Understanding what a carbon credit is and how it works mainly helps avoid misunderstandings: a credit is not a “green promise”, but an accounting unit tied to a project, to calculation rules, and to traceability on a registry.
In the voluntary market, credits are bought by companies that want to finance emissions reductions or removals and, in some cases, make offsetting claims. But everything depends on quality, verification, and on how the credit is used (and retired).
What a carbon credit is in simple terms (and what 1 tCO₂e represents)
A carbon credit is, in practice, 1 tonne of CO₂ equivalent (1 tCO₂e) reduced or removed compared to a reference scenario (baseline). This reduction or removal comes from a project and is “packaged” as a tradable unit in the voluntary carbon market (VCM).
The most important distinction for B2B buyers is between:
- Avoided reductions: the project prevents emissions that would otherwise have occurred (for example, capturing and destroying landfill methane).
- Removals: the project removes CO₂ from the atmosphere and stores it (for example, reforestation/ARR, biochar, or technologies such as DACCS). This is where permanence matters: how long the CO₂ stays stored and what the risks are of it “returning to the atmosphere”. In general, the higher and more measurable the permanence, the more the credit tends to cost.
“CO₂e” means we’re not talking only about CO₂. Different gases (CH₄, N₂O, HFCs and others) are converted into CO₂ equivalent using metrics such as GWP (Global Warming Potential). A practical example: a project that reduces methane can generate many tCO₂e equivalents even if “direct” CO₂ is low, because methane has a higher climate impact.
A credit is not “thin air”. It is a unit with verifiable attributes, typically:
- applied standard and methodology
- year of generation (vintage)
- geography and project type
- co-benefits and safeguards
- risks (for example, reversal and buffer management)
- serial number on a registry, which enables traceability, transfers, and retirement
Market context: the VCM is going through a phase of quality repricing. According to Ecosystem Marketplace, in 2024 traded volumes appear low (the lowest since 2018), while average prices are holding up better thanks to demand for credits considered “high-integrity”. Source:
How a carbon credit works: from the project to certification and credit issuance
What a carbon credit is and how it works, in practice, becomes clear by following the end-to-end flow. The key point is that credits don’t “come into existence” when someone buys them, but when a project demonstrates results under defined rules and controls.
Typical workflow:
- Project idea and definition of the intervention (what is done, where, and within what boundaries).
- Baseline study: define the reference scenario—i.e., what would have happened without the project.
- Choice of standard and methodology: the standard sets rules, requirements, and governance; the methodology defines how tCO₂e are calculated.
- Ex-ante validation: an independent third party checks that the project, “on paper”, is correctly designed and eligible.
- Monitoring: data collection according to the MRV plan (Measurement, Reporting, Verification).
- Ex-post verification: an independent third party checks the data and actual results (how many tCO₂e were reduced or removed).
- Issuance: the registry issues the credits, assigns serial numbers, and makes them transferable.
A simple but crucial difference:
- Validation: checks the project before it generates credits, reviewing design and assumptions.
- Verification: checks real-world results after the monitoring period.
Typical actors:
- Project Developer: develops and manages the project.
- Owner/host: the entity that controls the asset or land where the project takes place.
- Standard: defines rules and requirements (well-known examples include Verra and Gold Standard, as categories of VCM standards).
- VVB: accredited validators/verifiers that carry out validation and verification.
- Registry: manages accounts, serial numbers, transfers, and retirements.
The concept of vintage matters because credits are often issued for periods (annual or multi-year) after MRV and verification. This affects procurement:
- Spot: you buy credits that have already been issued, with lower delivery risk.
- Forward/offtake: you buy future credits, often to support projects under development, but with higher delivery risk.
On quality, many companies use reference frameworks. One example is ICVCM with the Core Carbon Principles (CCPs), which set expectations on governance, additionality, quantification, MRV, avoidance of double counting, and safeguards. Source:
Example of “serious” procurement (RFP-style): requirements on CCP alignment or tagging, disclosure of methodology and verification reports, information on buffer and risks, any corresponding adjustment if needed for specific claims, and credit replacement clauses.
Carbon credits vs EU ETS allowances: the differences that matter for companies and investors
The structural difference is this:
- EU ETS is a compliance cap-and-trade market. Allowances (EUAs) authorize the emission of 1 tCO₂e within a regulated perimeter, with annual obligations (the EU ETS is the European Union’s emissions trading system, which also affects companies operating in Italy as an EU Member State).
- VCM credits are units generated by projects and typically used for offsetting or voluntary claims, not to meet EU ETS obligations.
In the ETS system, the driver is the cap (emissions ceiling) and compliance. In voluntary credits, the driver is additional reduction or removal versus a baseline, under the standard’s rules.
