What is a carbon credit?

A carbon credit can be considered simply as a payment for a service. The service being provided is a reduction of the amount of carbon dioxide in the atmosphere. The credit is offered as an incentive to spur actions that reduce the amount of carbon dioxide in the atmosphere, considered by scientists and policymakers to be a contributing factor to global climate change. 


Carbon credits have two types, regulatory and voluntary. In a regulatory carbon market, carbon dioxide emission limits are set on various industries. If a particular plant or company exceeds its limit, it has to buy a credit from a company that is under its limit. Over time, the limits would be continuously tightened. In a voluntary market, a person or company who voluntarily wants to do the right thing for the planet (social/corporate responsibility) pays someone else to reduce the amount of carbon dioxide in the atmosphere.

Afforestation (planting trees where there historically were none) and reforestation (planting trees where historically there were trees, but not in the recent past) may be included in a carbon market as one mechanism to reduce carbon dioxide in the atmosphere, and thus offset emissions from other sources.