What are Carbon Credits? How They Work & Why They Matter
5 min read
Key highlights
One carbon credit represents one metric tonne of CO₂e reduced, removed, or avoided.
Carbon credits help compensate for unavoidable emissions.
They are issued only after independent verification.
Businesses use them to support climate projects and Net Zero goals.
Carbon credits complement emission reductions; they don't replace them.
Businesses around the world, from global technology companies to manufacturers and airlines, are increasingly investing in carbon credits as part of their sustainability strategies.
But what exactly are carbon credits? How do they work? And why are they becoming an important part of global climate action?
In this blog, we'll explain carbon credits in simple terms, how they are created, where they come from, and how organizations use them alongside emission reduction efforts to progress toward their sustainability and Net Zero goals.
What Is a Carbon Credit?
A carbon credit represents one metric tonne of carbon dioxide (CO₂), or an equivalent amount of another greenhouse gas, that has been reduced, removed, or avoided through a verified climate project.
In simple terms, carbon credits are tradable environmental instruments that enable organizations to support verified climate projects while compensating for emissions that are currently difficult or impossible to eliminate.
Each carbon credit is unique, traceable, and issued only after a climate project's environmental impact has been independently verified.
Why Do Carbon Credits Exist?
Every organization generates greenhouse gas emissions through activities such as:
Manufacturing
Transportation
Electricity consumption
Supply chains
Business travel
Industrial operations
Today, organizations are working to reduce these emissions by:
Improving energy efficiency
Switching to renewable energy
Electrifying operations
Upgrading equipment
Optimizing manufacturing processes
However, not all emissions can be eliminated immediately.
Certain industrial processes, heavy transportation, aviation, shipping, and other sectors still produce unavoidable emissions due to technological or economic limitations.
Carbon credits help organizations address these remaining emissions while continuing to reduce their own carbon footprint.
How Do Carbon Credits Work?
The lifecycle of a carbon credit follows a structured and verified process.
Step 1: A Climate Project Is Developed
A project is created to reduce, remove, or avoid greenhouse gas emissions.
Examples include:
Wind farms
Solar energy projects
Forest conservation
Reforestation
Methane capture
Improved industrial efficiency
Clean cooking initiatives
Step 2: Emission Reductions Are Measured
The project calculates how many tonnes of greenhouse gas emissions have been reduced or removed using approved scientific methodologies.
Step 3: Independent Verification
An accredited third-party verifier reviews the project to ensure the claimed emission reductions are real, measurable, and meet the required standards.
Step 4: Carbon Credits Are Issued
Once verified, carbon credits are issued based on the project's verified emission reductions.
One verified tonne of CO₂e equals one carbon credit.
Step 5: Organizations Purchase Carbon Credits
Companies can purchase these verified carbon credits through carbon markets to compensate for emissions they cannot currently eliminate.
A Simple Example
Think of your company's carbon footprint like a financial balance sheet.
Every business tries to reduce unnecessary expenses before settling its remaining obligations. Carbon emissions work in a similar way.
The first priority should always be reducing emissions wherever possible. For emissions that remain unavoidable, organizations can purchase carbon credits that support verified climate projects elsewhere in the world.
This is why carbon credits are considered a complement to emission reduction, not a replacement for it.
Why Do Businesses Buy Carbon Credits?
Organizations purchase carbon credits for several reasons.
Compensate for Unavoidable Emissions
Some emissions cannot currently be eliminated due to operational or technological limitations.
Carbon credits help organizations address these residual emissions while longer-term reduction strategies are implemented.
Support Climate Projects
Purchasing carbon credits provides financial support to projects that reduce or remove greenhouse gas emissions globally.
Advance Net Zero Goals
Many organizations include high-quality carbon credits within broader Net Zero roadmaps to address emissions that remain after reduction efforts.
Demonstrate Climate Leadership
Carbon credits can help organizations showcase their commitment to sustainability to customers, investors, regulators, and other stakeholders.
Where Do Carbon Credits Come From?
Carbon credits are generated through verified climate projects across various sectors.
Common project types include:
Project Type | Climate Benefit |
Renewable Energy | Avoids fossil fuel emissions |
Reforestation | Removes CO₂ from the atmosphere |
Forest Conservation | Prevents deforestation |
Methane Capture | Prevents high-impact methane emissions |
Energy Efficiency | Reduces energy consumption |
Waste Management | Reduces landfill emissions |
Each project follows rigorous methodologies before credits can be issued.
Carbon Credits in Practice
Imagine a manufacturing company emits 100,000 tonnes of greenhouse gases annually. The company invests in:
Energy-efficient machinery
Renewable electricity
Process optimization
These initiatives reduce emissions by 80,000 tonnes. However, 20,000 tonnes remain unavoidable.
To compensate for these remaining emissions, the company purchases 20,000 verified carbon credits from credible climate projects.
While continuing to reduce its own emissions over time, the organization also supports additional climate action through these projects.
Do Carbon Credits Replace Emission Reductions?
No. One of the most common misconceptions is that companies can simply buy carbon credits instead of reducing their own emissions.
In reality, best practices emphasize the following order of action:
Measure emissions.
Reduce emissions wherever possible.
Use high-quality carbon credits only for residual emissions that cannot yet be eliminated.
This "measure, reduce, then compensate" approach aligns with widely accepted corporate sustainability frameworks and helps organizations make meaningful progress toward their climate goals.
Conclusion
Carbon credits help organizations address emissions that are difficult to eliminate while supporting verified climate projects worldwide. However, they should complement, not replace, emission reduction efforts.
The most effective approach is to measure emissions, reduce them wherever possible, and use high-quality carbon credits for the remaining unavoidable emissions. This helps organizations move closer to their sustainability and Net Zero goals.
Frequently Asked Questions (FAQs)
What is a carbon credit?
A carbon credit represents one metric tonne of carbon dioxide (CO₂), or its equivalent in other greenhouse gases, that has been reduced, removed, or avoided through a verified climate project.
How many tonnes does one carbon credit represent?
One carbon credit equals one metric tonne of carbon dioxide equivalent (CO₂e).
Are carbon credits the same as carbon offsets?
The terms are often used interchangeably. Generally, a carbon credit is the tradable unit generated by a verified climate project, while carbon offsetting refers to the act of using those credits to compensate for emissions.
Who verifies carbon credits?
Independent third-party organizations verify climate projects before carbon credits are issued under recognized standards and methodologies.
Are carbon credits mandatory?
It depends on the market and applicable regulations. Many organizations purchase carbon credits voluntarily as part of their sustainability and Net Zero strategies, while some compliance markets require regulated entities to meet emissions obligations.
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