What is a carbon credit?

Quick Answer: A carbon credit is a tradeable certificate representing the removal or reduction of one tonne of CO2 (or equivalent greenhouse gas) from the atmosphere. Companies buy carbon credits to offset emissions they have not yet been able to reduce, typically through the voluntary carbon market. Carbon credits are separate from a company's core emissions reduction work and should not replace it.

What is a carbon credit?

A carbon credit is a certificate that represents one tonne of carbon dioxide equivalent (tCO2e) that has been avoided, reduced, or removed from the atmosphere. Each credit is generated by a project that prevents or captures greenhouse gas emissions, such as a reforestation scheme, a methane capture facility, or a renewable energy installation in a developing country.

When a company purchases a carbon credit, it retires that credit against its own emissions. The logic is that one tonne emitted by the buyer is balanced by one tonne avoided or removed elsewhere. This is the basis of carbon offsetting.

Credits are bought and sold through carbon markets, which operate either as compliance markets (where companies are legally required to offset or trade allowances) or voluntary carbon markets (where companies choose to offset emissions beyond any legal obligation).

How are carbon credits created?

A carbon credit does not exist simply because a project claims to reduce emissions. To be valid, a credit must be verified against a recognised standard. The most widely used standards in the voluntary market are Verra's Verified Carbon Standard (VCS), Gold Standard, and American Carbon Registry (ACR).

The verification process typically involves:

• Additionality: proving the emissions reduction would not have happened without the project's funding
• Permanence: demonstrating the removal or reduction is long-lasting, not temporary
• Measurability: quantifying the emissions impact using an approved methodology
• Third-party verification: independent audit of the project's claims before credits are issued

Once verified, credits are listed on a registry. Each credit carries a unique serial number so it can be tracked, sold once, and then retired. Retirement prevents double-counting, where the same tonne of reduction is claimed by more than one organisation.

What is the difference between carbon credits and carbon allowances?

The terms are sometimes used interchangeably, but they refer to different instruments.

Carbon allowances are permits issued under compliance schemes such as the UK Emissions Trading Scheme (UK ETS) or the EU ETS. Regulated industries receive or purchase a set number of allowances each year. If they emit more than their allocation, they must buy additional allowances. If they emit less, they can sell the surplus. Participation is mandatory for covered sectors.

Carbon credits (also called offsets) are generated by emission reduction projects and traded primarily through the voluntary carbon market. Participation is optional. Companies buy credits to compensate for emissions that remain after reduction efforts, often as part of a net zero or carbon neutral claim.

The distinction matters because allowances and credits operate under different rules, different oversight bodies, and different quality standards. Mixing them up in a corporate carbon claim creates both reputational and credibility risks.

Why do carbon credits attract criticism?

Carbon credits have faced significant scrutiny, and some of that criticism is well-founded. A 2023 investigation by The Guardian and others found that a large proportion of rainforest offset credits approved by Verra did not represent genuine carbon reductions, raising serious questions about additionality and verification quality.

The main concerns with carbon credits include:

• Overestimated impact: some projects claim far more reduction than independent analysis supports
• Impermanence: forest projects are vulnerable to fire, disease, and land-use change, which can reverse the captured carbon
• Greenwashing risk: companies that lead their climate communications with offsetting rather than emissions reduction face increasing scrutiny from regulators and stakeholders
• Low-quality credits: the voluntary market is unregulated, and credit quality varies widely between projects and standards

The UK Competition and Markets Authority (CMA) and the Advertising Standards Authority (ASA) have both issued guidance on how carbon neutral and net zero claims should be substantiated, with particular attention to the role of offsets. Using low-quality credits to support a net zero claim carries real regulatory and reputational exposure.

Where do carbon credits fit within a credible climate strategy?

The most credible frameworks, including the Science Based Targets initiative (SBTi) and the GHG Protocol, are clear: carbon credits are not a substitute for cutting emissions. They are a tool for addressing residual emissions that cannot yet be eliminated, or for contributing to broader climate finance beyond a company's own footprint.

The SBTi's Corporate Net-Zero Standard requires companies to reduce their Scope 1, 2, and 3 emissions by at least 90% before using carbon credits to neutralise the remaining 10%. Credits used at net zero are expected to be high-quality carbon removals, not avoidance-based offsets.

For most companies, the right order of operations is:

1. Measure your full emissions footprint accurately, covering Scopes 1, 2, and 3
2. Identify where meaningful reductions are possible and set science-aligned targets
3. Reduce emissions across the value chain over time
4. Address genuinely residual emissions using high-quality, verified carbon credits

Purchasing credits before completing steps one and two is where greenwashing risk concentrates. A company that does not know its actual emissions has no credible basis for deciding how many credits it needs, or whether they represent a proportionate response to its impact.

Seedling helps companies build the accurate, full-scope footprint that makes any responsible use of carbon credits possible. Without that foundation, offset purchases are difficult to justify to stakeholders, auditors, or regulators.

What makes a carbon credit high quality?

Not all credits carry the same integrity. When evaluating credits, the following criteria indicate higher quality:

• Verified under a rigorous standard (Gold Standard and Verra VCS are the most widely recognised)
• Carbon removal rather than avoidance, where possible (direct air capture, biochar, and enhanced weathering are more permanent than avoided deforestation)
• Co-benefits such as biodiversity protection or community development, which indicate a more substantiated project
• Recent vintage, meaning the credit was generated recently rather than carried over from older, less scrutinised projects
• Transparent project documentation, including methodology, monitoring reports, and independent audit findings

The voluntary carbon market is moving towards higher standards. The Integrity Council for the Voluntary Carbon Market (ICVCM) launched its Core Carbon Principles in 2023 to set a global baseline for credit quality, and adoption is growing among buyers and registries alike.

For companies using credits as part of a net zero strategy, the quality of the credit matters as much as the quantity. One well-verified, high-integrity removal credit is worth more to a credible climate claim than ten credits from a project with disputed methodology.