Carbon Credits Glossary: Key terms in Carbon Markets explained

The mitigation hierarchy is a framework for prioritising climate action. It encourages organisations to avoid emissions where possible, reduce emissions that cannot be avoided, and only then compensate for residual emissions using credible mitigation measures.

• Avoid: Stop emissions from happening in the first place, for example by changing a process or choosing a lower-carbon option.
• Reduce: Cut emissions from activities that still need to happen, such as through efficiency improvements, operational changes or cleaner technologies.
• Compensate: Address residual emissions by supporting verified projects that reduce or remove greenhouse gases elsewhere.¹

Cap-and-trade is a form of emissions trading that limits the total amount of greenhouse gas emissions allowed within a system. It works through two linked elements:

• A cap that sets the total emissions limit
• Tradeable allowances that participants can buy, sell or keep for later use

If an organisation emits less than its limit, it may be able to keep or sell its spare allowances. If it emits more, it must buy additional allowances. This creates flexibility for participants while keeping total emissions within the overall cap.²

A carbon credit is a tradable unit that represents one metric tonne of greenhouse gas emissions reduced, avoided or removed, expressed as carbon dioxide equivalent (CO₂e). Credits are issued only after the claimed impact has been measured and verified under an approved methodology. Each credit is typically assigned a unique serial number and recorded in a registry, helping to track ownership and use over time.³

Carbon markets are systems that allow governments and non-state actors to trade carbon credits and other greenhouse gas emission instruments. Their purpose is to support climate action by creating a mechanism to price emissions and channel finance towards emissions reductions.⁴

Carbon offsets are a broad term often used to describe the use of carbon credits or other mitigation instruments to compensate for greenhouse gas emissions. In practice, a carbon credit is the tradable unit itself, while offsetting is the act of using that unit to counterbalance emissions. The term is often used interchangeably with carbon compensation, although definitions can vary by context.⁵

CORSIA is a global market-based mechanism developed by the International Civil Aviation Organization to address emissions from international aviation. It complements other emission-reduction strategies by enabling organisations to offset unavoidable emissions through the purchase of carbon credits and the use of CORSIA-eligible sustainable aviation fuels (SAFs).⁶

For more information about Shell’s CORSIA offerings, visit: Insights to CORSIA: Market trends and strategies for airlines | Shell Global

Carbon pricing puts a financial cost on greenhouse gas emissions, often by assigning a price to CO₂. The aim is to encourage lower-carbon choices by making emissions more visible in economic decision-making. Different types of carbon pricing include carbon taxes and emissions trading systems (ETS) such as cap-and-trade.⁷

A carbon tax is a government levy on greenhouse gas emissions, usually linked to the carbon content of fossil fuels. It is designed to discourage high-emission activity by increasing its cost.⁸

Compliance markets are regulated carbon trading systems in which organisations must meet emissions limits set by law or regulation. Participants typically buy, sell or surrender allowances, and in some systems may also be able to use eligible credits, to comply with legal obligations. Unlike voluntary carbon markets, participation is driven by regulation rather than a self-directed climate claim or target.⁹

Credit retirement is the permanent removal of a carbon credit from circulation so it cannot be traded or used again. Retirement is what allows the underlying emissions reduction or removal to be claimed without double counting.¹⁰

Credit vintage is the year in which the emissions reduction or removal linked to a carbon credit took place. It can help indicate when the underlying activity happened and, in some cases, the standards that applied at the time.¹¹

The EU ETS is the European Union’s emissions trading system and one of the best-known examples of cap-and-trade. Launched in 2005, it was the world’s first major carbon market and is designed to help reduce emissions across the EU.¹²

Voluntary carbon markets allow companies, cities and other non-state actors to buy carbon credits without being legally required to do so. They sit outside mandatory compliance systems and are typically used to compensate for residual emissions or support broader climate goals. Unlike compliance markets, participation is driven by voluntary commitments, internal targets or claims rather than regulation.¹³