What is Carbon Credits?

What is Carbon Credits?

A carbon credit is a tradeable certificate or permit representing the right to emit one metric tonne of carbon dioxide or its equivalent in other greenhouse gases. In compliance markets, credits are issued by governments and traded under regulatory schemes such as the EU Emissions Trading System. In voluntary markets, credits are generated by projects that reduce or remove emissions and verified by independent standards bodies like Verra or Gold Standard.

Why It Matters

Carbon credits form the financial backbone of global efforts to put a price on carbon pollution. The compliance carbon market reached approximately $950 billion in trading volume in 2024, making it one of the largest commodity markets globally. The voluntary carbon market, while smaller at roughly $2 billion, plays a critical role in channeling private capital to emissions reduction projects in developing countries.

For corporations, carbon credits serve multiple strategic purposes. They enable compliance with emissions trading schemes that cap total allowable emissions. They provide a mechanism to compensate for residual emissions while decarbonization technologies mature. And they allow organizations to finance climate action beyond their own value chains, supporting projects that might not otherwise be economically viable.

The integrity of carbon credits has been sharply debated. Investigations by The Guardian and academic studies published in Science found that significant percentages of forestry credits from leading registries failed to deliver claimed emissions reductions. This scrutiny has driven major reforms: the Integrity Council for the Voluntary Carbon Market (ICVCM) launched its Core Carbon Principles in 2023, establishing quality benchmarks that are reshaping the market.

Price signals from carbon credit markets also influence corporate behavior. EU Allowances trading above €60-80 per tonne make emissions-intensive practices increasingly costly, driving investment in cleaner alternatives. As carbon prices rise, the economic case for abatement strengthens relative to purchasing credits.

How It Works / Key Components

Compliance market credits are created through government allocation or auction. Under cap-and-trade systems, regulators set a declining cap on total emissions and distribute or auction allowances to covered entities. Companies that reduce emissions below their allocation can sell surplus credits; those that exceed their cap must purchase additional allowances or face penalties.

Voluntary market credits are generated through a project-based mechanism. A project developer implements an activity that reduces or removes emissions (renewable energy, forest conservation, cookstove distribution, direct air capture), quantifies the impact against a baseline, and submits the project for verification by an accredited auditor under a recognized standard.

Credit quality is assessed across several dimensions: additionality (would the reductions have happened without credit revenue?), permanence (will the carbon stay sequestered?), leakage (does the project shift emissions elsewhere?), and accurate quantification (are the claimed reductions real and measurable?). High-quality credits command premium prices; questionable credits face market discounts and reputational risk.

Market infrastructure includes registries (which track credit issuance, transfer, and retirement), exchanges (which facilitate trading), and rating agencies (like Sylvera and BeZero) that assess individual project quality. Blockchain-based registries have emerged to improve transparency, though traditional registries maintained by Verra, Gold Standard, and the American Carbon Registry remain dominant.

Council Fire's Approach

Council Fire helps clients develop carbon credit strategies that balance cost, quality, and reputational risk. We evaluate credit portfolios against emerging quality standards, structure procurement approaches that deliver genuine climate impact, and ensure credit use aligns with credible decarbonization pathways rather than substituting for direct emissions reductions.

Frequently Asked Questions

What is the difference between carbon credits and carbon offsets?

The terms are often used interchangeably, but technically a carbon credit is the tradeable unit (one tonne of CO₂e), while a carbon offset is the act of using that credit to compensate for emissions elsewhere. In compliance markets, the term "allowance" is more common than "offset."

How much does a carbon credit cost?

Prices vary enormously. EU Allowances trade at €60-80+/tonne. Voluntary market credits range from under $5/tonne for older renewable energy credits to $200-600+/tonne for engineered carbon removal credits like direct air capture. Quality, vintage, project type, and co-benefits all influence pricing.

Are carbon credits effective at reducing emissions?

When high-quality, carbon credits channel finance to legitimate emissions reduction and removal projects. However, low-quality credits that lack additionality or overstate reductions can undermine climate goals. The key is rigorous quality assessment and using credits to complement—not replace—direct emissions reductions.