Published

3 years ago

October 8, 2023

Alice Rush

With global temperatures continuing to rise, governments and corporations are looking for ways to reduce greenhouse gas emissions. One method that’s gaining popularity is the use of Carbon Credits to incentivize emissions reductions and support renewable energy development. This article is the 3rd in a series we’re doing based on our widely respected Climate Change and Carbon Markets 2023 Report. Previous posts in the series are:

In this article we examine what carbon credits are, and how they work as part of a broader emissions reduction strategy.

What Are Carbon Credits?

A carbon credit represents one ton of carbon dioxide or other greenhouse gas that is prevented from entering the atmosphere. Each credit is assigned a unique identification number that allows it to be tracked and traded.

How Are Carbon Credits Created?

Carbon credits are generated through activities like renewable energy generation, reforestation projects, or installing technology to reduce industrial emissions. Organizations can then purchase these credits to offset their own emissions and essentially pay someone else to reduce greenhouse gases on their behalf. This gives companies an economic incentive to finance projects that take carbon out of the atmosphere.

How big is the Carbon Credit market?

Globally, the voluntary carbon credit market was estimated at $1 billion in 2021. Meanwhile the compliance carbon credit market, which consists of credits generated under cap-and-trade systems and carbon taxes, was valued around $272 billion. As more jurisdictions enact climate policies, demand for carbon credits is expected to grow.

Cap-and-Trade Systems

One of the most common uses of carbon credits is in emissions trading systems, also known as cap-and-trade. This revolutionary approach to controlling carbon emissions sets caps on the amount of carbon that can be released into the atmosphere, and creates a market where companies can trade carbon allowances. Those who wish to emit more can purchase additional allowances, while others might sell their unused ones.

How Does Cap-and-Trade work?

Under a cap-and-trade system, the government sets an overall legal limit on greenhouse gas emissions from major sources like power plants and heavy industry. Companies receive or buy emission allowances up to their allotted share of the cap. If they reduce emissions below their cap, they can sell spare allowances to other companies as carbon credits.

Using Carbon Credits in Cap-and-Trade Systems

This creates a financial incentive for organizations to cut their carbon footprints, as they can profit from selling excess carbon credit allowances while still meeting their own targets. Meanwhile companies that would struggle to reduce emissions can purchase carbon credits as a flexible, cost-effective way to comply with regulations. The overall emissions cap guarantees the desired environmental outcome is still achieved.

Using Carbon Credits in Carbon Tax Systems

In a carbon tax system, governments directly tax emissions from sources like electricity generation and transportation fuels. This gives companies a standing financial reason to look for ways of reducing their tax burden by cutting carbon output.

Carbon credits can provide tax relief in two main ways:

Credits can be surrendered to offset tax obligations directly. Each credit represents one tonne of emissions that a company doesn’t have to pay tax on.
Revenue from credit sales can help finance emission reduction projects, lowering a company’s overall taxable emissions.

Voluntary Carbon Credit Purchases

Beyond regulatory requirements, some organizations and individuals buy carbon credits on a voluntary basis. Reasons for voluntary credit purchases include:

Corporate social responsibility – Companies offset their emissions to demonstrate a commitment to sustainability to customers and shareholders.
Carbon neutral products – Retailers and manufacturers invest in credits to compensate for emissions associated with making and transporting products, allowing them to sell carbon neutral or “net zero” goods.
Voluntary reductions – People offset things like air travel through credits to reduce their personal carbon footprint.
Pre-compliance buying – Companies purchase credits speculatively in anticipation of future climate regulations.

Carbon Credit Project Categories

There are many types of activities that can generate saleable carbon credits, provided they satisfy the key requirement of demonstrably reducing or removing emissions. Some major project categories include:

Renewable energy – Building wind, solar or hydropower instead of fossil fuel generation.
Energy efficiency – Upgrading equipment, appliances and processes to reduce energy usage and associated emissions.
Fuel switching – Transitioning from higher emission fuels like coal to lower carbon alternatives like natural gas or bioenergy.
Industrial gas destruction – Destroying potent greenhouse gases like nitrous oxide or hydrofluorocarbons.
Waste management – Installing gas capture systems at landfills and livestock operations to prevent methane release.
Forestry – Planting trees or avoiding deforestation through forest conservation programs. Trees naturally absorb CO2 as they grow.
Carbon capture and storage – Technologically capturing emissions at source and permanently sequestering them underground.
Agricultural practices – Adopting techniques like low/no-till cultivation, crop rotation and organic soil management to boost carbon storage in farmland.

