Carbon credits explained

Carbon credits have emerged as a critical tool in the fight against greenhouse gas emissions - and also as a way for businesses to buy, sell and trade units as a way to balance carbon output. Here Minimum investigates their benefits to businesses and how they’re created. 

What are carbon credits?

Carbon credits represent a market-based approach to reducing greenhouse gas emissions by assigning a financial value to the carbon dioxide (CO2) and other greenhouse gases that are released into the atmosphere - which organisations looking to balance their carbon output can purchase. 

Essentially, carbon credits offer organisations, governments, and individuals a way to offset their carbon footprint by investing in projects that reduce or capture an equivalent amount of emissions elsewhere.

How are they linked to carbon offsets?

Carbon credits and carbon offsets are closely linked, with the terms often used interchangeably. However, they have subtle differences in their terminology and usage:

Carbon credits refer to the tradable units that represent a specific amount of greenhouse gas emissions. They are typically associated with compliance markets, where they are used to meet regulatory requirements set by governments or international agreements.

Carbon offsets are a broader concept which encompass both compliance-related and voluntary efforts to compensate for emissions by investing in projects that reduce or capture an equivalent amount of greenhouse gases. They’re often used in the voluntary market by individuals, organisations, and businesses. 

Unlike carbon credits, which are primarily purchased to meet regulatory requirements, carbon offsets are purchased voluntarily to offset personal or corporate emissions, or work toward carbon neutrality.

How do carbon credits work?

By creating a market-based mechanism to incentivize and reward activities that reduce or offset greenhouse gas emissions, carbon credits help channel investment into projects that benefit the environment and combat climate change.

Investing

Investing in carbon credits can be a way to support emissions reduction projects while potentially achieving environmental and financial benefits. Investing in carbon credits involves businesses or individuals purchasing offsets that represent a reduction in greenhouse gas emissions. These credits are generated by projects that reduce emissions, like renewable energy installations or reforestation initiatives. 

The carbon credit market operates based on supply and demand, with credits bought and sold through regulated trading platforms or over-the-counter transactions.

Selling

Selling carbon credits involves offering verified emission reduction units to potential buyers on carbon markets or directly to interested parties. To do this, carbon credits have been properly verified and certified by recognized standards such as the Verified Carbon Standard (VCS) or the Gold Standard. 

This ensures the legitimacy and quality of the credits before other organisations are able to purchase them. There are two primary spaces that organisations selling carbon credits typically engage with potential buyers

• Compliance Markets
• Voluntary Markets

Depending on the jurisdiction of the selling and purchasing parties and the size of the transaction, there may be legal and tax implications with selling carbon credits.

Trading

Trading involves buying and selling carbon offset units across voluntary and compliance markets within the context of specific rules and regulations.

As with any other commodity, it’s important to understand the market and its associated risks - for example, transactions involving the trade of carbon credit are likely to be recorded on registry systems to prevent double counting 

How are they created?

Credits are created through a structured process that involves identifying, measuring, and verifying greenhouse gas emissions reductions or removals, like so:

How credits benefit businesses

Carbon credits are a valuable tool for both environmental sustainability and financial advantage, making them a positive investment option for businesses:. 

• Regulatory compliance - Many regions and countries have implemented regulations or cap-and-trade systems that require businesses to limit their carbon emissions. Investing in carbon credits can help businesses meet them.
• Risk mitigation - Climate change and environmental issues pose risks to businesses, from supply chain disruptions to increased regulatory scrutiny. By investing in carbon credits and reducing their carbon footprint, companies can mitigate some of these risks and ensure long-term business resilience.
• Access to new markets -  Some companies invest in carbon credits not only to offset emissions but also to gain access to new markets.
• Cost efficiencies - By investing in emissions reduction projects and purchasing carbon credits, businesses can often achieve cost savings in comparison to making internal emissions reductions. 
• Penalty avoidance - Carbon credits can help businesses meet regulatory requirements and avoid penalties by providing a flexible way to ensure compliance with emissions caps and regulations.
• Investor support -  Investors, particularly those focused on environmental, social, and governance (ESG) factors, may be more inclined to invest in or support businesses that are actively involved in carbon offset initiatives. 

How Minimum can help

Minimum can help organisations to understand their existing carbon output, and create plans to mitigate climate related risks in the future.  Our Emissions Data Platform seamlessly collects and processes emissions data from every corner of your organisation and supply chain - no matter the format. Making it the ideal platform for emissions audits and all-round business intelligence. 

Learn more about how Minimum's Emission Data Platform can help to power you all the way to Net Zero today.

FAQs about carbon credits

Are carbon credits a commodity?

Yes, carbon credits are a commodity. They  have a market price that fluctuates based on supply and demand dynamics and are often subject to broader trading and investment strategies. As with many other commodities, the value of carbon credits can be influenced by factors such as market regulations, international agreements, and environmental policies.

What is the average price of carbon credits?

The price of carbon credits can vary significantly depending on several factors, including the type of market (compliance or voluntary), the specific project and location, the certification standard, and market dynamics.

Where can you buy carbon credits?

Carbon credits can be purchased from various sources, depending on your goals, whether you want to offset your personal carbon footprint or meet regulatory requirements for your business. Here are some common places where you can buy carbon credits:

• Carbon Offset Retailers
• Project Developers and Project Owners
• Carbon Credit Brokers
• Voluntary Carbon Markets
• Compliance Markets
• Auctions and Exchanges
• Carbon Credit Registries

When purchasing carbon credits, it's important to consider factors such as the project type, certification standards, and the credibility of the credits. Look for projects that have undergone third-party verification and adhere to recognized standards like the Verified Carbon Standard (VCS) or the Gold Standard.