What Are Carbon Credits?

Carbon credits are a key tool in global efforts to mitigate climate change, supporting national and international goals such as those set by the Paris Agreement and reinforced at successive COP (Conference of the Parties) meetings.

The world has committed to limiting global warming to well below 2°C, ideally 1.5°C — and carbon markets are one of the instruments that help achieve this goal.

At their core, carbon credits represent a verified reduction or removal of one metric tonne of carbon dioxide equivalent (tCO₂e) from the atmosphere - including other greenhouse gases such as methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), per-fluorocarbons (PFCs), and sulphur hexafluoride (SF₆), which are often significantly more dangerous to humans and our ozone layer.

Importantly, these reductions are real, measurable, and verified. Buyers of carbon credits use them to offset against their own emissions at a cost to them, while at the same time they are funding climate-positive projects that may not have otherwise occurred or reached meaningful scale.

What Do Carbon Credits Represent?

A carbon credit certifies that a reduction or removal of one tonne of CO₂e has occurred and has been verified through an approved methodology. These credits can then be sold to a willing buyer in either the voluntary or compliance markets. Projects generating these credits span sectors such as:

• Renewable energy - avoiding the emissions of CO₂e from coal and gas power plants
• Waste and methane capture - avoiding the emissions from land-fills and turning the waste into energy;
• Reforestation and afforestation - replanting and protecting deforested areas with local, indigenous trees;
• Improved cookstoves and avoided deforestation - using cookstoves to improve cooking and reduce the amount of wood/coal required;
• Biochar and soil carbon - turning biomass waste into high density biochar and adding this into degraded soils; and
• Direct air capture and engineered removals - utilising high technology carbon ccapture techniques to sequest carbon from the atmosphere

Standards and Methodologies

Carbon credits are issued under internationally recognised Standards, including:

• Verra VCS (Verified Carbon Standard)
• Gold Standard
• UN FCCC Clean Development Mechanism (no longer accepting new projects)
• Puro.Earth
• Climate Action Reserve
• Credible Carbon
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Each standard publishes their own methodologies, or accepts standardised ones — detailed procedures and methods outlining how to measure, monitor, and verify the emission reductions or removals from a specific activity type.

These methodologies are technically rigorous and often include the use of satellite data, sensors, smart meters, life cycle analysis tools, and/or remote verification platforms. While some methodologies are common across multiple standards, their application and approval are standard-specific. They are often complex and require experienced technical teams to implement correctly, applying a range of specific-tools to test various project details and ensuring compliance.

Commonly used methodologies include:

Constraints and Applicability

Not all projects are eligible to generate carbon credits. Some of the key constraints include:

• Project Size: Certain methodologies cater specifically to small or large-scale projects. Larger projects typically require more in-depth monitoring, but benefit from economies of scale. For example, AMS.I.F only allows projects under 15MW.
• Country/Location Context: Some methodologies are only valid in certain countries, particularly lower-middle-income nations, where the technology or practice being adopted is not yet widely available. Others may require host country approval. For example, AMC0002 is only applicable in lower income countries, as per Verra's rules.
• Methodology Availability: If no approved methodology exists for a particular project type, credits cannot be issued — although new methodologies can be proposed, this is a time and cost intensive process. For example, there is no widely accepted water crediting methodology that rewards efficient usage or water cleanliness.

Registries: Where Credits Are Recorded and Stored

Carbon credits exist digitally on registries — which act as a hybrid between a central securities depository and a stock exchange ledger. They record how many credits exist, which project they came from, the status of the credits as well as who currently owns them.

Registries provide full transparency of:

• Project documentation and audit reports (similar to public company filings)
• Credit issuance records (date, volume, serial number range)
• Ownership transfers (analogous to share trading)
• Credit retirements (when credits are used and removed from circulation)

Examples of major registries include Verra Registry, Gold Standard Impact Registry, and South Africa’s Carbon Offset Administration System (COAS). While registries are expected to be robust in their data storage, some registries have been susceptible to beaches and fraud. As seen, often the registries are operated by the same Standards that issue the credits.

