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There are two different types of carbon credits: Spot and forward credits. Spot credits can be counted towards the CO2 balance sheet right when they are bought, forward credits are bought before the carbon was removed from the atmosphere and therefore it can not be counted towards the CO2 balance sheet right away. While spot credits are more flexible, forward credits represent the actual project development cycle and should be cheaper than spot credits. Thus a combination of spot credits and forward credits are the best solution for many companies.
When it comes to carbon credits, you can distinguish between two types. Spot credits and forward credits.
Spot Credits
Spot credits (or ex-post credits) represent an emission reduction that has already occurred. The project, which saves emissions or removes carbon from the atmosphere, has already been implemented. The credits are usually available immediately or with little lead time and can be added directly to the CO2 balance.
Forward Credits
Forward credits (or ex-ante credits) represent intended emission reductions. The project that saves emissions or removes carbon from the atmosphere is only being implemented now or in the future. The carbon has therefore not yet been removed from the atmosphere and there is still a risk that the project will capture less (or ideally more) carbon. Forward credits cannot be added directly to the CO2 balance, but only when the carbon has actually been sequestered.
Why are there two Types?
Companies that want to offset their emissions need a certain amount of certificates at a certain time. Spot credits are ideal for this purpose. Forward credits, on the other hand, require more advanced planning and forecasting on the part of companies. If the company buys forward credits that will only save emissions in two years, then the company needs to know now how many emissions it wants to offset in two years.
So are forward credits unnecessary?
Unfortunately, it's not that simple. Unlike spot credits, forward credits reflect the development cycle of a carbon offsetting project. For these projects, money is first needed to implement the corresponding measures (e.g. planting trees) and only after some time is CO2 actually removed from the atmosphere. In other words, even if a project sells spot credits, it usually needs the money in advance. For this purpose there are companies that finance carbon projects. Through forward credits, this financing (but also partially the associated risks) is mapped by the buyer of the spot credits.
As a compensation for the assumed risk, as well as a compensation for the opportunity costs of the tied up capital, the forward credits should be cheaper than spot credits for projects of comparable quality. It should therefore generally be more favorable for companies to cover their issues with forward credits.
The Best of both Worlds
A good strategy is to combine favorable forward credits with flexible spot credits. The company can make a forecast of how many emissions it will have in the next few years. Of course, the further into the future this forecast goes, the less accurate it becomes. But there remains a portion that is very likely to be incurred. In financially good years, the company can already cover this part with forward credits. If financially more difficult years follow, the emission targets for these years are already (partially) covered.
The emissions that cannot be forecast exactly can then be flexibly covered each year with spot credits.
