Common Terms in Carbon Markets

When discussing carbon markets, many terms come together. Clear understanding of these terms is critical for making correct investment and purchasing decisions. Terminology complexity can lead to misunderstandings and inappropriate credit selection.

Basic Concepts

Carbon credit

A unit created in exchange for the reduction of one ton of CO2 equivalent (tCO2e) emissions or removal from the atmosphere. Each credit is tied to a specific project and tracked in a registry.

Important distinction: Carbon credit is a general term. Under it, there are "avoidance" (avoided emissions) or "removal" (removed emissions) types. This distinction is critical for the credit's climate impact.

Offset

Offsetting emissions from a company's own operations or value chain with emission reductions or removals made elsewhere.

Example: An airline company purchases reforestation project credits to offset emissions from its flights.

Critical point: Offset should be used for "residual emissions" remaining after reduction efforts. Using offset instead of reduction is not appropriate for climate strategy.

Inset (Within value chain removal)

Emission reduction or removal carried out within the company's own value chain. Unlike offset, the project is directly connected to the company's suppliers, operations, or customers.

Example: A food company supports soil carbon management practices of supplier farmers. Carbon removal from this project is directly related to the company's Scope 3 emissions.

Advantage: Inset projects strengthen supply chain relationships and provide carbon reduction in areas under the company's direct influence.

Avoidance (Avoided emissions)

Prevention of emissions that would normally occur. Does not change the current amount of carbon in the atmosphere, but prevents future increase.

Common avoidance project types:

Forest conservation (REDD+): Protection of forests planned for logging
Renewable energy: Wind or solar energy replacing fossil fuel power plants
Methane capture: Burning methane escaping from landfills or mining
Improved cookstoves: Replacing traditional stoves with efficient ones

Critical evaluation: Avoidance projects contain the "counterfactual scenario" question: Would the emission really happen without this project? This question is the basis of additionality assessment.

Removal (Carbon removal)

Extracting CO2 from the atmosphere and storing it long-term. The fundamental difference from avoidance is that it reduces the current amount of carbon in the atmosphere.

Removal project types:

Nature-based:

Afforestation and forest restoration
Soil carbon management
Blue carbon (mangroves, seagrass)
Biochar

Engineered:

Direct Air Capture (DAC)
Bioenergy with Carbon Capture and Storage (BECCS)
Enhanced mineralization

Permanence difference: Nature-based removals typically offer 20-100 years permanence, while engineered solutions can provide 1,000+ years permanence.

Quality Criteria

Additionality

The principle that the project would not occur without carbon credit revenue. It is the most controversial quality criterion.

Additionality tests:

Financial additionality: Is the project economically viable without credit revenue?
Legal additionality: Is the project already required by existing laws?
Technological additionality: Is the project an application beyond common technology?

Example: For renewable energy projects in Turkey, additionality is controversial because these projects are already economically viable and receive government incentives.

Permanence

How long the carbon storage will remain permanent. Nature-based projects have risks of fire, disease, or land use change.

Permanence periods:

Forest projects: Generally 30-100 year commitment
Soil carbon: 10-50 years (depending on practice)
Engineered (DAC + geological storage): 1,000+ years

Buffer pool: Many standards hold a portion of credits in a buffer pool against reversal risk. Typical ratio is 10-20%.

Leakage

Increase of emissions outside project boundaries when reduced within boundaries.

Example: A forest conservation project is implemented in one region, but logging activity shifts to neighboring forest. No net emission reduction occurs.

Prevention: Standards require leakage risk assessment and correction factors.

Market Types

Compliance market

A mandatory market created by government regulation. Companies buy or sell credits to meet legal obligations.

Examples:

EU Emissions Trading System (EU ETS)
California Cap-and-Trade
China National ETS
Korea ETS

Characteristics: Prices are generally higher than voluntary market. Credit types are limited. Government oversight exists.

Voluntary Carbon Market (VCM)

A market used for companies' voluntary sustainability commitments. No obligation.

