How Carbon Allowances differ from Carbon Offsets
Carbon Allowances vs Carbon Offsets
Between similar sounding terms like carbon offsets, carbon credits, carbon allowances, carbon permits and more, there can be much confusion about the different terms and which ones can be used interchangeably. It is important to take care as to which term you use as there are key differences among the terms that speak to their very different use cases.
Carbon Allowances are not the same thing as Carbon offsets
There are two basic mechanisms to be understood regarding allowances and offsets – the first is a regulatory compliance unit allowing an emission and the other a primarily voluntary unit representing an actual emissions reduction. Hence an “allowance” allowing an emission and an “offset” providing a reduction that counteracts or offsets your emission.
Allowances
Carbon or emission allowances (or sometimes referred to as a permit) are a regulatory compliance unit. They are issued by a government under a cap and trade program, this system creates a market and a value for emissions, incentivizing investment in better technologies to avoid buying allowances. Under this system, the government sets the overall number of allowances with a cap – essentially how much the entire economy (or sectors covered) are “allowed” to emit in a given year.
Each allowance typically represents the allowed emission of one metric ton of CO2. Allowances are either allocated for free or sold via auction to regulated emitters.
The key attribute to understand is that emissions allowances do not represent the physical reduction of CO2 or greenhouse gas (GHG) emissions. They simply represent the “right” or “ability” to emit one metric ton of CO2 under a given regulatory scheme.
For example, in aviation, these schemes could be the EU or UK Emissions Trading Schemes (ETS). Every year allowances have to be surrendered to the respective government for your emissions.
Therefore, surrendering allowances does not make one carbon neutral. The allowance does not represent the reduction of any emissions, simply a permitted emission under a certain regulatory scheme.
Carbon Offsets
This contrasts with carbon offsets or carbon credits which are verified emissions reductions generated from a voluntary carbon offset project. Carbon offsets are emissions reductions generated from projects that are funded by the sale of carbon offsets. Without the proceeds from the sale of carbon offsets, the reductions would have never occurred. Therefore, one can claim to be funding emissions reductions through the purchase and retirement of carbon offsets.
If you retire an amount of offsets equivalent to your own emissions, you have prevented or removed an equivalent footprint to your own and thus can claim carbon neutrality.
Whereas carbon allowances are issued annually from the regulator, carbon offsets undergo a rigorous approval and verification process before being issued and in some cases may have reductions generated from multiple years issued altogether in one batch.
Carbon offsets must be generated from a project under an approved methodology, by an independent credit issuer (known as a registry), and need an independent verification to confirm the generation or avoidance of real emissions reductions.
Carbon offsets were designed to be a global mechanism that aligned financing with the lowest hanging fruits of global carbon reduction opportunities.
Today, it is cheaper to decarbonize one metric ton of CO2 from the replacement of fossil-based electricity than to reduce one metric ton from the replacement of fossil-based petroleum in aircraft. Both reductions need to be done over the long term, but offsets create a bridge across industries to align interest and financing with the cheapest emission reduction options first. As the lower hanging fruit are accomplished and new technology scales up, it becomes more economical to decarbonize harder and more expensive projects or to reduce one’s own emissions. Carbon offsets are not meant to be the long-term final solution, but rather an interim mechanism to accelerate a global, multi-industry decarbonization journey.
Other similarities and differences
Both allowances and offsets typically have a year assigned to them. Years for allowances denote what year’s emissions the allowances can be applied towards. For example, 2021 UK allowances can only be applied to a company’s emissions that were created in 2021. These allowances have to be permanently “surrendered” by a certain deadline to the UK government. Once surrendered, they cannot be used or transferred again.
When a year is assigned to an offset, it signifies the year that the reduction or avoidance was achieved – known as its “vintage”. Multiple vintages can be issued in a given year if the project developer decides to have multiple years verified at the same time. Moreover, there is no requirement to use a certain vintage, though it is better to use more recent vintages that more closely align to the year you are offsetting (however, some regulatory schemes like CORSIA that do use offsets will have requirements around vintages to use).
Rather than being “surrendered”, offsets are “retired” on the public registry where they were first issued. This serves as an independent and verifiable way to ensure only one claim was made to each credit. Retirements are similarly permanent and cannot be reversed.
Finally, where an allowance only represents the allowed or permitted emission of one metric ton of CO2, a carbon offset can carry additional benefits beyond just the reduction or avoidance of a metric ton of CO2. Typically, they will carry additional societal, economic, educational, technological, and local environmental benefits to their communities. Look for information from the project developer on what additional United Nations Sustainable Development Goals (U.N. SDGs) the project may achieve.
Which one is right for me?
If your organization is subject to UK, EU or another emissions trading scheme and you meet certain thresholds, you may be subject to regulatory requirements to purchase and surrender allowances. However, it is important to understand that this does not make you carbon neutral and does not achieve any sustainability goals beyond compliance with the regulatory scheme. Even compliance with the scheme does not mean that you as an organization are compensating, addressing or reducing your own emissions.
CORSIA does present one exception to this rule in that it is a regulatory program requiring the use of carbon offsets. CORSIA is not a cap and trade program, but it does cap sector wide international emissions at 2019 levels and requires operators to offset any amount over this cap. Using carbon offsets to comply with CORSIA does provide the opportunity to claim the credits towards carbon neutrality because the program uses offsets issued from the voluntary market, rather than issuing allowances (though note that CORSIA does not require offsetting 100% of emissions, only a portion).
The achievement of actual emissions reductions through operational improvements, or the use of alternative fuels within aviation, is the first way to actually reduce your footprint (and it does also reduce the number of allowances one will need). Beyond these reductions, carbon offsets are a viable and verifiable mechanism to compensate for your footprint and achieve carbon neutrality today.
Could you use a carbon offset or allowance interchangeably?
No. Allowances are used exclusively for compliance with their respectively regulatory programs and do not add to any carbon neutrality claims – or count towards any regulatory programs like CORSIA that require the use of carbon offsets. Similarly, carbon offsets cannot be used to meet the needs of allowances. ETS programs exclusively accept their respective allowances.
This is due to the fact that an allowance is an allowed emission under a certain regulatory program while an offset is an actual emission reduction. Though similar in name, both represent very different mechanisms that are used to serve different roles under regulatory and voluntary programs.
Summary of Allowances vs Offsets
| Characteristics | Carbon allowances (aka permits) | Carbon offsets (aka credits) |
|---|---|---|
| Creation | Issued by a government for compliance with a cap and trade system | Issued by a registry and created by a project developer once independently verified by a third party |
| What they Represent | Represent the allowed emission of one metric ton of CO2 | Represent the actual reduction or avoidance of one metric ton of CO2 |
| Year | The allowance year corresponds to the year of your emissions that the allowance will be applied towards | The offset year corresponds to the year the reduction or avoidance was achieved |
| Claiming | Allowances are permanently “surrendered” for the appropriate year to the regulator | Offsets are permanently “retired” whenever the owner would like. They are retired on a public registry to ensure transparency and accountability |
| Carbon Neutrality | Using allowances does not mean you are carbon neutral | Using carbon offsets can be used to compensate against your own emissions and claim carbon neutrality |
| Use Case | Used solely within Emissions Trading Schemes like the UK or EU ETS | Used primarily for voluntary programs, though CORSIA does use carbon offsets for its compliance* |
*When using offsets under CORSIA, these additionally can count towards a carbon neutrality claim because the offset represents a verified emissions reduction.