the voluntary market. Compliance credits are used by corporates to offset their obligations from the carbon tax. Voluntary credits are just that, they are voluntary and they cannot be used as an offset for the carbon tax. Both compliance credits and voluntary credits are also in demand from international markets.