Usage purposes:

Carbon neutrality or net-zero claims
Customer and investor expectations
Brand reputation
Corporate responsibility

Characteristics: High project diversity. Wide price range (1-1,500+ USD/ton). Quality differences are significant.

Registries

Registries manage the creation, tracking, and retirement of credits. They prevent double counting.

Verra (VCS - Verified Carbon Standard)

The largest standard and registry in the voluntary market. Founded in 2006.

Scope: Forest conservation, renewable energy, waste management, agriculture and more.

Characteristics: Wide methodology range, large credit volume.

Gold Standard

Founded by WWF in 2003. Emphasizes contribution to Sustainable Development Goals (SDGs) alongside environmental integrity.

Characteristics: Stricter additionality requirements, community participation conditions.

Puro.earth

Focuses on engineered carbon removal (CDR) projects. Founded in 2019.

Scope: Biochar, direct air capture, wood construction materials, enhanced mineralization.

Characteristics: High permanence requirements, detailed MRV (monitoring, reporting, verification).

American Carbon Registry (ACR)

One of the oldest voluntary registry systems, founded in 1996. Supports both voluntary and compliance market credits.

Climate Action Reserve (CAR)

A North America-focused registry system. Connected to California compliance market.

Vintage and Timing

Vintage

Indicates which year the credit was produced. For example, a "2022 vintage" credit represents emission reduction that occurred in 2022.

Vintage importance:

Older vintage credits are generally cheaper
Some buyers request last 3-5 year vintage
Older projects may be questioned due to quality concerns

Retirement

Recording that the credit has been permanently used. Retired credits cannot be resold. Each credit is tracked with a unique serial number.

Retirement procedure: The buyer specifies in the registry for which commitment the retirement is made. This information is public.

SBTi Perspective

Science Based Targets initiative (SBTi) has a clear position on carbon credits.

Basic principle

SBTi states that carbon credits should not count toward company targets. That is, offset use cannot be reported as contributing to Scope 1, 2, or 3 targets.

BVCM (Beyond Value Chain Mitigation)

SBTi supports the use of credits as "beyond value chain climate action." This is voluntary investment made in addition to the company's own targets.

Removal preference

SBTi Net-Zero Standard prefers carbon removal for long-term targets. Avoidance credits do not count as "removal."

Price Ranges and Market Trends

Carbon credit prices vary widely. Quality, project type, and market conditions determine price.

Voluntary market price ranges (as of 2024):

Avoidance (forest conservation, renewable): 2-15 USD/ton
Nature-based removal (afforestation): 10-40 USD/ton
Biochar: 80-200 USD/ton
Direct Air Capture (DAC): 400-1,500+ USD/ton

Market trends:

Increasing demand for quality, price decline in low-quality credits
Growing interest in removal credits
Increased investment in engineered solutions
Regulatory scrutiny and questioning of claims

Due Diligence Checklist for Buyers

The following questions should be evaluated before purchasing carbon credits:

Project quality

Which standard verified it?
How was additionality proven?
What is the permanence commitment?
Is there a buffer pool mechanism?
Was leakage assessment conducted?

Registry and traceability

Which registry system are the credits in?
Can serial numbers be verified?
Can previous ownership history be seen?

Community and environment

Was local community participation ensured?
Are there additional environmental benefits?
Were side effects evaluated?

Claims and communication

What claim will the company make?
Is the claim aligned with sector guidelines?
How will it be communicated to stakeholders?

Conclusion

Carbon market terminology may seem complex, but understanding basic concepts is necessary for correct decisions. The avoidance and removal distinction, additionality and permanence criteria, registries and SBTi perspective are fundamental knowledge for informed purchasing.

Carbon credit purchase should be part of the company's climate strategy. Priority should always be reduction, and credits should only be used for residual emissions. Quality criteria and due diligence are critical for protecting against greenwashing risk.

Common Terms in Carbon Markets