A greenhouse gas emission reduction is not per se a Carbon Credit. Greenhouse gas reductions may refer to either reductions in actual emissions (e.g. through energy efficiency measures), specific projects that are aimed for offsetting carbon emissions (e.g. renewable energy) or the creation of emission sinks (e.g. Afforestation). To create a Carbon Credit, accreditation or formal recognition by an authority is required.

Credit-based emission reductions are project-based, and in most cases stem from entities which are outside the scheme. This system allows for an extension to the scheme by allowing offsetting reductions to be purchased from third parties that are not required to reduce their emissions. In mandatory carbon trading schemes, regulators approve each trade and the offsets need to be legally recognized by the regulator as Carbon Credits.

Allowances:

These emission rights are allocated in mandatory schemes by the regulator; no additional allowances can be created. Some exisitng allowances assigned under Kyoto called Amount Units (AAUs).The assigned amount is the total amount of greenhouse gas that each Annex B country is allowed to emit during the first commitment period of the Kyoto Protocol. An Assigned Amount Unit (AAU) is a tradable unit of one tonne of CO2 equivalent.

Emission Allowance Units (EAUs) under the ETS:

Those allowances are allocated under the EU scheme by the national regulator; each EAU represents the right to emit one tonne of CO2 equivalent.

Emissions Credits (EC):

These are a type of credit that can be nationally generated by a company or project developer through the implementation of an emission reduction or savings project, without having an emission obligation (as in the UK). These ECs can be traded on a nationally scale but not necessarily on the international market.

Emissions Reductions Units (ERU's)

ERU's are carbon reduction credits that have been generated under Joint Implementation Initiatives and are called emission reduction units (one ERU signifies an emission reduction of one tonne of CO2 equivalent.)

Certified Emission Reductions (CER's)

This type of carbon credits is generated from projects that have been approved under the Clean Development Mechanism. An industrialised country that wishes to get credits from a CDM project must obtain the consent of the developing country hosting the project that it will contribute to sustainable development.

Then, using methodologies approved by the CDM Executive Board (EB), the applicant must make the case that the project would not have happened anyway (additionally), and must establish a baseline estimating the future emissions in absence of the registered project.

A validation is undertaken by a third party agency, a so-called Designated Operational Entity. This is done to ensure the project results in real, measurable, and long-term emission reductions. The CDM Executive Board then decides over approval of the project. Once a project is registered, the EB issues the CER's to project participants based on the monitored difference between the baseline and the actual emissions.

Voluntary Emission Reductions (VER's):

For voluntary abatement projects outside the Kyoto protocol, VER's are available for sale to corporations and individuals who want to offset their emissions for non-regulatory purposes. These offsets are not certified by a regulatory authority for use as a compliance instrument, but can be verified by independent agents. They carry the possibility that regulators will consider them for future emission reduction requirements, however this cannot be guaranteed. Thus most projects try to operate as close as possible to the Kyoto Protocol requirements.