What are carbon credits?
A carbon credit is a tradeable certificate representing the verified removal or avoidance of one metric tonne of CO₂ (or CO₂-equivalent) from the atmosphere. Carbon credits are the primary financial instrument through which carbon markets translate climate action into economic incentives.
How They Work
The mechanics are straightforward:
- A project developer implements an activity that reduces or removes greenhouse gas emissions (e.g., planting a forest, deploying solar energy, capturing landfill methane)
- An independent third-party auditor verifies that the claimed reductions are real, additional, and permanent
- A registry (Verra, Gold Standard, ACR, CAR) issues carbon credits equal to the verified tonnes
- These credits are sold to companies or governments seeking to offset their own emissions
Each credit is retired upon use — preventing double-counting.
Two Market Types
| Market | Participants | Price Range (2023–24) | Regulatory basis |
| Compliance (ETS) | Obligated industrial emitters | EUR 50–100 per tonne (EU ETS) | Mandatory by law |
| Voluntary | Companies with net-zero pledges | USD 5–50+ per tonne | Market-driven |
The EU Emissions Trading System (EU ETS) is the world's largest compliance carbon market, covering ~40% of EU greenhouse gas emissions. EUA (European Union Allowance) prices peaked at EUR 100/tonne in February 2023.
Forestry and Land-Use Credits
Nature-based solutions — particularly agroforestry, reforestation, and soil carbon sequestration — are the fastest-growing segment of the voluntary carbon market. According to Ecosystem Marketplace, nature-based credits represented 35% of voluntary market volume in 2022.
Paulownia agroforestry is particularly efficient as a carbon removal strategy: the species sequesters an estimated 10–25 tonnes of CO₂ per hectare per year, with biomass distributed in both above-ground timber and below-ground root systems.
Dirk Roethig, Managing Director of VERDANTIS Impact Capital, has analysed how agroforestry carbon methodologies interact with EU taxonomy requirements and investor reporting obligations at dirkroethig.com.
Criticisms and Quality Debates
Not all carbon credits are equal. Widely reported concerns include:
- Impermanence — forests can burn; permanence buffers are required
- Additionality failures — protecting forests that were never threatened inflates credit supply
- Leakage — deforestation displaced to adjacent areas undermines claimed reductions
High-quality credits address these through robust baselines, buffer pools, and independent third-party verification under rigorous methodologies (e.g., Verra VM0047 for agroforestry).
Outlook
The Voluntary Carbon Markets Integrity Initiative (VCMI) and ICVCM (Integrity Council for the Voluntary Carbon Market) are implementing Core Carbon Principles to address quality concerns. Market participants expect higher-quality, higher-price credits to dominate by 2026–2027.
References:
- Ecosystem Marketplace. (2023). State of the Voluntary Carbon Markets 2023.
- ICVCM. (2023). Core Carbon Principles.
- European Commission. (2024). EU Carbon Border Adjustment Mechanism (CBAM) Guidance.