As the world races to reduce greenhouse gas emissions, carbon credits have emerged as a key tool in the transition to a low-carbon economy. While the concept might sound complex, at its core it’s about assigning a value to pollution—and offering a market-based mechanism to control it. In this post, we break down what carbon credits are, how they work, and why they matter for businesses, individuals, and the planet.
What are carbon credits?
Carbon credits are permits that represent the right to emit one metric ton of carbon dioxide (CO₂) or its equivalent in other greenhouse gases. Essentially, they act as a "license to pollute"—but within a regulated cap. Organizations can buy, sell, or trade these credits depending on how much they emit, creating a financial incentive to reduce emissions.
There are two main types: compliance credits, which are part of government-mandated programs, and voluntary credits, which individuals or companies purchase to offset their own carbon footprint outside of legal obligations.
How do carbon credits work?
The basic idea is simple: if a company reduces its emissions below a certain threshold, it earns credits it can sell. If another company exceeds its limit, it can buy those credits to stay in compliance. This mechanism is known as “cap and trade.”
In the voluntary market, individuals or companies can purchase carbon credits from projects that actively remove or avoid emissions—like reforestation, renewable energy installations, or methane capture programs. These credits help balance out emissions that can’t yet be eliminated.
Why were they created?
Carbon credits were created as part of a global strategy to reduce greenhouse gases while offering flexibility to emitters. The concept gained momentum with the Kyoto Protocol in 1997 and was further developed under the Paris Agreement.
By introducing a cost to carbon emissions, credits aim to:
- Encourage cleaner practices
- Fund climate-positive projects
- Promote innovation in sustainability
They’re designed to make it more economically viable to reduce emissions than to pay for the right to pollute.
Who can use carbon credits?
Carbon credits are used by a wide range of stakeholders. Governments and corporations are the most active players in compliance markets, particularly in industries like energy, manufacturing, and transportation.
However, individuals and small businesses are increasingly participating in the voluntary market. For example, a company might offset its shipping emissions, or a traveler might offset the carbon impact of a flight. Platforms have made it easier to buy verified credits, making sustainability more accessible for everyone.
Benefits of carbon credits
Carbon credits offer a number of environmental and economic advantages when used responsibly:
- Support sustainable projects around the world
- Encourage emission reductions through financial incentives
- Promote accountability and transparency
- Allow flexibility in meeting climate goals
For companies, participating in carbon markets can also enhance their brand image, meet ESG (Environmental, Social, Governance) objectives, and prepare for future regulation.
Criticism and Challenges
Despite their potential, carbon credits are not without controversy. Critics argue that they can be used as a way to avoid making real emissions reductions, essentially "buying a clean conscience" without changing behavior. Others point to issues with verification and transparency, where credits are sold without solid proof of actual climate benefits.
To address these challenges, stricter verification protocols and independent auditing systems are being developed. It’s crucial that carbon credits are used as part of a comprehensive decarbonization strategy, not as a substitute for direct action.
Carbon credits are one piece of a much larger climate puzzle. They offer a way to drive funding to climate solutions and motivate emissions reductions—but they work best when paired with real efforts to cut pollution at the source. As the pressure grows for all sectors to take responsibility, understanding and using carbon credits effectively can be a step toward a more sustainable future.