Voluntary demand makes up a relatively small segment of the global carbon credit market, but this segment has seen significant growth over the past decade – According to data from Forest Trends’ Ecosystem Marketplace, voluntary carbon credit retirements have increased over 20-fold from 10 million tons CO2e in 2010 to 220 million tons CO2e in 2020. The value of the voluntary carbon market more than tripled between 2017 and 2021, reaching an estimated $1 billion in transactions last year, and this segment is expected to play an increasing role as sustainability awareness grows among businesses and consumers.

Are Carbon Credits Effective?

Carbon credits are sometimes criticized as an excuse for companies to keep polluting while paying others to enact change. However, when paired with sound climate policies, credits can provide an efficient market mechanism to drive meaningful emissions reductions.

Conclusion – Carbon Credits for a Net-Zero Future

With rising worldwide emissions, new strategies are essential for achieving global climate targets. Carbon pricing policies like emissions trading and carbon taxes create regulatory and economic incentives to tackle greenhouse gas output. Within this context, carbon credits offer a market mechanism for driving cost-effective emissions reductions while supporting renewable energy and climate-smart development.

To learn more about the role carbon credits play in fighting climate change contact us for the full report.

Additional sources and suggested reading

World Bank. (2019). State and Trends of Carbon Pricing 2019. Link
Stavins, R. N. (2008). A meaningful U.S. cap‐and‐trade system to address climate change. Harvard Environmental Law Review, 32, 293.
Carbon Pricing Leadership Coalition. (2021). Carbon Pricing Dashboard. Link
Ellerman, A. D., & Buchner, B. K. (2008). Over-allocation or abatement? A preliminary analysis of the EU ETS based on the 2005–06 emissions data. Environmental and Resource Economics, 41(2), 267-287.
European Commission. (2021). EU Emissions Trading System (EU ETS). Link
Metcalf, G. E. (2009). Designing a carbon tax to reduce U.S. greenhouse gas emissions. Review of Environmental Economics and Policy, 3(1), 63-83.
Forest Trends’ Ecosystem Marketplace. (2021). Voluntary Carbon Markets Insights. Link
Wara, M. W. (2007). Is the global carbon market working? Nature, 445(7128), 595-596.
Aldy, J. E., & Stavins, R. N. (2012). The promise and problems of pricing carbon: Theory and experience. The Journal of Environment & Development, 21(2), 152-180.
Intergovernmental Panel on Climate Change (IPCC). (2018). Global Warming of 1.5°C. Link

Carbon Footprint

Insetting vs Offsetting: Which Actually Counts Toward Your Scope 3 Targets

Published

4 days ago

August 12, 2026

Alice Rush

The accounting differences that decide whether your nature investment shows up in inventory, in BVCM, or nowhere at all.

The question reaches a procurement team about three weeks before the next sustainability committee meeting. Someone has read about insetting. Someone else has just signed off on an offset purchase. The CSO wants to know if the two are interchangeable. The answer is no, and the GHG Protocol Land Sector and Removals Standard is the reason why.

This article walks through what each term means at audit-grade specificity, what the standards actually say about how each gets counted, and how to decide which tool fits which target. The insetting vs offsetting question is one of the most-searched in corporate climate strategy, and one of the most poorly answered. By the end of this piece, you should be able to brief a committee on the difference without notes.

The two definitions, in plain English

Offsetting means buying carbon credits generated outside your value chain and retiring them against your residual emissions. The reduction happens somewhere else, financed by you, and the credit is the receipt.

Insetting means investing in emission reductions or removals inside your own value chain, typically with suppliers, where the reduction is directly linked to the products and services you buy. The reduction happens inside the boundary of your Scope 3 inventory, and the accounting treatment is fundamentally different.

The shorthand from the University of Oxford’s Nature-based Insetting Initiative is useful: insetting is what you do with the supply chain you have; offsetting is what you do with the supply chain you do not have.

What the GHG Protocol Land Sector Standard actually says

The GHG Protocol Land Sector and Removals Standard, finalised in 2024 after a multi-year pilot, sets the rules for how land-based emission reductions and removals enter corporate inventories. The Standard distinguishes between inventory accounting (Scope 1, 2, and 3) and project or intervention accounting (a separate methodology for crediting).

