Types of carbon credits: ex-ante, ex-post, pre-purchase
· 7 min read
This article is part of illuminem's Carbon Academy, the ultimate free and comprehensive guide on key carbon concepts
Carbon credits are typically generated through projects or activities that reduce or remove greenhouse gas emissions, and each credit represents one metric ton of carbon dioxide equivalent (CO₂e) that has been mitigated. Each carbon credit is the equivalent of 1 tonne of CO₂ avoided or removed.
The credits are purchased by companies, individuals, and other entities to offset GHG emissions or otherwise contribute to carbon dioxide emissions abatement. Carbon Credits are primarily traded in the Voluntary Carbon Market. The prices of carbon credits are determined by the types and quality of carbon projects as well as the demand for credits from those projects.
It typically takes several years before carbon credits are actually issued. To progress from initial project planning through production, verification, certification, and the issuance of carbon credits. For example, newly planted trees require years to reach a size sufficient to ensure significant carbon absorption. This process consists of three stages (see also the VCM piece).
Retiring a carbon credit indicates that it has been used, that the carbon benefit it represents has been claimed by the entity that purchased it – it is taken off the carbon market, and cannot be sold or traded again.
Once the carbon benefit which the credit represents has taken place, the carbon credit is retired in its registry to indicate that it has been used – again ensuring the purchase and impact is traceable, and avoiding any double counting.
Retiring a carbon credit is a way to ensure that the environmental benefit it represents is permanently recognized. Once retired, the carbon credit cannot be sold, transferred, or otherwise used to offset emissions again. This process is crucial for maintaining the integrity and effectiveness of carbon offset programs and standards.
When a buyer acquires carbon credits, the positive impacts of these credits are not immediately linked to the purchasing act. Instead, the buyer retains ownership of these credits until they decide to retire them.
Carbon credits have the potential to be traded, at times multiple times, among various market participants. This implies that carbon credits may persist, unretired, for a certain period. In order to avoid double counting, it is key to distinguish between these two timelines on carbon offset certificates.
Upon retirement, carbon credits are irrevocably withdrawn from circulation and become ineligible for resale. Once a retirement has been executed, the buyer is free to claim the positive impacts the credits represent. When a credit is retired, the carbon offset it represents is permanently removed from market circulation. This effectively marks the credit’s ‘life’ since it cannot be used or claimed again.
Only the stakeholder who retires the credit can claim the emission reduction towards its climate targets and they can only do so once. Retirement is extremely important for driving credibility, preventing the benefits of credit from being claimed multiple times.
Carbon credits vary not only in relation to the projects they are linked with but also in terms of their issuance timing. Two distinct types of credits exist in this context:
Pros: The buyer faces reduced risk as the project has already been successful and its impact has already been verified by the issuing entity of the carbon credits. Carbon credits can be retired after they are sold.
Ex-post carbon credits often originate from projects whose climate impact has already been measured and verified. This constitutes a positive aspect for buyers, too, who want to count these verified credits towards their climate targets.
Cons: While ex-post credits provide accurate estimates of their impact, the types of projects they are linked to may not often contribute towards net-zero or net-negative targets as much as ex-ante or pre-purchase carbon credits (see below).
Pros: Ex-ante credits allow the buyer to finance the project in its early stages and directly contribute to its success.
Cons: Because the impact has not yet happened, there is some risk that the project may fall short of its expected outcomes. In this respect, it becomes crucial to prioritize high-quality projects.
Verification and monitoring are crucial aspects of ex post carbon credits, but even more so in the case of ex ante credits given that their climate impact is still to be realized.
A Direct Air Carbon Capture and Storage (DACCS) project that is still in the design or construction phase: carbon credits can be issued when the plant is operational and be removed only when the carbon benefit has accurately been estimated.
Pros: Pre-purchase credits are usually associated with early-stage and innovative projects, often technological carbon removal initiatives (e.g. DACCS), which hold immense potential, but are not easy to scale up in the short term and require huge financial commitment.
Cons: Similarly to ex-ante carbon credits, there are a few risks associated with this type of carbon credits for buyers since the benefits of the project have not been measured or verified, or the project may not even be operational yet.
In our previous articles, we discussed the differences between nature-based and tech-based solution credits, as well as the distinctions between reduction and removal. The additional categorization of ex-ante, ex-post, and pre-purchase carbon credits further underscores the complexity of the carbon credit landscape.
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