The world is facing increasingly severe impacts of climate change and controlling and reducing greenhouse gas (GHG) emissions has become an urgent task. To cope with this global issue, many economic measures and market-based instruments have been introduced by countries and jurisdictions around the world, including carbon pricing instruments, carbon mechanisms/standards, or trade mechanisms that solve carbon leakage and promote decarbonization. These measures and mechanisms not only show the commitment of the international community in controlling the impacts of climate change but also open opportunities for global cooperation in fighting climate change. However, these are new measures and mechanisms which utilize plenty of technical terms, sometimes confusing terms, especially the units used for measurement of the amount of GHG traded or offset, including emission allowance (i.e. emission permits or allowance for short), carbon credits, and CBAM certificates. In this article, we will take a deep dive into these three important concepts to clearly distinguish their differences and goals in responding to the climate change challenge.
1. What are emission allowances?
According to Clause 33, Article 3 of the Law on Environmental Protection No. 72/2020/QH14 “GHG emission allowances mean the amount of GHG emissions a country, an entity or an individual is permitted to emit a specified period of time, expressed in tons of carbon dioxide (CO2) or tons of carbon dioxide equivalent (CO2e)”. Through GHG emission inventories, the Government can determine the total national GHG emissions and emission intensity of each product and service, thereby allocating suitable allowances to companies. These companies are only allowed to emit GHGs within the allocated allowances or a cap. If they want to emit above the allowed cap, they have to buy allowances from other companies that emit below the allowed cap. If the allowance cannot be used up, companies can also bank them for exchange and sale through the carbon market.
2. What are carbon credits?
Carbon credits represent the results of activities that reduce emissions and increase GHG sequestration from the environment. One carbon credit is equivalent to one ton of CO2 (or other emissions) that has been reduced or absorbed. To obtain carbon credits, companies must implement emission reduction measures through programs and projects that are registered under government-regulated mechanisms or voluntary mechanisms/standards. These measures could include technology improvement, optimization of production processes, renewable energy generation, or even planting trees to absorb CO2. These credits can then be sold or traded on the carbon credits market, generating profits for the companies. Therefore, carbon credits are not only an effective management tool, but also an economic incentive to promote environmental protection and climate change mitigation interventions.
3. What are CBAM certificates?
The EU’s Carbon Border Adjustment Mechanism (CBAM) is a new and concerning carbon pricing instrument that will be implemented by the European Union (EU) with a transition phase starting from October 1, 2023, and a fully implemented phase starting from 2026. CBAM will levy a fee on several carbon-intensity goods such as iron and steel, aluminum, cement, fertilizer, and hydrogen imported into the EU market based on the GHG emission intensity of the manufacturing products in the country of origin. Specifically, importers will have to purchase one CBAM certificate for each ton of CO2 equivalent embedded in the above-mentioned products when imported into the EU. The price of CBAM certificates will be based on the weekly market price of the EU allowances (EUA) under the EU Emission Trading System (EU ETS). If the price of carbon emissions has been paid in the exporting country through carbon pricing instruments, it will be deducted from the price of CBAM certificates. This is to avoid double counting and demonstrate fairness in carbon pricing.
The following table compares the three concept:
| Emission allowances | Carbon credits | CBAM certificates |
Used for | Control emissions from companies operating within a specific jurisdiction | Cover emissions from companies, organizations, or individuals that want to reduce their emissions below a certain level | Cover emissions from imported goods |
Issued by
| Emission rights are granted by a government or regulatory body to companies participating in a cap-and trade program | Carbon mechanisms or standards | EU agency in charge of CBAM |
Issued to | Companies and organizations that are emitting GHG and participating in cap-and-trade program | Companies and organizations implementing activities to reduce GHG emissions and enhance GHG sequestration | Importers of goods into the EU market |
Unit of measurement | CO2e
| ||
Price | Based on supply and demand of carbon market
| Based on weekly EU ETS price | |
Overall, emission allowances, carbon credits, and CBAM certificates all play an important role in efforts to control and mitigate the impacts of climate change by incentivizing countries, organizations or individuals to reduce GHG emissions and enhance GHG sequestrations by the most appropriate and economically effective solutions. While emission allowance focuses on limiting emissions of companies under a cap, carbon credits encourage the participation of companies in reducing emissions and enhancing GHG sequestration. Finally, CBAM certificates mark a new milestone in applying carbon pricing to imported goods, ensuring the EU's and global carbon-neutral ambitions.
Pham Hai Minh