For insetting, the practical implication is that supplier-level interventions, when properly measured and attributed, can reduce your Scope 3 category 1 (purchased goods and services) emissions in your inventory. The reduction is not a credit retired against the inventory; it is a lower inventory number, period.

For offsetting, the credit is retired separately. It can be reported as a contribution toward a net-zero claim under the SBTi Beyond Value Chain Mitigation framework or as part of a VCMI Carbon Integrity claim, but it does not lower the inventory number.

A practical consequence: if your Science Based Target requires a 50% absolute reduction in Scope 3 emissions by 2030, insetting moves you toward the target. Offsetting does not. This single point of difference reshapes the procurement decision.

When insetting counts toward Scope 3 (and when it does not)

Insetting counts toward Scope 3 only when several conditions are met:

The intervention must occur with an entity in your value chain.
The emissions reduction or removal must be measured against a defensible baseline.
The reduction must be attributed to your share of that supplier’s output, not double-counted with other buyers.
It must follow the inventory accounting rules in the GHG Protocol Land Sector Standard, not the project accounting rules used to generate credits.

The most common failure mode is double counting. If your supplier sells the same reduction as a credit on the voluntary market and also reports it to you as a Scope 3 reduction, the math breaks. The Standard requires you to address this risk, typically by purchasing and retiring the supplier-issued credit as part of your inventory or by contractual provisions that prevent the supplier from selling the reduction twice.

When insetting does not count toward Scope 3: when the intervention sits with a supplier you do not buy from, when the baseline is not defensible, when the attribution is unclear, or when the documentation does not survive audit. Those cases default to Beyond Value Chain Mitigation, which is still useful but operates on a different ledger.

The procurement and supplier engagement question

Insetting is harder than offsetting. That is the unfashionable truth most buyers eventually confront. Offsetting is a transaction; insetting is a relationship.

To run an insetting program, you need supplier mapping precise enough to know which farms or facilities sit at which Scope 3 boundary. You need an engagement model that gets suppliers to participate, which usually requires multi-year commitments and shared economics. You need an MRV architecture that measures the right things and produces audit-ready documentation. And you need a contractual structure that prevents double counting and protects both sides.

The trade-off you receive in return is significant. Reductions count against your inventory rather than your residual. Supplier relationships deepen, which protects sourcing continuity. Yield and quality improvements often follow regenerative interventions, which reduces your input cost over time. And the regulatory file, under CSRD, CSDDD, EUDR, and the SBTi FLAG Guidance, is materially stronger.

Choosing the right tool for the right target

A practical decision rule. If your target is a science-based Scope 3 reduction and you operate in a FLAG sector or source FLAG commodities, insetting is the structurally correct tool. If your target is a net-zero claim that includes neutralising hard-to-abate residual emissions outside your value chain, BVCM via high-integrity offsets is the structurally correct tool. Most companies with material Scope 3 exposure need both, in different proportions, sequenced over time.

The sequencing matters. Insetting takes longer to stand up but produces a permanent reduction in the inventory. Offsetting can be transacted faster but does not change the inventory and now sits under tighter claim restrictions. Treat them as complementary tools with different jobs, not as substitutes. The Accountability Framework Initiative and the IUCN Global Standard for Nature-based Solutions both provide useful guardrails for the insetting side, with biodiversity, human rights, and benefit-sharing requirements that go beyond carbon math.

If you are mapping a Scope 3 reduction roadmap and need to scope which interventions count toward your inventory versus which sit in Beyond Value Chain Mitigation, the carbon and sustainability experts at Carbon Credit Capital can help you structure a nature-based supply chain investment program that fits your FLAG exposure, your target architecture, and your audit horizon. Schedule a consultation.

Carbon Footprint

Net zero needs nature: a carbon credit guide

Published

5 days ago

August 11, 2026

Alice Rush

Net zero is often described as a balancing act: cut what you can, account for the rest, and reach zero on the ledger. That framing is useful, but it leaves something out. It treats every tonne of carbon as interchangeable and every route to zero as equally sound, while the science tells a more specific story.

Carbon Footprint

Deforestation in Malawi: causes and solutions

Published

6 days ago

August 10, 2026

Alice Rush

Malawi has lost a striking share of its forests over the past three decades. Woodlands that once covered well over a third of the country now cover less than a quarter, and the pressure on what remains is increasing. Behind those figures sit two practical questions: what is driving the loss, and what reverses it?