Implications for companies:
- The EU ETS concerns Scope 1 emissions from installations and sectors covered by the regulation.
- Voluntary credits more often feature in net-zero strategies and approaches such as mitigation beyond the value chain, but they do not replace internal reductions or ETS obligations.
On claims and greenwashing risk, it is Source:
Investor note: EUAs are more “commodity-like” because they depend mainly on policy and market design. Voluntary credits carry more idiosyncratic risk: project, methodology, reputation, delivery, and liquidity.
How a carbon credit is used: offsetting, claims, and what it means to “retire” a credit
The step that enables a claim is not the purchase itself. It is retirement.
Typical sequence:
- Purchase
- Transfer to the buyer’s registry account
- Retirement (retirement/cancellation): the credit is “switched off” on the registry, can no longer be resold, and the retirement records date and beneficiary
Types of B2B claims commonly seen:
- Offsetting: “I use these credits to offset emissions.”
- Contribution claim: “I finance reductions/removals” without saying an inventory has been neutralized.
- Product/service/event claims: require even more care because they are more exposed to challenges.
Useful link: SBTi frames the use of credits as Beyond Value Chain Mitigation (BVCM)—actions beyond the value chain—and encourages companies not to present them as a substitute for internal reductions. Source:
Typical use case for manufacturing or retail: using credits for residual emissions after a decarbonization plan, building a portfolio with a mix of reductions and removals, different geographies, and different vintages.
On double counting and the corresponding adjustment: it becomes crucial when the claim context is more stringent or linked to specific schemes. The idea is to avoid the same reduction being counted twice—for example, by a company and by a country. Source:
How to tell whether a credit is reliable: additionality, permanence, leakage, and double-counting risk
Quality is not a single label. It is a set of risks and controls. If you’re asking what a carbon credit is and how it works “for real”, this is the section that makes the difference.
Additionality: the project must generate reductions or removals that would not have happened without that financing and those rules. As a buyer, signals to look for:
- financial barriers or limited access to capital
- common practice testing (is it already common practice?)
- regulatory elements (policy surplus: is it already legally required?)
- economic logic and assumptions disclosed in the documentation
Permanence: how long storage lasts.
- Biological (forests, soils): risk of fire, harvesting, extreme events. Often managed with buffer pools and reversal rules.
- Geological or technological: generally aims for longer durations and different risk profiles, but it depends on methodology and monitoring.
Leakage: emissions must not “shift” elsewhere. Example: you protect a forest, but deforestation moves to a nearby area. In project documents, look for assumptions, boundaries, and anti-leakage measures.
Double counting:
- technical: double issuance or double use of the same credit. Here, serial numbers, the registry, and chain of custody matter.
- accounting: two parties make claims on the same reduction. Here, claim rules and, where required, corresponding adjustments come into play.
Practical due diligence (minimum checklist):
- MRV documentation and the VVB verification report
- applied methodology and project boundaries
- issuance date, vintage, serial number
- any external ratings and risk disclosures
- alignment with integrity principles such as the CCPs
- contractual clauses on invalidation, reversal, and credit replacement CCP reference:
Where to buy them and how much they cost: registries, marketplaces, contracts, and main price factors
Credits are bought through different channels, but the practical rule is one: if you can’t reconstruct the documentary chain back to the registry, you’re increasing risk.
Typical channels:
- Registries: accounts, transfers, and retirements happen there (the registry is the “source of truth” for serial numbers and credit status).
- Brokers/OTC: bilateral negotiation, often used in institutional procurement.
- Marketplaces: more accessible, but pay attention to how they present quality and documentation.
- Auctions or clearing mechanisms: present in some market configurations.
B2B contracting: the main distinction is between
- Spot: credits already issued.
- Forward/offtake: future credits. Here, delivery schedule, replacement conditions, invalidation, force majeure, vintage ranges, and constraints on standard/methodology matter a lot.
Prices: in the VCM, dispersion is wide. The World Bank notes that prices can range from under 1 USD/tCO₂e to hundreds of USD/tCO₂e, depending on credit type and quality. Source:
Most common price drivers:
- project type (reduction vs removal)
- permanence and reversal risk
- standard and methodology
- co-benefits and safeguards
- integrity rating or tier
- geography and country risk
- vintage and credit “age”
- availability and liquidity
Useful context: a Morgan Stanley report citing SOVCM analysis indicates a 2024 market value of around ~US$0.5bn and about US$1.9bn for 2020 as “market value of traded carbon credits” (2019–2024 series). It’s a practical reminder: trust and liquidity also influence price formation. Source:
