A carbon credit represents avoidance or removal of emissions, measured by one tonne of atmospheric CO2 equivalent.

Avoided emissions credits are usually issued through projects such as creating forest protections, or energy efficiency measures - activities that essentially “avoid” the release of CO2 emissions into the atmosphere, against a business-as-usual scenario. Carbon removal credits, on the other hand, are issued through natural regeneration processes (e.g. reforestation, or afforestation), or technological solutions such as direct air capture. A carbon removal credit represents the removal, or sequestration, of one tonne of existing atmospheric CO2 through such methods.

Organisations can purchase carbon removal credits to achieve carbon neutrality in the near term, as well as support their long-term decarbonisation plans. Interestingly, the first carbon offset scheme is said to have taken place in 1988 in the United States, as a stop-gap measure to start a conversation around companies’ carbon emissions.

Nature-based carbon removal credits are a vital component of organisations’ sustainability strategies, to help them achieve both near and long-term climate change and nature-related targets. They are cost-effective when applied with scientific rigour, help improve reputation, and most importantly, generate many environmental and social co-benefits to climate change adaptation and mitigation. (You can find a more comprehensive overview of why nature-based carbon removal strategies are particularly effective for organisations in our earlier blog post here.) 

Credits, akin to commodities or other tradable instruments, can be procured in three ways - via spot market purchases, forward contracts, and large-scale offtake agreements.

Spot market purchases, or simply spot purchases, are the most common vehicle for procuring carbon credits. Buyers purchase credits that have already been issued, i.e., have undergone a verification process. These credits are referred to as “ex-post” credits, as they represent carbon units that have already been sequestered from the atmosphere via a carbon project. Spot purchases can be made in the primary market via a project developer, or in the secondary market through existing holders. Pricing depends largely on prevailing market conditions and sentiment for the credits being purchased. 

Forward contracts involve an agreement between the buyer and seller of credits, whereby the buyer purchases the credits at a future date at a predetermined price. Forward purchases are more commonly used by carbon traders that seek to hedge their trades, as well as organisations that want to incorporate carbon credits into their long-term decarbonisation strategy. Forward contracts therefore involve the purchase of “ex-ante” credits: credits that are yet to be delivered. 

Carbon credit offtakes are agreements where the buyer commits to a purchase of a specified number of credits upfront over multiple years at a fixed price. Buyers can use offtakes to finance new projects from the ground up, allowing them to make greater claims on impact - as opposed to spot credit purchases, where the carbon projects are already developed. Offtakes also help organisations secure credits issued by a project over a specified period, supporting long-term sustainability strategies. Similar to forward contracts, offtakes are purchase agreements for ex-ante credits, which are yet to be delivered. 

As mentioned above, spot purchases are frequently used by buyers in the primary or secondary markets for ex-post carbon credits at the prevailing market price. 

They’re the most common means to procure carbon credits and can be purchased by organisations on a need basis. An important benefit to spot purchases is that the credits are ex-post - which means the credits have already been issued, and the impact of a spot credit is already verified by a third party, eliminating delivery risk that often comes with the purchase of ex-ante credits. 

Spot trading of carbon credits, however, is not without its own set of risks. Spot market purchases present some drawbacks to buyers that can be addressed by forward or offtake agreements. For one, the pricing of credits is subject to tremendous volatility. Corporate buyers who require stringent budgeting for their carbon strategies are exposed to this volatility and may end up paying more for credits based on the timing of their purchases. 

Additionally, given the relatively long time spans for project development, carbon sequestration, and validation and verification, there are limited options for ex-post credits currently in the market for carbon credit purchasers. This also makes it more difficult for purchasers to identify and access credits that meet their needs and requirements - be it geographical, or based on project type (agroforestry, reforestation, etc.). 

Finally, spot market purchases being limited also don’t allow for the same level of large-scale impact that offtake contracts can offer. Their immediacy means they are simply one-off purchases that cannot be planned for strategically as multi-year offtake contracts can. 

This is why companies are increasingly choosing to enter into long-term offtake agreements for carbon credits, rather than spot contracts, as these align better with their climate strategies as well as allow them to deliver impact at scale. Offtakes allow companies to undertake financial planning in a market where prices for carbon removal credits are estimated to increase significantly and reach as much as $254 per tonne by 2037.  

Spot market purchases provide organisations with flexibility when they need to offset their emissions in the short term, but the nature and accompanying risks of these credits also imply that such purchases can only take place on a small scale on a limited, one-off basis. 

Organisations that want to ensure impact at scale can instead turn to carbon offtakes for high-quality, monitored projects that mitigate delivery risk through robust project design and strong community participation and benefit sharing. 

Treeconomy provides solutions for both spot and offtake purchases. If your organisation is interested in purchasing high-quality, nature-based, monitored credits, either ex-ante (forwards and offtakes) or ex-post (spot purchases), feel free to contact us at hello@treeconomy.co or visit our marketplace to learn about our pipeline here.