Inside the World of Carbon Credits
When setting out to make their business more sustainable, many corporations turn to carbon credits as part of their strategy. While the concept may seem simple at first glance, in practice, the world of carbon credits is anything but that. Those who are new to this area can become quickly overwhelmed by all the intricacies of the complex voluntary carbon market (VCM). Understanding the VCM landscape and the characteristics of high-quality carbon credits will help you make informed choices on the role they can play in your climate strategy.
What are Carbon Credits?
A carbon credit represents one metric ton of greenhouse gas emissions that has been reduced, avoided, or removed from the atmosphere. Because different greenhouse gases have different warming effects, credits use a standardized metric: metric tons of carbon dioxide equivalent (tCO2e). This unit allows the impact of all GHGs to be compared to carbon dioxide.
1 carbon credit represents the removal, avoidance, or reduction of one metric ton of GHG emissions from the atmosphere.
Carbon credits are generated through projects that prevent emissions from being released into the atmosphere or remove greenhouse gases that are already there. These projects take many forms, with a wide range of natural and technological solutions.
Some common project types include:
Afforestation, Reforestation, and Revegetation (ARR): Carbon removal through tree planting and forest restoration.
Landfill Methane Capture: Prevention of methane emissions by collecting and destroying landfill gas before it escapes.
Renewable Energy Generation: Displacement of fossil fuel use by producing electricity from sources like wind, solar, or hydropower.
Improved Forest Management: Avoidance of emissions through protection of existing forests and carbon removal through the enhancement of carbon storage in standing biomass.
Industrial Gas Destruction: Prevention of high-impact greenhouse gas emissions by capturing and destroying gases like HFCs and N₂O from industrial processes.
These projects, and the science behind them, are the foundation of the voluntary carbon market. They turn real climate benefits into quantifiable credits that are treated as a commodity in the voluntary carbon market. Credits are issued unique serial numbers and they can be bought, sold, and used by entities. A credit is used, or “retired,” once an organization takes ownership of the associated environmental benefit, and the credit is permanently removed from circulation.
Many corporations use carbon credits to address emissions that remain after direct reduction efforts. Some apply them to specific emissions sources like value chain emissions, while others use them to achieve broader climate targets like achieving carbon neutrality. In each case, carbon credits serve as a way to take responsibility for emissions that may be difficult to otherwise eliminate.
How Are Carbon Credits Made?
Carbon credits go through a series of steps that turn real emission reductions or removals into tradable units that organizations can use. This lifecycle helps maintain transparency and accountability throughout the process.
Project Development: A project is designed to avoid, reduce, or remove greenhouse gas emissions, following approved methodologies under a recognized carbon standard.
Validation and Verification: Independent auditors assess the project to confirm that its emission reductions or removals are real, measurable, and meet the required standards.
Issuance: Verified results are converted into carbon credits. Each credit receives a unique serial number and is recorded in a public registry for transparency.
Transfer and Distribution: Credits can be bought and sold on the voluntary carbon market through direct purchases, brokers, or marketplaces.
Retirement: A credit is permanently removed from circulation when a buyer retires it, claiming the associated climate benefit.
Revenue Reinvestment: The revenue generated from the sale of the carbon credit supports the ongoing efforts of the project.
Understanding this lifecycle provides a clearer picture of how carbon credits are created, traded, and ultimately used to account for emissions.
Are All Carbon Credits the Same?
While commodities in many typical markets are similar or identical in quality, the VCM is different. In theory, all carbon credits are equivalent, representing 1 metric ton of emissions reduced or removed. In practice, however, this is not always the case. There are various factors that determine the quality of a carbon credit, and how likely it represents high quality climate benefits.
One of the most important of these is permanence, which looks at how long the emissions reduction or removal will last. Some projects, like geological storage, can secure carbon for centuries, while others, such as forestry, face risks that stored carbon could be released through fire, disease, or land-use change. High-quality projects include measures to monitor and manage these risks over time.
Leakage considers what happens outside the project boundary. If protecting one area simply shifts deforestation, agriculture, or other emitting activities to a different location, the net climate benefit is reduced. Strong projects identify these risks and either prevent leakage from happening or account for it in their crediting.
Additionality examines whether the climate benefit is truly a result of the project, rather than something that would have occurred anyway. If the activity was already required by law, economically attractive on its own, or common practice, then it isn’t additional. Projects with strong additionality demonstrate that carbon finance played a decisive role in making the activity possible.
Navigating carbon credit quality can be complex, even for those familiar with climate topics. The terms may sound straightforward, but applying them in practice involves careful evaluation of project design, methodologies, and real-world risks. With so many credit types and standards on the market, it’s easy to feel uncertain about which options genuinely deliver climate benefits.
We Are Neutral aims to restore balance to our planet by helping businesses and individuals understand these topics and provide them with education, resources, and support on how to responsibly reduce their environmental impact. Whether you are looking for guidance on navigating the carbon market, selecting trustworthy credits, or simply want to learn more, we are happy to talk and help you make informed decisions that lead to real climate impact.