Carbon Credits and Emissions Allowances are two important concepts in the carbon market and are effective tools to reduce GHG emissions. Although both have the unit of 01 ton of CO2e, their nature and characteristics are completely different. Practice shows that many people are often confused, so this article will help to untangle these concepts.

Characteristics

Emission quota represents the amount of greenhouse gases an organization is allowed to emit over a specified period of time. Emission quotas are allocated by the Government to organizations based on national and sectoral emission targets. At the beginning of the year, the Government will allocate an appropriate amount of quotas. At the end of the year, the facility will have to pay back the amount of quotas corresponding to the total actual emissions of the facility in that year. In case the actual emissions exceed the quota allocated by the Government, the facility will have to buy more or borrow to make up the difference.

Carbon credit generated from projects that reduce/avoid emissions or remove GHGs from the atmosphere. For example, projects on reforestation, renewable energy or CO2 capture, etc. Investors will be approved by independent standards organizations or the Government to issue carbon credits if the project meets specific conditions for each type of project. After that, investors can trade carbon credits on the voluntary carbon market. The laws of some countries (for example, Vietnam) also allow carbon credits to be traded on the ETS market to offset a small amount (10%) of emission quotas. However, there are also places like the EU that do not allow carbon credits to be used to offset emission quotas.

Basic differences

• Source: Carbon credits are typically generated from activities that reduce/avoid or remove GHG emissions. While emission allowances are emission rights that the Government grants or auctions to facilities participating in the ETS.
• Function: Carbon credits are financial instruments to encourage emission reduction. While emission quotas are policy instruments for the Government to control total emissions.
• Market: Carbon credits can be traded on the voluntary carbon market (and ETS in some countries). While emission allowances are only traded on the ETS market.
• Subject has the right to trade: According to the draft amendment to Decree 06, it is expected that all individuals, domestic organizations and foreign organizations can participate in trading Carbon Credits. Meanwhile, only establishments allocated quotas by the Government are allowed to trade Emission Quotas.

Conclusion

Understanding the difference between carbon credits and emissions allowances is important for organisations to effectively manage their greenhouse gas emissions, comply with regulations and participate in the Carbon Market.