In the fight against climate change, we often hear terms like “carbon offset” and “carbon credit”. While they are often used interchangeably, these two phrases actually have different meanings. Carbon offsetting is something you do, while a carbon credit is what you use do it. Understanding the difference between them is important for businesses and individuals looking to address their environmental impact.
Carbon Credits: Creating a Global Market for Carbon Emission Reduction
The concept of a carbon credit originated decades ago as mechanism to fund the reduction of carbon emissions. One carbon credit represents the reduction of 1 metric ton of CO2 from the atmosphere. There are two different kinds of carbon credits – voluntary and compliance. We will explain the difference, but this article primarily focuses on voluntary carbon credits which apply to everyone – businesses and individuals alike.
Compliance carbon credits are relevant for only a small number of very large companies. Compliance credits exist in government regulated cap-and-trade carbon markets that are isolated to specific high-emission industries like power generation or heavy manufacturing. In regulated carbon markets, the government identifies an industry that is responsible for significant carbon emissions. The government establishes a carbon emission limit for each facility (a cap) and enforces financial penalties on facilities that exceed their cap. Facilities with carbon emissions below their cap are awarded credits that they can sell to facilities who are over their cap. Hence the term cap-and-trade. Notable regulated carbon market includes the Regional Greenhouse Gas Initiative (RGGI), California (CARB) in the United States, and the China Emissions Trading System (ETS) to name a few.
Voluntary carbon credits on the other hand are generated by projects that are implemented exclusively to reduce carbon emissions. These projects rely on the sale of carbon credits for funding and have no other regulatory or financial incentives to exist. Voluntary carbon credit projects are basically carbon reduction factories. These carbon reduction projects are major capital projects just like building and operating a manufacturing plant. They have significant up-front investment and ongoing operating expenses. They need continuous carbon credit revenue for decades to recoup the cost of construction and operation. Every year that these projects reduce carbon emissions, they generate carbon credits that they sell to keep the doors open. That’s why it is important for you and I to buy carbon credits. We help existing projects continue to operate and we create demand for new projects.
Only certain types of carbon reduction projects are allowed, and they must meet rigorous data collection, inspection, performance and reporting standards. So, what makes something a carbon reduction project? These rules are set by registries like Verra, Climate Action Reserve, American Carbon Registry, and Gold Standard. Registries are organizations that identify scientifically valid forms of carbon reduction and establish the data collection and reporting standards necessary to prove that a carbon emission reduction has occurred. The rules are called project methodologies.
Carbon reduction project developers all over the world follow apply with the registries to build and operate projects under the rules of a certain methodology. These include nature-based projects like protecting forests so they can grow and capture carbon, to engineered projects like installing systems to capture methane leaking from landfills. There are many types of projects and there are many more in development. Newer projects include direct air capture (DAC) plants that literally suck CO2 out of the air and soil carbon projects that incentivize farmers to use farming practices that store CO2 in soils.
When you buy carbon credits, you become the owner of the carbon reduction they generate, and you ensure that these projects continue operating and reducing carbon emissions. Terrapass is proud to play a critical role in bringing these amazing projects to our customers, so they have the funding needed to succeed.
What Are the Important Terms for Carbon Credits?
Voluntary: There is no regulation or requirement to generate or purchase voluntary carbon credits; they are available for purchase by anyone who wants to fund carbon reduction, from individuals to businesses.
Additionality: A key concept in carbon credits; this means that the project wouldn’t have happened without carbon credit revenue, leading to a genuine reduction in emissions.
Reduction and Removal: Reduction (or avoidance) carbon credits are generated by projects that reduce a source of greenhouse gas emissions, like landfill gas capture. Removal carbon credits are generated by projects that remove CO2 from the atmosphere like forestry or direct air capture.
Carbon Offset: Balancing the Scales
At Terrapass, we talk about three critical steps in climate action, Calculate, Conserve and Offset:
- Priority 1: Calculate means understand where carbon emissions come from in your business or personal life by estimating your carbon footprint annually.
- Priority 2: Conserve means create a plan to reduce carbon emissions over time and achieve consistent progress.
- Priority 3: Offset means balance the carbon emissions that you can’t eliminate (your residual emissions) by purchasing carbon credits.
Imagine you take a flight that generates carbon emissions. Carbon offsetting is compensating for those flight emissions by purchasing carbon credits that fund an equivalent amount of carbon reduction.
Before Terrapass, carbon offsetting was mostly an area for major corporations who can calculate their own carbon emissions and buy carbon credits from projects without any help – but most of the world cannot do that. Terrapass changed that by creating the tools, products and platform that enables anyone to easily estimate their carbon footprint and purchase carbon credits from amazing projects.
Terrapass is constantly working to make it easier for individuals and businesses to offset their carbon footprint. We are doing this by creating a wide variety of newer, smarter products that match our customers’ needs like Business Plans, Family Plans or Wedding Offsets. We are also working with businesses to make carbon offsetting part of how you buy products.
Without question, we need to reduce carbon emissions in the atmosphere as quickly as possible. The only way to do this is to stop carbon emissions everywhere we can and offset our remaining emissions. We must do both of these in order to achieve the impact we need. Most importantly, this within our reach – if every individual and every business does their part, then together we can reduce the impact of climate change.
Beyond the Basics: Additional Facts About the Carbon Market
The Voluntary Carbon Market Integrity Initiative (VCMI): VCMI is a not-for-profit organization focused on ensuring carbon offset programs are credible and contribute to real environmental benefits. They work to prevent misleading claims and promote high-quality carbon markets that fight climate change. The market for carbon credits is vast and complex. While some credit providers maintain high standards, concerns exist regarding project verification and the overall effectiveness of some offset programs. Choosing reputable providers with transparent reporting is crucial.
