Carbon credits explained

Carbon credits represent a measurable and verifiable reduction, avoidance or removal of one tonne of carbon dioxide equivalent (CO₂e) from the atmosphere. They are generated by verified climate action projects (e.g., reforestation, renewable energy, direct air capture) that adhere to rigorous international standards, such as Verra's Verified Carbon Standard (VCS) or the Gold Standard (GS).

Beyond their climate impact, these projects often deliver additional co-benefits, like empowering communities, protecting biodiversity or improving public health. Once purchased and retired by an end user, a carbon credit is permanently retired in a registry, ensuring it cannot be reused and guaranteeing its unique contribution to climate action.

A compliance carbon market is a mandatory, government-regulated system where certain companies or industry sectors must adhere to emissions limits set by law, such as the EU Emissions Trading System (ETS). The voluntary carbon market (VCM), on the other hand, is not regulated by governments. It allows companies, organisations and individuals to voluntarily purchase and sell carbon credits to fulfil their own climate commitments, such as achieving net-zero goals.

However, these two markets are increasingly converging. This has a ripple effect, with requirements and standards flowing in both directions. For instance, in Europe, some governments like Sweden and Switzerland are now allowing voluntary credits to be used for compliance purposes. Conversely, some forward-thinking corporations are already considering using future credits from the UN's new standard—the UN Paris Agreement Crediting Mechanism (PACM)—for their voluntary climate goals.

Standards bodies such as Verra (Verified Carbon Standard), Gold Standard , American Carbon Registry (ACR) and Climate Action Reserve (CAR) are crucial for ensuring the integrity of the voluntary carbon market. They are third-party organisations that establish rigorous methodologies and standards for climate projects, which outline the eligibility criteria, rules, and carbon accounting frameworks for carbon projects. Their role is to define the detailed rules and criteria that carbon projects must meet to generate high-quality carbon credits.

They ensure credibility and consistency by setting methodologies, monitoring requirements and verification protocols - all of which are under constant review and evolution. Supporting them are the third-party auditors (validation and verification bodies or VVBs). These are independent entities accredited by certification standards to conduct rigorous, impartial assessments. They perform both validation (pre-implementation review of a project's design) and verification (regular post-implementation checks of actual emission reductions), ensuring that projects comply with all rules and that their claimed impacts are real and measurable. Their independent stamp of approval is vital for the issuance of carbon credits and building buyer confidence.

To sell carbon credits, project developers must first develop and register a certified climate project that reduces, avoids or removes greenhouse gas (GHG) emissions, such CO₂e or methane. This is a highly rigorous, multi-stage process that requires meticulous attention to detail and a long-term commitment.

The journey begins with the initial design of the project, which outlines the specific activities and methodology for addressing emissions. This design is then independently audited in a process known as validation to ensure it meets strict international standards. Once the project is implemented, it undergoes continuous monitoring and periodic third-party verification to prove that the emissions reductions have genuinely occurred. Only after this rigorous process can the carbon credits, which represent a tonne of CO₂e reduced, be officially issued and listed on a public registry.

As a leading Carbon Asset Developer, South Pole acts as a crucial expert partner throughout this complex journey. We assist project developers with everything from initial design and financing to navigating the entire validation and verification process, ensuring their projects are of the highest integrity and successfully generate verifiable carbon credits.

Purchasing carbon credits is a key step for individuals and organisations committed to making a tangible climate impact. While the process can be tailored to fit your specific needs, a thoughtful approach ensures that your investment supports high-quality projects and drives meaningful environmental change.

The primary ways to buy carbon credits range from the simplest for individuals to the most strategic for corporations. For individuals and small businesses, the most common and straightforward way to buy carbon credits is through an online retailer or a marketplace, such as South Pole's marketplace. These platforms offer a curated selection of projects, often categorised by type (e.g., forestry, clean cookstoves) and a simple checkout process.

For large corporations with ambitious climate goals and a high volume of unabatable emissions, a more strategic and rigorous approach is necessary. The process for a large-scale buyer typically begins by determining their preferences for project attributes (e.g. project type, location, co-benefits, certification, etc.), price and risk appetite.

Partnering with an expert in carbon asset development and procurement is often the most common and effective approach for large corporations. At South Pole, we offer a comprehensive, end-to-end service, providing access to our vetted portfolio, which includes a diverse, global collection of projects that have already undergone rigorous quality and integrity checks. We also offer strategic planning to help you develop a purchasing plan that aligns with your specific climate goals and moves beyond one-off transactions. Furthermore, we give you access to various sourcing channels, including long-term offset agreements or direct investments into projects.

The price of carbon credits can vary significantly, ranging from a few dollars to several hundred dollars per tonne. The value and cost of a credit are influenced by a dynamic combination of market forces, project characteristics, and broader regulatory factors.

The primary reasons for the variance in pricing include:

• Supply and demand: Like any market, the availability of credits and the demand from companies and individuals heavily influence pricing.
• Project type and technology: Different project types, such as nature-based projects (e.g., forestry), renewable energy, or innovative technological removals (e.g., Direct Air Capture), have varying implementation costs, which directly affect their credit price.
• Project quality & co-benefits: High-quality projects that adhere to stringent standards generally command higher prices. Projects offering significant social or environmental co-benefits (e.g., protecting biodiversity, empowering local communities) also tend to have a premium.
• Vintage: The year a credit was generated can affect its value, with newer credits often being more desirable.
• Location & regulation: The project's location can impact costs, and broader regulatory frameworks, such as compliance markets or carbon taxes, can also influence voluntary market prices.

