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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

The Strategic Case for Nature-Based Carbon Investments

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Nature-based carbon investments deserve consideration when they address a specific business dependency and produce outcomes you can measure. Imagine Moonbucks, a global coffee roaster planning next season’s espresso blend. It is considering natural Grade 4 coffee from Jimma, in southwestern Oromia, Ethiopia. Its sourcing decisions affect the roasting schedule and the cash tied up in coffee purchases. Moonbucks needs to understand which measures could protect that supply, what they would cost and how it would judge the results.

1. Define the sourcing problem before choosing a project

Moonbucks needs a dependable component for its espresso blend. Its procurement team wants continuity of volume and an agreed cup profile. Replacing a shipment at short notice could require new sample approval and changes to the blend, and given the schedules for cultivation, processing, and freight delivery, is practically impossible. Moonbucks needs to get this right, and its initial concern is inconsistent deliveries. It commissions an assessment of the supplying farms and post-harvest chain. The questions cover land condition, harvest availability and whether drying or storage problems are affecting saleable lots.

This distinction changes the investment brief. A tree-planting proposal cannot be assumed to fix drying problems. Better storage cannot restore eroded land. The team must establish which problem exists before selecting the response.

CCC’s guide to finding nature-based solutions in your supply chain explains where to look. Here, the next task is to turn a broad concern into a testable proposal.

2. Develop nature-based carbon investments around the actual supply chain

The assessment would trace Moonbucks’ purchases back through the exporter and supplying producer groups. Which farms supply the contracted lots? Who controls land-management decisions? How long does the buyer expect to maintain the purchasing relationship?

Furthermore, Jimma natural Grade 4 cannot be treated as interchangeable with every Ethiopian coffee. Moonbucks would need to test any substitute against its own blend and quality requirements.

Suppose Moonbucks’ assessment identifies an opportunity to maintain shade trees and restore vegetation along exposed streambanks. The IPCC describes agroforestry as a way to store carbon in vegetation and soil, with potential benefits for erosion control and water quality.1 Moonbucks would need local advice on species, growing conditions and maintenance before deciding how these measures fit its sourcing plan.

The proposal now has a defined sourcing connection and a candidate intervention. The next steps are to test its effect on production, assess carbon eligibility and build the financial case.

3. Compare the proposal with other ways to protect supply

WBCSD’s Nature-based Solutions Blueprint recommends comparing nature-based options with other responses across their benefits and costs.2 For Moonbucks, that means evaluating the landscape proposal alongside drying improvements, storage controls and alternative sourcing arrangements.

The product’s natural-process designation matters. Moonbucks should examine the drying and dry-milling chain alongside land conditions. Its team would check storage practices, contamination risks and incoming-lot quality to see whether problems arise before or after the coffee leaves the farms.

The revised proposal might combine land stewardship with separate post-harvest controls. Each component needs its own purpose and budget. A sustainability label should not obscure which activity is expected to solve which problem.

The project develops as the evidence improves. Its scope should follow the diagnosis rather than preserve the first idea unchanged.

4. Establish what the carbon outcome could count toward

Moonbucks’ sustainability team now tests the proposed carbon case separately from the sourcing case. Is the objective a measurable change in Moonbucks’ value-chain emissions, verified credits for separate voluntary use, or distinct outcomes under carefully defined arrangements?

Scope 3 covers value-chain emissions. A purchasing relationship alone does not prove that a farm intervention can be included in Moonbucks’ inventory. The team needs an applicable accounting method, defensible boundaries and evidence supporting attribution.

SBTi’s FLAG Guidance (forest, land and agriculture), version 1.2, says purchased credits used as offsets cannot meet near-term FLAG or energy and industry targets. Eligible land-based removals are subject to accounting requirements.3 Moonbucks needs to test its proposal against those rules before including an outcome in its targets.

For Moonbucks’ Jimma proposal, maintaining existing trees and establishing new vegetation could involve different carbon questions. Specialists must examine the baseline and additionality, meaning what changes because the project proceeds. They must also assess measurement and the risk that stored carbon is lost. CCC’s MRV and additionality article introduces those tests.

Until that work is complete, Moonbucks should not budget an assumed Scope 3 reduction or credit-sale receipt. Direct emissions reductions remain the priority.

5. Build a financial case that survives weaker assumptions

Moonbucks’ finance team would now build a multi-year budget. UNEP’s State of Finance for Nature 2023 compares current finance with the investment needed to meet climate, biodiversity and land-restoration goals.4 The company would cost its proposed activities, farmer participation and ongoing monitoring. Verification, where required, is a separate expense. Maintenance and responsibility for replacing failed plantings must remain visible after the initial establishment budget ends.

Operational benefits need equally careful treatment. If fewer rejected lots reduce emergency purchasing, count that saving once. Do not add “supply resilience” as another financial benefit when it represents the same avoided cost.

Moonbucks should compare a base case with slower benefits, higher implementation costs and no carbon revenue. It should also distinguish production outcomes from quality and shipment outcomes. A single good harvest would not prove that the landscape intervention caused better delivery performance.

A project can remain worth funding even when its carbon case needs more work. That decision must rest on the operational evidence and the company’s objectives, without unsupported environmental claims.

6. Fund a pilot with a clear expansion decision

Moonbucks’ first approval would fund a bounded pilot, rather than commit the entire sourcing program. Before spending, Moonbucks would agree on participating farms, responsibilities and the evidence needed at review.

Its scorecard could track farmer participation, implementation costs and plant survival, alongside accepted coffee volumes and lot-quality results. Carbon measurements would follow the selected method. Farm-level traceability must connect the intervention to the actual sourcing relationship.

Suppose Moonbucks’ review later finds that storage changes explain most quality improvements, while the land measures need longer observation. Those findings would shape the next decision: expand the proven component, adjust the landscape work or pause further spending. They would not justify crediting all improvements to tree planting.

This gives nature-based carbon investments a practical place in a multi-year strategy. Funding increases as the evidence supports it, and the project can change direction before a larger commitment.

Discuss a sourcing opportunity with CCC

Carbon Credit Capital’s nature-based supply-chain investment service uses its Dual-Value Model to examine supply-chain economics alongside potential sustainability outcomes.

Schedule a consultation to discuss your sourcing exposure and the questions to resolve before allocating capital.

Sources

  1. Intergovernmental Panel on Climate Change (IPCC), Climate Change 2022: Mitigation of Climate Change, Chapter 7, Agriculture, Forestry and Other Land Uses, section 7.4.3.3 (Agroforestry).
  2. World Business Council for Sustainable Development (WBCSD), Nature-based Solutions Blueprint, 5 June 2024.
  3. Science Based Targets initiative (SBTi), Forest, Land and Agriculture Science-Based Target-Setting Guidance, version 1.2, March 2026, section 3.1.4, pp. 37–38.
  4. United Nations Environment Programme (UNEP), State of Finance for Nature 2023, 2023.
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Carbon Footprint

How to buy plastic credits, and what to check before you do

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A plastic credit funds the collection of plastic waste in places where no formal system exists to collect it. Each credit represents a measured, independently audited quantity of plastic taken out of the environment or returned to use, tracked on a public registry.

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Carbon Footprint

EU carbon credit claims after 27 September 2026

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EU carbon credit claims changed on 27 September 2026, the day the Directive (EU) 2024/825 began to apply across the European Union. The change is narrow. It changes how a company can talk about the credits it buys. A product can no longer be called neutral on the strength of compensation alone; however, every specific, evidenced statement about what a company measured, reduced, and funded stays fully available.

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