Carbon Credits 101 — How They Work and Why They Matter

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Carbon Credits 101 — How They Work and Why They Matter

BY RAMAN SENGHERA | APRIL 07, 2025 | Sustainability : The Fight Against GHGs

Let’s face it—climate change isn’t just knocking at the door anymore; it’s barging in. With rising sea levels, intensifying weather patterns, and stubbornly high global emissions, the need to act has never been clearer. But while slashing emissions at the source is the gold standard, that’s not always realistic—especially for industries where change takes time, innovation, and serious investment.

Enter carbon credits: a flexible climate tool that allows us to balance the scales while working on the more significant fixes. They’re not magic bullets, but when used well, carbon credits can drive real change—and fund the kinds of projects that make the world greener and fairer.

So, what exactly are they, how do they work, and why should you care?

First Things First: What Is a Carbon Credit?

At its simplest, a carbon credit is a kind of permission slip that allows the holder to claim the removal or avoidance of one metric tonne of carbon dioxide (or its equivalent in other greenhouse gases). Think of it as a way to balance out your emissions by supporting something good happening elsewhere.

Let’s say a company emits 10,000 tonnes of CO₂ a year. It could invest in a reforestation project or a wind farm, helping reduce or absorb the same amount. Purchasing those credits can essentially say, “We’re making up for what we can’t cut—yet.”

A Quick History Lesson

The concept of carbon credits isn’t new—it’s been around since the Kyoto Protocol of 1997. That agreement laid the groundwork for global emissions trading, creating two broad categories that still exist today:

  • Compliance markets – where governments or regulated industries are legally required to limit emissions.
  • Voluntary markets – where companies and individuals choose to offset emissions as part of their sustainability goals.

Both systems follow the same logic: if you can’t reduce emissions directly, support someone else who is.

So, How Do They Work?

It all starts with a project. That could be anything from planting trees and conserving forests to installing solar panels or developing futuristic tech like direct air capture. These projects are assessed and verified by independent experts who ensure they’re genuinely cutting or removing emissions.

If the project passes the test, it’s issued a certain number of carbon credits. Those credits can then be sold to people or businesses looking to offset their emissions. Once bought and “retired” (taken off the market), the buyer can count that offset against their carbon footprint.

Why Carbon Credits Matter—Even If They’re Not Perfect

Let’s be clear: carbon credits aren’t a get-out-of-jail-free card. But they do serve a real purpose, mainly when used wisely. Here’s why they’re essential:

  1. They help tackle emissions we can’t eliminate yet. Some sectors—aviation, shipping, or heavy manufacturing—aren’t yet regarding complete decarbonisation. Offsets offer a way to reduce the damage while we wait for better technology or infrastructure.
  2. They fund real climate solutions. The money spent on carbon credits supports projects that make a difference—like restoring wetlands, installing clean cookstoves in rural villages, or protecting biodiversity hotspots. These projects often have social and economic benefits beyond just cutting carbon.
  3. They hold companies accountable. When businesses commit to net-zero targets and use offsets as part of that plan, they’re also signing up for a journey of better data, more transparent reporting, and more responsible environmental behaviour.

Not All Carbon Credits Are Created Equal

Here’s where it gets tricky: the quality of a carbon credit matters—a lot. Some credits have come under fire for not delivering the promised impact or supporting projects that would’ve happened anyway. So, how do you separate the real deal from the greenwashing?

High-quality credits usually meet four key criteria:

  • Additionality – The project wouldn’t exist without the funding from carbon credits.
  • Permanence – The carbon stays out of the atmosphere for the long haul.
  • No leakage – The project doesn’t cause emissions to rise elsewhere.
  • Third-party verification – Independent auditors keep everything honest and transparent.

Organisations like Verra, Gold Standard, and the Climate Action Reserve help define what “good” looks like.

What Kinds of Projects Generate Carbon Credits?

The beauty of the carbon market lies in its diversity. Here are a few examples:

  • Nature-based solutions—tree planting, peatland restoration, mangrove conservation—harness the Earth’s natural ability to absorb carbon.
  • Tech-based solutions – Solar farms, methane capture, and next-gen tools like direct air capture or biochar that trap emissions at the source.
  • Community-based initiatives – Programmes that distribute cleaner cooking stoves or improve energy access in underserved areas. These don’t just reduce emissions—they improve lives.

Why Businesses Are Getting on Board

For companies of all sizes, carbon credits have become a go-to strategy for Environmental, Social and Governance (ESG) goals, climate commitments, and consumer trust.

Typically, the journey looks like this:

  1. Measure your total carbon emissions.
  2. Reduce wherever possible with efficiency or clean tech.
  3. Offset what’s left with high-quality carbon credits.

It’s not just good PR—it’s increasingly seen as a smart, future-facing move in a world that demands climate accountability.

The Flip Side: Common Criticisms of Carbon Credits

Of course, there’s a darker side to all this. The system isn’t perfect, and criticism is valid. Some of the key issues include:

  • Greenwashing – When businesses use offsets to look eco-friendly without changing core practices.
  • Dubious project quality – If credits come from projects that don’t truly reduce emissions, they do more harm than good.
  • Lack of transparency – Voluntary markets can be murky, and not all buyers know exactly what they support.

That said, change is in the air. New rules, better digital tracking (think satellites and blockchain), and independent watchdogs like the Integrity Council for the Voluntary Carbon Market are helping to tighten standards.

What’s Next for Carbon Credits?

Looking ahead, carbon markets are evolving rapidly. Here’s what to expect:

  • A shift to more permanent removals – Direct air capture and biochar are gaining attention for their long-lasting impact.
  • Smarter tracking – Digital tools make verifying, tracing, and trusting what you’re buying easier.
  • More government-led initiatives are needed, especially in emerging markets, where carbon projects can drive emissions cuts and economic opportunity.

Most importantly, there’s a growing recognition that carbon credits should complement, not replace, deep emissions cuts.

Final Word: Use With Care

Carbon credits won’t save the planet alone—but they can help us buy precious time. When paired with bold action and used with integrity, they offer a way to support real-world change, especially in places that need it most.

Whether you’re a business leader, a policymaker, or someone trying to fly a bit more responsibly, understanding how carbon credits work—and what makes them credible—is a great place to start.

Because offsetting isn’t the end of the climate conversation—it’s the start of something more thoughtful, accountable, and hopeful.