Ratings Agencies

Not all carbon credits are created equal. Ratings agencies independently assess the quality and risk of a credit using criteria such as:

• Additionality: Would the project happen without carbon finance or is it the most attractive investment opportunity? For instance, utility-scale renewables in Europe may not need carbon revenue due to government incentives.
• Permanence: How long will the emission reduction/removal last? For example, forests can burn down, reversing carbon gains.
• Co-benefits: Social and environmental benefits, such as job creation, biodiversity, and improved public health.
• Host Country Risk: Some jurisdictions may assert control over credits or limit their export. For example, certain African countries may claim a share of credits for hosting the project.
• Alignment with Net-Zero Pathways: Whether the credit supports a science-aligned transition to a net-zero future.

Major ratings platforms include BeZero Carbon, Sylvera, Calyx Global, and Renoster.

Voluntary vs Compliance Markets

Before using credits, companies are expected to reduce their own emissions where feasible. However, where reductions are not yet possible — due to cost, technical limits, or industry constraints — credits can serve as an interim bridge.

Markets fall into two categories:

• Voluntary Carbon Market (VCM): Used by companies and individuals seeking to meet their own climate goals (e.g. 2030 or 2050 targets). Voluntary buyers often prioritise co-benefits with high SDG goals, removal projects, and brand alignment (country, technology etc). There is no penalty imposed on the companies or individuals for not reducing their emissions, however, they may face public scrutiny.
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• Compliance Markets: Operated by governments and regulators. Emitters may face a tax or cap on emissions. Rather than paying a tax (e.g. South Africa’s Carbon Tax), companies can purchase qualifying credits — ensuring funds go directly to climate action. In compliance markets, failure to meet targets results in an increasing financial burden to emitters, forcing them to invest more into emissions reductions technology and processes or into more sustainability initatives - both a financial cost to the company.

How Retirement Works

To officially offset emissions, a carbon credit must be retired — permanently removed from circulation. Once retired:

• It cannot be transferred, sold, or retired again.
• The tonne of CO₂e it represents is considered compensated.
• The retirement is publicly recorded, often tied to a specific buyer or claim.

This prevents double counting and preserves market integrity.

Use Cases and Market Alignment

Different schemes and regulations recognise different types of credits. For example:

• CORSIA (aviation) only accepts credits from approved standards and methodologies.
• South Africa’s Carbon Tax allows credits from certain Verra, Gold Standard, and CDM projects, within capped volumes and vintage periods.
• Corporate Net-Zero Strategies often require high-integrity, removal-based credits aligned with principles like those from the Oxford Offsetting Principles.

Addressing Greenwashing Concerns

Carbon credits have been criticised for enabling “greenwashing” — misleading claims about environmental action. But when used correctly, they are part of the solution. Key safeguards include:

• Recognised Standards: Only credits from robust methodologies that are science-based and conservative.
• Independent Verification: Ensures projects are real, monitored, and properly documented.
• Conservative Accounting: Assumes lower impact unless proven otherwise.
• Transparent Disclosure: Buyers should publicly state how many credits they used, where from, and for what purpose.
• Complementing Real Emissions Cuts: Carbon credits should be used in addition to, not instead of, reducing actual emissions.

As prices rise, the cost of offsetting will incentivise companies to find cheaper, direct reductions — ensuring credits remain a temporary bridge, not a permanent crutch.

Final Thoughts

Carbon credits are not a silver bullet. But when well-designed and well-used, they are a critical piece of the climate finance puzzle — channeling funds into activities that avoid or remove greenhouse gases.

With growing regulation, better tools, and increasing market transparency, understanding the role and functioning of carbon credits is essential for any climate-conscious organisation.

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Stuart McMaster
Head of Tech and Operations, Green Asset Exchange

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Get in touch:
If you would like to develop or trade Carbon credits, reach out to us at info@greenassetexchange.com

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Disclaimer:
This article is provided for informational purposes only and does not constitute financial, tax, or legal advice.