Choosing the Right Approach with Carbon Credits
It’s crucial to choose reputable carbon credit providers with strong quality standards, verified projects, and transparent reporting such as Terrapass. By understanding the differences and limitations, you can make informed decisions to offset your environmental impact and be part of the solution.
Brought to you by terrapass.com
The post Carbon Offset vs. Carbon Credit: Understanding the Language of Climate Action appeared first on Terrapass.
The accounting differences that decide whether your nature investment shows up in inventory, in BVCM, or nowhere at all.
The question reaches a procurement team about three weeks before the next sustainability committee meeting. Someone has read about insetting. Someone else has just signed off on an offset purchase. The CSO wants to know if the two are interchangeable. The answer is no, and the GHG Protocol Land Sector and Removals Standard is the reason why.
This article walks through what each term means at audit-grade specificity, what the standards actually say about how each gets counted, and how to decide which tool fits which target. The insetting vs offsetting question is one of the most-searched in corporate climate strategy, and one of the most poorly answered. By the end of this piece, you should be able to brief a committee on the difference without notes.
The two definitions, in plain English
Offsetting means buying carbon credits generated outside your value chain and retiring them against your residual emissions. The reduction happens somewhere else, financed by you, and the credit is the receipt.
Insetting means investing in emission reductions or removals inside your own value chain, typically with suppliers, where the reduction is directly linked to the products and services you buy. The reduction happens inside the boundary of your Scope 3 inventory, and the accounting treatment is fundamentally different.
The shorthand from the University of Oxford’s Nature-based Insetting Initiative is useful: insetting is what you do with the supply chain you have; offsetting is what you do with the supply chain you do not have.
What the GHG Protocol Land Sector Standard actually says
The GHG Protocol Land Sector and Removals Standard, finalised in 2024 after a multi-year pilot, sets the rules for how land-based emission reductions and removals enter corporate inventories. The Standard distinguishes between inventory accounting (Scope 1, 2, and 3) and project or intervention accounting (a separate methodology for crediting).
For insetting, the practical implication is that supplier-level interventions, when properly measured and attributed, can reduce your Scope 3 category 1 (purchased goods and services) emissions in your inventory. The reduction is not a credit retired against the inventory; it is a lower inventory number, period.
For offsetting, the credit is retired separately. It can be reported as a contribution toward a net-zero claim under the SBTi Beyond Value Chain Mitigation framework or as part of a VCMI Carbon Integrity claim, but it does not lower the inventory number.
A practical consequence: if your Science Based Target requires a 50% absolute reduction in Scope 3 emissions by 2030, insetting moves you toward the target. Offsetting does not. This single point of difference reshapes the procurement decision.
When insetting counts toward Scope 3 (and when it does not)
Insetting counts toward Scope 3 only when several conditions are met:
- The intervention must occur with an entity in your value chain.
- The emissions reduction or removal must be measured against a defensible baseline.
- The reduction must be attributed to your share of that supplier’s output, not double-counted with other buyers.
- It must follow the inventory accounting rules in the GHG Protocol Land Sector Standard, not the project accounting rules used to generate credits.
The most common failure mode is double counting. If your supplier sells the same reduction as a credit on the voluntary market and also reports it to you as a Scope 3 reduction, the math breaks. The Standard requires you to address this risk, typically by purchasing and retiring the supplier-issued credit as part of your inventory or by contractual provisions that prevent the supplier from selling the reduction twice.
When insetting does not count toward Scope 3: when the intervention sits with a supplier you do not buy from, when the baseline is not defensible, when the attribution is unclear, or when the documentation does not survive audit. Those cases default to Beyond Value Chain Mitigation, which is still useful but operates on a different ledger.
The procurement and supplier engagement question
Insetting is harder than offsetting. That is the unfashionable truth most buyers eventually confront. Offsetting is a transaction; insetting is a relationship.
To run an insetting program, you need supplier mapping precise enough to know which farms or facilities sit at which Scope 3 boundary. You need an engagement model that gets suppliers to participate, which usually requires multi-year commitments and shared economics. You need an MRV architecture that measures the right things and produces audit-ready documentation. And you need a contractual structure that prevents double counting and protects both sides.
The trade-off you receive in return is significant. Reductions count against your inventory rather than your residual. Supplier relationships deepen, which protects sourcing continuity. Yield and quality improvements often follow regenerative interventions, which reduces your input cost over time. And the regulatory file, under CSRD, CSDDD, EUDR, and the SBTi FLAG Guidance, is materially stronger.
Choosing the right tool for the right target
A practical decision rule. If your target is a science-based Scope 3 reduction and you operate in a FLAG sector or source FLAG commodities, insetting is the structurally correct tool. If your target is a net-zero claim that includes neutralising hard-to-abate residual emissions outside your value chain, BVCM via high-integrity offsets is the structurally correct tool. Most companies with material Scope 3 exposure need both, in different proportions, sequenced over time.
The sequencing matters. Insetting takes longer to stand up but produces a permanent reduction in the inventory. Offsetting can be transacted faster but does not change the inventory and now sits under tighter claim restrictions. Treat them as complementary tools with different jobs, not as substitutes. The Accountability Framework Initiative and the IUCN Global Standard for Nature-based Solutions both provide useful guardrails for the insetting side, with biodiversity, human rights, and benefit-sharing requirements that go beyond carbon math.
If you are mapping a Scope 3 reduction roadmap and need to scope which interventions count toward your inventory versus which sit in Beyond Value Chain Mitigation, the carbon and sustainability experts at Carbon Credit Capital can help you structure a nature-based supply chain investment program that fits your FLAG exposure, your target architecture, and your audit horizon. Schedule a consultation.
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