The terms are used interchangeably in press releases and sustainability reports. They shouldn't be. Carbon credits and carbon offsets come from different markets, serve different functions in a corporate emissions strategy, and carry very different risks. Conflating them is how companies end up making claims their auditors can't support.
Carbon credits: compliance markets
A carbon credit is a unit issued within a regulated emissions trading system (ETS). The EU Emissions Trading System is the largest. Under an ETS, a regulator sets a cap on total emissions across covered sectors, issues allowances up to that cap, and requires covered entities to surrender allowances equal to their verified emissions each year.
One EU allowance (EUA) represents the right to emit one tonne of CO2-equivalent. Companies that emit less than their allocation can sell surplus allowances. Companies that emit more must buy additional ones. The price is set by the market and currently trades well above where it was five years ago.
ETS compliance is a legal obligation, not a voluntary choice. If your operations fall within the covered sectors and thresholds, you participate in the scheme whether you want to or not. This is entirely separate from your sustainability commitments — it's a regulatory cost of doing business.
Carbon credits from ETS schemes cannot be used by companies outside the scheme to claim emissions reductions. A tech company that voluntarily buys EU allowances and retires them is not generating a legitimate offset under any recognized corporate accounting standard.
Carbon offsets: voluntary markets
A carbon offset is a unit representing one tonne of CO2e that has been reduced, avoided, or removed from the atmosphere through a project outside the buyer's own operations. The voluntary carbon market (VCM) is where these are bought and sold.
Offset project types broadly fall into two categories. Avoidance/reduction projects prevent emissions that would otherwise occur: avoided deforestation (REDD+), clean cookstove programs, methane capture from landfills, industrial gas destruction. Removal projects take CO2 out of the atmosphere: afforestation and reforestation, soil carbon sequestration, direct air capture, enhanced weathering.
The market has faced significant credibility problems. High-profile investigations found that large portions of some REDD+ registries overestimated their emission reductions — in some cases dramatically. This doesn't mean all offsets are fraudulent, but it does mean quality assessment is critical. Standards like Gold Standard, Verra VCS, and the new IC-VCM Core Carbon Principles provide frameworks for evaluating project quality.
How they fit into a net-zero strategy
The Science Based Targets initiative and the Oxford Offsetting Principles both take a clear position: offsets should be used to address residual emissions that cannot be eliminated, not as a substitute for actual reductions. A company that buys offsets to claim carbon neutrality without reducing its own emissions is greenwashing, and increasingly regulators in the EU and UK have said so explicitly.
The appropriate role for offsets in a serious net-zero strategy is neutralizing the small percentage of emissions that genuinely can't be reduced with available technology — and even then, the preference is for removal offsets (which take CO2 out of the atmosphere) over avoidance offsets (which prevent future emissions).
Near-term: focus on reductions. Use avoidance offsets sparingly if you need to neutralize residual emissions while working toward deeper cuts. Long-term: transition to high-quality removal offsets for the residual emissions that remain after genuine decarbonization. Budget for the fact that high-quality removal credits cost substantially more than cheap avoidance credits from questionable registries.
Disclosure requirements
Under CSRD, companies must disclose their use of carbon credits separately from their emission reduction figures. You cannot net offset purchases against your gross emissions when reporting Scope 1, 2, and 3. Gross emissions are disclosed. Offsets are disclosed as a separate line item. This is the right approach — it prevents companies from hiding real emissions growth behind offset purchases.
When disclosing offsets, include: the standard used, project type (avoidance vs. removal), volume retired, and how the offsets relate to your net-zero target. Vague references to "carbon neutral operations" without this breakdown are increasingly scrutinized by regulators and green claims legislation in both the EU and UK.
The short version: reduce first, offset last, disclose everything.