Introduction
As the urgency to address climate change intensifies, the global community is turning to a range of solutions to reduce greenhouse gas emissions. One of the most widely discussed and increasingly adopted tools in this effort is the carbon credit. These tradable instruments play a central role in both regulatory and voluntary markets, enabling companies and individuals to support climate-positive projects around the world.
But what exactly are carbon credits? How do they work? And how can they be used effectively to make a measurable difference? In this article, we unpack the meaning behind carbon credits, explore real-world examples, and offer guidance on how to use them responsibly as part of your climate strategy.
Carbon credits: meaning and origins
At its core, a carbon credit is a market-based instrument that represents the removal or reduction of one metric ton of carbon dioxide (CO₂) or its equivalent in other greenhouse gases. The idea is simple but powerful: if you emit CO₂ in one part of the world, you can balance that impact by financing a project that reduces or removes an equivalent amount of emissions elsewhere.
The concept of carbon credits emerged in the late 1990s through international frameworks like the Kyoto Protocol, which introduced mechanisms such as the Clean Development Mechanism (CDM). These frameworks laid the groundwork for the carbon markets we know today, which have evolved under the Paris Agreement and are now widely used by governments, corporations, and sustainability-conscious individuals.
It’s important to distinguish between carbon credits (the actual tradable units) and carbon offsetting, which is the act of purchasing and retiring credits to compensate for emissions. The credit is the tool; offsetting is the action.
How do carbon credits work?
Carbon credits are issued through verified climate projects that either avoid new emissions or actively remove greenhouse gases from the atmosphere. These projects range from reforestation and renewable energy development to more advanced solutions like direct air capture and biochar.
Here’s how the process works in practice:
A project developer—say, a company planting trees or installing wind turbines—designs and implements a project that demonstrably reduces emissions. The emissions savings are calculated using approved methodologies and monitored over time. Then, a third-party verification body audits the project and confirms the reductions are real, additional (i.e. they wouldn’t have happened without carbon financing), and permanent.
Once verified, the project receives carbon credits, typically registered through platforms such as Verra (under the Verified Carbon Standard) or Gold Standard. These credits can then be sold to buyers—companies, governments, or individuals—who retire them to claim the climate benefit.
The retirement of a credit is crucial. Once retired, it’s removed from circulation, ensuring that no one else can claim the same benefit. Public carbon registries keep track of issuances and retirements for transparency and integrity.
Types of carbon credit projects
Carbon credit projects are incredibly diverse and exist across virtually every continent. They generally fall into two main categories: avoidance and removal.
Avoidance projects focus on preventing new emissions from occurring. A classic example is a forest conservation project that protects existing trees from being cut down. Known as REDD+ (Reducing Emissions from Deforestation and Forest Degradation), these efforts help maintain carbon sinks and biodiversity. Other avoidance projects include the installation of renewable energy infrastructure, such as solar farms or wind turbines, which displace fossil fuel–based power.
On the other hand, removal projects actively extract carbon from the atmosphere. These include afforestation (planting new forests), soil carbon sequestration through regenerative agriculture, and technological solutions like direct air capture. One innovative example is biochar, a form of charcoal made by heating organic waste in the absence of oxygen. When added to soil, biochar locks carbon away for centuries while improving soil fertility.
Many projects offer co-benefits beyond carbon, such as improving water quality, creating local jobs, or protecting endangered species. These social and environmental advantages make certain projects more appealing to values-driven buyers.
Real-world examples of carbon credits in action
Numerous case studies demonstrate the real-world potential of carbon credits to support sustainable development and drive emissions reductions.
For example, Microsoft has committed to becoming carbon negative by 2030 and is purchasing carbon credits from global projects like reforestation in the Amazon and carbon removal via enhanced weathering. The company carefully vets its purchases using quality criteria and often partners directly with project developers.
In East Africa, Burn Manufacturing produces efficient, clean cookstoves that significantly reduce charcoal and wood consumption. These stoves not only lower emissions but also improve indoor air quality and reduce deforestation. Burn earns carbon credits based on the emissions reductions from each stove distributed and sells them on the voluntary carbon market.
Australian farmers are also embracing the carbon economy. By adopting practices that increase soil carbon—such as rotational grazing or compost application—they can generate carbon credits through government-accredited methodologies, diversifying their income while restoring degraded land.
How to use carbon credits effectively
For businesses and individuals alike, using carbon credits starts with a commitment to measure and reduce emissions first. Carbon credits are not a license to pollute—they are a tool to compensate for unavoidable emissions while supporting climate solutions elsewhere.
The process begins by calculating your carbon footprint using platforms like CoolClimate or ClimatePartner. Once you know your emissions, you can reduce them through efficiency improvements, renewable energy use, low-carbon transport, and more.
For the portion of emissions you cannot eliminate immediately, you can purchase carbon credits. Look for projects that are certified by credible standards like Verra, Gold Standard, Puro.Earth, or the Climate Action Reserve. Platforms such as Regreener, Pachama, or Carbonfuture allow you to select credits based on geography, impact type, and co-benefits.
Once purchased, credits should be retired in your name to ensure their exclusivity. You’ll usually receive a retirement certificate with a serial number and registry link. This certificate can be used in sustainability reports, ESG disclosures, or climate claims.
If you’re a business, be transparent about your use of carbon credits. Many leading organizations follow best practices such as the Oxford Offsetting Principles or align with initiatives like the Science Based Targets initiative (SBTi), which emphasizes offsetting only residual emissions.
Quality, risks, and evolving standards
Not all carbon credits are created equal. In recent years, the voluntary carbon market has faced criticism for low-quality or non-additional credits—those that claim emissions reductions that aren’t truly new or wouldn’t have occurred anyway.
To avoid these pitfalls, focus on credits that meet the four pillars of quality:
Additionality – The project would not have happened without carbon finance.
Permanence – The carbon stays out of the atmosphere for the long term.
No Leakage – Emissions aren’t just shifted to another location.
Verification – The project is validated and audited by a trusted third party.
New frameworks like the Integrity Council for the Voluntary Carbon Market (ICVCM) and Article 6 of the Paris Agreement are working to improve transparency, standardization, and environmental integrity across the market.
Conclusion
Carbon credits are a powerful mechanism in the global response to climate change. When used thoughtfully and in combination with real emissions reductions, they allow companies and individuals to support impactful climate solutions around the world.
But quality matters. By understanding how carbon credits work, recognizing credible project types, and using reputable providers, you can ensure your investment contributes meaningfully—not just symbolically—to a healthier, more sustainable planet.
Whether you’re offsetting a flight, neutralizing product emissions, or building a long-term climate strategy, carbon credits can be a vital part of the toolkit. The future of carbon markets is one of growing demand, improving quality, and increasing accountability. Now is the time to engage with them responsibly.
