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

Want a simpler way to buy carbon credits? Discover our carbon marketplace

Published

4 days ago

September 2, 2026

Alice Rush

Want a simpler way to buy carbon credits? Discover our carbon marketplace

Most businesses that decide to act on their net-zero targets reach the same point of friction. Buying carbon credits has meant tracking down brokers, sitting through sales calls, and requesting a quote just to learn a price, sometimes with limited proof of what you are buying.

Carbon Footprint

Climate-Linked Supply Chain Risk Is Already in Your P&L

Published

2 weeks ago

August 26, 2026

Alice Rush

The earnings calls that quietly reframed climate from sustainability question to operating risk.

Three earnings calls in the last 18 months tell the story without any help from a press release.

Hershey, May 2024: cocoa price exposure compresses margin, and the company attributes part of the cost shock to West African weather. Olam, July 2024: coffee climate exposure quantified in the annual report. JBS, January 2025: supply chain climate disclosures expanded materially in response to investor pressure and regulatory expectation. None of these companies issued the announcement as climate news. They issued it as financial news. The climate-linked supply chain risk did not arrive with a sustainability framing; it arrived as a P&L line.

You are probably reading this article because you suspect the same thing is happening to your business. This piece walks through what is showing up on which earnings calls, how procurement and finance leaders are quantifying the exposure, and what serious corporates are doing about it before the regulator asks.

Where climate risk has already appeared in earnings

The pattern is consistent across resource-intensive sectors. A weather event compresses supply, the price spikes, the cost flows through the income statement, and the analyst on the call asks whether the event is anomalous or structural. Increasingly, the honest answer is the second one.

Cocoa is the cleanest example. The 2023 to 2024 West African harvest fell sharply on the back of erratic rainfall and disease. Cocoa futures more than tripled. Companies with concentrated West African sourcing absorbed the cost; companies with diversified sourcing absorbed less. The exposure was not climate as ESG topic. It was climate as cost of goods.

Coffee follows the same pattern. Brazilian and Vietnamese harvests have moved on weather more sharply across the last several seasons. Roasters with long-tenor supplier relationships and origin diversification have managed the volatility; roasters with spot-market exposure have not. Wheat, sugar, palm oil, beef: the same dynamic in different commodities, a pattern the IPCC AR6 Working Group II report projects will intensify across agricultural systems through mid-century.

What this means: climate risk is no longer a footnote in the 10-K. It is a line item the CFO has to explain on the call.

The three commodity exposures that hit margin first

For most companies with material Scope 3 exposure, three exposures dominate the near-term P&L risk.

Concentrated single-origin sourcing in a climate-vulnerable region. If your tier-one supply for any material commodity sits in one geography, you have a concentration risk that climate amplifies. Diversification across origins is the obvious hedge, but it takes years to build and requires relationships you cannot acquire by tender.
Supplier financial fragility under climate stress. Smallholder farmers, who supply a large share of the global cocoa, coffee, and palm oil market, do not carry the balance sheets to absorb yield shocks. When yields collapse, they exit. When they exit, your supply base shrinks, and the surviving suppliers raise prices. The risk is structural, not cyclical.
Logistics and storage exposure to extreme weather. Hurricane disruptions to Gulf shipping, drought-driven Panama Canal restrictions, flooding in European inland waterways: each of these has moved input costs in the last three years, a pattern documented in Munich Re’s natural catastrophe data. The exposure shows up as a one-quarter event in the financial press but accumulates over time on the cost line.

TCFD and ISSB disclosure changes

The disclosure architecture has now caught up with the risk. The Task Force on Climate-related Financial Disclosures, whose recommendations are now embedded in the ISSB’s IFRS S2 climate standard, requires companies to disclose climate-related risks across physical and transition categories, with quantification where possible.

For physical risk specifically (the climate-linked supply chain risk you are reading about), the disclosure must address both acute exposures (extreme weather events) and chronic exposures (gradual changes in temperature, precipitation, and growing seasons). The disclosure must address the time horizon over which the risk is material, the parts of the value chain exposed, and the financial impact under different scenarios.

The CSRD imposes similar requirements under European law, with double materiality (both financial and impact materiality) embedded in the assessment. The practical effect: your auditors and your investor relations team now need a defensible answer to the climate-linked supply chain risk question, and the answer needs to be quantified.

What procurement and finance can do now

Three actions matter near-term.

Map your exposure. Most companies do not have a clear view of which tier-one and tier-two suppliers sit in which climate-vulnerable geographies. Without the map, you cannot quantify the risk, and without the quantification, you cannot disclose it credibly. The map is the foundation, and World Resources Institute climate risk research provides useful public tooling to start.

Diversify and deepen, in that order. Diversification across origins reduces concentration risk, but the deeper move is to invest in the resilience of the suppliers you already have. Regenerative practices, agroforestry, soil health interventions: these reduce yield volatility under climate stress and protect your input cost trajectory.

Embed the climate spend inside procurement, not outside it. Treating climate risk as a sustainability cost line subordinates it to the ESG budget. Treating it as a procurement and resilience investment puts it in the budget that matters, which is the cost-of-goods budget that the CFO defends quarterly.

Nature-based supply chain investments are the asset class designed for exactly this purpose. They sit inside the value chain, they reduce climate-linked supply risk, they generate verifiable Scope 3 reductions, and they produce the documentation an auditor and a regulator can both test.

If you are quantifying climate-linked supply chain risk in advance of the next earnings cycle or the next disclosure period, the carbon and sustainability experts at Carbon Credit Capital can help you map your exposure and structure a Dual-Value Model response that addresses reduction, resilience, and disclosure-readiness in a single program. Schedule a consultation.

Carbon Footprint

Where should an SME start with a carbon action plan?

Published

2 weeks ago

August 24, 2026

Alice Rush

Where should an SME start with a carbon action plan?

More and more small and medium-sized businesses are hearing the same question from their larger customers: What is your carbon footprint? That question now travels down entire supply chains, and it arrives next to tender requirements, certification criteria, and rising customer expectations.