How carbon credits work: a plain-English guide

Carbon credits are one of the most talked-about and least-understood tools in climate action. This guide explains what they are, how they are created, who verifies them, and what actually matters when you are buying or selling them.

What is a carbon credit?

A carbon credit represents one tonne of carbon dioxide — or the equivalent in another greenhouse gas — that has been either prevented from entering the atmosphere or removed from it. Each credit is a tradeable unit. Buy one, and you can claim to have offset one tonne of CO₂e against your emissions.

That sounds simple. The complexity lies in verifying that the claim is real. A credit issued for a cookstove project in Uganda may represent a genuine, measurable reduction. A credit issued for a poorly-designed avoided deforestation project may represent very little at all. The market has struggled to reliably distinguish between them — which is why prices range from under a dollar to several hundred dollars per tonne.

Quick definition

1 carbon credit = 1 tonne of CO₂ equivalent (tCO₂e). Other greenhouse gases are converted to CO₂e using their global warming potential (GWP). Methane, for example, has a GWP of approximately 28 over 100 years, so one tonne of methane equals roughly 28 carbon credits.

How are carbon credits created?

Credits are generated by projects that demonstrably reduce or remove greenhouse gas emissions. These fall into two broad categories.

Avoidance and reduction projects prevent emissions that would otherwise have occurred. Common types include improved cookstoves (which replace open fires and reduce fuel combustion), renewable energy installations in places that would otherwise use fossil fuels, and avoided deforestation (REDD+), where landowners are paid to keep forests standing rather than clearing them.

Removal projects physically extract carbon from the atmosphere and store it. Reforestation grows new trees that absorb CO₂ over decades. Biochar converts biomass into a stable carbon-rich material buried in soil. Direct air capture uses mechanical systems to pull CO₂ directly from the air. Blue carbon projects restore coastal ecosystems such as mangroves and seagrasses, which store significant amounts of carbon in their soils.

Each project calculates a baseline — what emissions would have been without the project — and measures the actual outcome. The verified difference is the number of credits issued.

Who verifies them?

Verification standards set the rules for how projects are designed, measured, and audited. They determine whether a credit is credible. The main standards operating in the voluntary carbon market each have different strengths, project types they accept, and price ranges.

Third-party auditors — called validation and verification bodies (VVBs) — assess whether projects meet the standard's requirements. Projects must pass both initial validation (before credits are issued) and periodic verification (to confirm ongoing performance).

Tool via The Carbon Workbench

The carbon credit lifecycle

A credible carbon credit should move through a clear lifecycle before it is used in a climate claim. The first stage is project design, where the developer defines the project boundary, the baseline scenario, the emissions methodology, monitoring plan, leakage risks and expected co-benefits. The second stage is validation, where an independent auditor checks whether the project design meets the rules of the chosen standard.

The third stage is monitoring. This is where the project gathers real-world data: hectares protected, cookstoves distributed, biochar tonnes produced, methane captured, trees planted, or energy generated. The fourth stage is verification, where an auditor reviews that monitoring data and confirms how many tonnes of CO2e have actually been reduced or removed. Only then does the registry issue credits.

The final stage is retirement. A credit is not fully used until it is retired on a registry against a specific buyer or claim. If a business buys a credit but does not retire it, that credit can still theoretically be sold or used elsewhere. Retirement is what prevents double counting and creates the audit trail behind a public claim.

Questions buyers should ask before purchasing

A buyer does not need to become a carbon market expert to avoid the weakest credits. But every buyer should ask a small set of practical questions before spending money or making a claim.

What exact claim will this credit support? A credit used for internal contribution, such as funding climate projects without claiming neutrality, carries less reputational risk than a credit used to claim a product is carbon neutral.

Is this credit avoidance, reduction or removal? Avoidance credits can be legitimate, but removals are usually more aligned with long-term net zero claims because they physically store carbon.

What vintage is it? A 2025 credit is usually more useful for a current-year claim than a much older vintage, unless there is a clear reason for using older units.

Has it been retired? Ask for the retirement record, not just an invoice. The registry retirement entry should identify the project, credit volume, vintage and beneficiary.

What is the reversal risk? Nature-based credits can be affected by fire, disease, illegal logging or political change. Standards use buffer pools to manage that risk, but buyers should still understand it.

Internal links

For deeper price context, read Carbon credit prices in 2026. For standards, read Gold Standard vs Verra vs Puro.earth. For aviation compliance, read CORSIA: aviation carbon offsetting explained. For a buyer checklist, read Carbon credit quality checklist.

What makes a high-quality credit?

The carbon market has converged on five core quality criteria, sometimes called the principles of high-quality carbon credits:

Additionality means the emissions reduction would not have happened without the carbon finance. A wind farm that would have been built anyway for commercial reasons is not additional.

Permanence means the carbon stays stored. A forest that burns down five years after credits are issued has not permanently stored anything. High-quality standards require buffer pools — a reserve of credits held back to compensate for reversal risks.

Measurability means the reduction can be quantified against a credible baseline. Avoided deforestation has historically struggled here, since estimating what would have happened without the project involves significant uncertainty.

Independent verification means the claims have been assessed by an accredited third party, not just the project developer.

Uniqueness means the credit can only be used once. Registries such as the Verra Registry and Gold Standard Impact Registry prevent double-counting by retiring credits when they are used.

Key takeaway

Removal credits — biochar, reforestation, direct air capture — are generally considered higher quality than avoidance credits because the carbon is physically stored rather than notionally prevented. Institutional buyers, including many large corporates making net zero commitments, now prefer removal credits and pay a significant premium for them.

Voluntary versus compliance markets

Carbon credits operate in two largely separate markets.

Compliance markets are mandatory. The EU Emissions Trading System (EU ETS), the UK ETS, and California's cap-and-trade system require covered industries to hold permits for every tonne they emit. These use a different type of unit (allowances or permits) and are not the same as voluntary carbon credits, though the underlying logic is similar.

The voluntary carbon market (VCM) is where companies and individuals buy credits to offset emissions on a voluntary basis — to meet net zero pledges, satisfy corporate sustainability policies, or respond to customer expectations. Credits in the VCM are issued under the standards described above and traded through brokers, exchanges, and direct project relationships.

Prices in the two markets are entirely separate. EU ETS allowances traded at approximately €68 per tonne in May 2026. Voluntary credits for nature-based avoidance projects traded at $3–15 per tonne. Engineered removal credits (biochar, direct air capture) traded at $100–500 per tonne.

How to use carbon credits responsibly

The scientific consensus, including guidance from the Science Based Targets initiative (SBTi), is that carbon credits should complement genuine emissions reductions rather than substitute for them. A company that buys credits without reducing its own emissions is not on a net zero pathway — it is paying to maintain the status quo.

The responsible use of credits looks like this: reduce all emissions that can practically be reduced, use high-quality credits to address residual emissions that cannot yet be eliminated, and be transparent about the methodology and standards used.

Tool via The Carbon Workbench

For businesses navigating these decisions, The Carbon Workbench offers free tools to compare credit prices across standards, estimate verification costs, and model carbon footprints step by step.

The bottom line

Carbon credits are a legitimate climate tool when they are additional, permanent, independently verified, and used to address genuine residual emissions. They are not a licence to continue emitting unchecked. The quality of a credit matters enormously — which is why the price difference between a $3 avoidance credit and a $300 removal credit reflects something real.

If you are buying credits for a business, the questions to ask are: is this credit additional? Who verified it? Is it removal or avoidance? Does the standard require a buffer pool? Has the registry retired it against your account?