What Are Carbon Credits?

Carbon credits are often mentioned in discussions about climate action, but the term covers very different things. This article explains what a credit represents, how the main markets work, and how to tell a credible credit from a weak one.

One credit, one tonne

A carbon credit represents one metric tonne of carbon dioxide, or the equivalent amount of another greenhouse gas, that has been prevented from reaching the atmosphere or removed from it. Credits are generated by projects such as forest protection, reforestation, renewable energy, energy efficiency or methane capture, and are issued after the project’s results have been measured and verified under a carbon standard.

It helps to distinguish two kinds:

• Avoidance or reduction credits come from preventing emissions that would otherwise have happened, for example protecting a forest that was at risk of being cleared.
• Removal credits come from taking carbon out of the atmosphere, for example by growing new forest.

Voluntary and regulated markets

Voluntary carbon markets are where companies, organizations and individuals buy credits by choice, usually to support climate commitments beyond what the law requires. Credits are issued by independent standards that set rules for how projects measure and verify their results.

Regulated (compliance) markets are created by governments. The best-known are emissions trading systems, such as the European Union Emissions Trading System, which cap the emissions of covered companies and let them trade allowances. Some regulated systems also accept a limited amount of offset credits. Under Article 6 of the Paris Agreement, countries are also developing rules for trading emission reductions between them. Brazil created its own regulated market, the Sistema Brasileiro de Comércio de Emissões de Gases de Efeito Estufa (SBCE), through Law 15.042 of December 2024, a cap-and-trade system whose detailed rules are being set in phases.

Carbon pricing has become significant: the World Bank reported that global carbon pricing revenues reached a record of around USD 84 billion in 2021, almost 60% more than in 2020, and have continued to grow since.

What makes a credit credible

Credits are only as good as the claims behind them. The questions that matter most are:

• Additionality. Would the emission reduction have happened anyway, without the carbon finance?
• Permanence. Will the carbon stay out of the atmosphere, for example if a protected forest later burns?
• Leakage. Did protecting one area simply push deforestation somewhere else?
• Accurate baselines and measurement. Are the reductions calculated conservatively and verified independently?
• Social safeguards. Do local and Indigenous communities consent to, and benefit from, the project?

Initiatives such as the Integrity Council for the Voluntary Carbon Market’s Core Carbon Principles aim to set a common quality bar. Even with high-quality credits, the scientific consensus is clear that companies should cut their own emissions first and use credits to address what they cannot yet avoid.

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This article is for general information and education. World Funding does not issue, broker or sell carbon credits, and nothing here is investment advice.

Sources and further reading

1. Agência Gov — Lei que cria o mercado regulado de carbono no Brasil é sancionada (Dec 2024)
2. Investopedia — What Is a Carbon Credit?
3. World Bank — Global Carbon Pricing Generates Record $84 Billion in Revenue (24 May 2022)
4. World Bank — State and Trends of Carbon Pricing
5. Integrity Council for the Voluntary Carbon Market — Core Carbon Principles

This article is for general information and education. It is not legal, financial, investment or engineering advice.