Carbon credits: Represent verified reductions or removals of one metric ton of greenhouse gases (GHGs), most commonly carbon dioxide (CO2). These credits are generated through projects that prevent or remove emissions (e.g., renewable energy projects, and forest conservation). Companies or individuals can purchase carbon credits to offset their emissions.

Emission allowances: Permits issued by a government or regulatory body to allow emitting a specific amount of GHGs within a cap-and-trade system. Unlike credits, allowances are generally freely allocated or auctioned, and companies can trade them.

Key differences:

  • Origin: Credits originate from emission reduction/removal projects, while allowances are permissions within a regulated cap-and-trade system.
  • Trading: Both can be traded in voluntary or compliance markets, but allowances are typically only for regulated entities within a cap-and-trade system.