Originally posted May 31, 2019 – Updated May 30, 2025
Is carbon credit trading a real solution to reducing emissions? Could it be our green light in the fight against climate change? Let’s explore.
What is a Carbon Credit?
A carbon credit is a permit that allows an entity such as a company, organisation, or country to emit a specific amount of carbon dioxide (CO₂) or other greenhouse gases (GHGs). One carbon credit typically equals one metric ton of CO₂-equivalent (CO₂e) emissions.
If the entity emits less than its allowance, it can sell its surplus credits to others who exceed their limits. This system encourages emissions reductions while allowing flexibility in how targets are met.
Carbon credits are often linked to carbon offset activities like tree planting, renewable energy projects, or methane capture that remove or reduce emissions. These offsets can be purchased to compensate for emissions that cannot be eliminated immediately.
How Are Carbon Credits Created?
Entities that reduce emissions below their regulatory or voluntary cap can generate carbon credits. These credits can then be:
- Sold in compliance markets (such as those established under the Kyoto Protocol or the EU Emissions Trading System), or
- Traded in voluntary carbon markets, which allow individuals and organisations to offset emissions voluntarily.
Common ways to create carbon credits include:
- Reforestation and afforestation
- Renewable energy installations (e.g., solar, wind)
- Methane capture from landfills or livestock
- Energy efficiency projects
- Avoided deforestation (REDD+ projects)
What Is Carbon Credit Trading?
Carbon trading, also known as cap-and-trade, is a market-based approach that incentivises emission reductions.
Here’s how it works:
- A cap (limit) is set on total emissions for a group of emitters.
- Emission allowances (carbon credits) are distributed.
- Those who emit less can sell their surplus credits.
- Those who exceed their limits must buy credits or face penalties.
This system creates a financial incentive for companies to reduce emissions: the lower your emissions, the more credits you can sell.
There are two main carbon markets:
- Compliance Market: Regulated by international agreements or national laws (e.g., EU ETS, California Cap-and-Trade).
- Voluntary Market: Used by organisations aiming to meet sustainability goals or demonstrate climate leadership (e.g., Verra’s VCS or Gold Standard certified credits).
How Are Carbon Credits Verified and Calculated?
Credits must be measurable, reportable, and verifiable (MRV). Verification is typically done by independent third parties under international standards such as:
- Clean Development Mechanism (CDM) under the Kyoto Protocol
- Verified Carbon Standard (VCS)
- Gold Standard
- Plan Vivo
The amount of carbon offset is calculated based on project type, size, and duration, often involving baseline emissions scenarios and monitoring data.
Carbon Credits vs. Carbon Tax
Unlike a carbon tax, which sets a fixed price for emitting CO₂, carbon trading lets the market determine the price of emissions. While both aim to reduce emissions, carbon trading offers flexibility and the potential for a win-win scenario: polluters pay, and those reducing emissions can earn.
Is Carbon Credit Trading a Viable Climate Solution?
Pros
- Encourages innovation in clean technologies
- Mobilises private finance for climate solutions
- Provides flexibility in meeting emission targets
Challenges
- Risk of greenwashing in voluntary markets
- Some projects lack environmental integrity
- Can allow wealthier countries or companies to delay actual reductions
Recent Updates (as of 2025)
- Article 6 of the Paris Agreement now governs global carbon markets with stricter rules for transparency and double-counting prevention.
- Efforts are ongoing to integrate voluntary and compliance markets while improving standardisation and accountability.
Conclusion
Carbon credit trading can reward low-emission practices and provide a flexible mechanism for achieving climate goals. While not a silver bullet, it is a valuable tool, especially when combined with carbon taxes, strict regulation, and direct emissions reductions.
Used responsibly, carbon credits can support climate action, biodiversity protection, and sustainable development.