Ultimately, the market for carbon credits reflects that a credit's price is a direct indicator of a project's verified impact and the level of transparency and rigour associated with it.

A typical carbon credit transaction involves several key steps. First, the buyer conducts due diligence on the selected projects and the seller. Next, a purchase agreement is executed. The credits are then transferred from the seller's account to the buyer's account on a public registry. Finally, the credits are "retired" or cancelled in the buyer's name, permanently removing them from circulation and ensuring they can only be used once for a climate claim and avoiding the risk of double-counting.

Carbon credits are an essential tool for accelerating global climate action. While the primary focus for all organisations should be on reducing their own emissions, carbon credits provide a mechanism to address the remaining, hard-to-abate emissions that cannot be eliminated in the short term. They also serve as a crucial bridge to a net-zero future by channelling private finance into vital climate projects that would otherwise not exist.

There are three main roles that carbon credits can have within a company's net-zero strategy:

• Addressing residual emissions that cannot be further abated - Once a company has achieved its long-term emissions reduction targets (~90% reduction), it can neutralise the remaining unabatable emissions through the procurement of removal credits, and at that point claim a state of net-zero.
• Taking responsibility for ongoing emissions - While decarbonising, companies can also contribute to climate mitigation beyond their own value chains, through the financing of projects or procurement of carbon credits.
• Addressing underperformance against targets - If a company is not meeting its near-term emission reduction targets, it can take accountability for its underperformance by procuring carbon credits, ideally in removals. This use case is considered by the SBTi in its revision of the Corporate Net Zero Standard v2. VCMI also published the scope 3 Action Code of Practice to guide how to address the emission gap through high-quality carbon credits.

The strategic use of carbon credits is not limited to businesses. Governments are increasingly turning to credits to meet their ambitious climate commitments under the Paris Agreement, by leveraging international carbon markets to stimulate emissions reductions and attract private capital for projects in developing nations. Similarly, tech companies and other large corporations are making significant investments in innovative projects like Direct Air Capture (DAC) to both address their own large, global carbon footprints and help scale nascent, critical climate technologies.

A company's use of carbon credits should be an integral part of a comprehensive climate strategy that follows the "mitigation hierarchy," as outlined in frameworks such as the SBTi and the Oxford Principles. This means they first prioritise deep, value chain emissions reductions in line with a 1.5°C pathway.

Once the company has established its emissions reduction targets and identified the role of carbon credits within its long-term net-zero roadmap, it can develop a carbon credit strategy. A robust strategy involves several key elements:

• Strategic sourcing: prioritising credits that align with the company's broader climate goals and values, such as supporting projects within their supply chain or a community where they operate.
• Ensuring credit quality: selecting high-quality credits that are independently verified and certified by recognised standards
• Portfolio diversification: spreading investments across different project types (e.g., carbon removal vs. emissions avoidance) and geographies to manage risk and maximise impact.
• Transition to removals: gradually shifting the portfolio over time from emissions avoidance credits to high-quality carbon removal credits in line with evolving global net-zero standards.

By integrating strategic sourcing, rigorous quality standards, diversified investments, and a clear transition to carbon removals, companies can build a carbon credit strategy that drives meaningful climate impact. Such a strategy supports long-term net-zero goals, strengthens stakeholder trust, and positions the company as a responsible leader in the transition to a low-carbon economy.

A high-quality carbon credit represents a genuine, verifiable, and permanent climate benefit. The key criteria for a high-quality credit are:

• Real: Emission reductions must genuinely occur and be proven.
• Additional: The project's emission reductions would not have happened without the finance generated from carbon credits.
• Measurable: Impact is quantifiable using recognised monitoring practices and robust methodologies against a credible baseline.
• Verified: An independent, third-party auditor must verify that the emission reductions have taken place.
• Permanent: Emission reductions and removals must be permanent. For projects where there's a risk of the carbon being released back into the atmosphere (like with Nature-Based Solutions), measures must be in place to address this risk.
• Unique: Each carbon credit represents one tonne of CO2e reduction or removal and is uniquely tracked to prevent double-counting.
• No Harm: Projects must ensure that they do not cause any social or environmental harm to local communities or ecosystems.

These principles are continuously evolving, notably with the introduction of the Core Carbon Principles (CCPs) by the ICVCM and upcoming standards under the Paris Agreement Crediting Mechanism (PACM, Article 6.4).

A carbon credit is a standardised unit, equivalent to one metric tonne (tCO₂e) of greenhouse gas (GHG) emissions reduced, avoided or removed from the atmosphere. The measurement process for a project is highly technical and is conducted by third-party auditors. It involves verifying the “baseline scenario" (what would have happened without the project, as set by the project developer) and then quantifying the actual emissions reductions achieved by the project. This rigorous process, known as Monitoring, Reporting, and Verification (MRV), ensures that each credit represents a real and unique climate benefit.

A project is additional if its emissions reductions wouldn't have happened without the revenue from the carbon market. Third-party auditors verify this by assessing whether the project goes beyond “business as usual" through a series of rigorous tests. These include an investment analysis to ensure the project isn't financially viable without selling carbon credits, a legal & regulatory analysis to confirm it isn't legally required by existing laws and a common practice analysis to verify that the project's technology isn't already standard practice in the region.

In the world of carbon credits, permanence and reversals are closely related concepts. Permanence refers to the long-term durability of a project's emissions reductions or removals, ensuring the climate benefit is secure and long-lasting. This principle is particularly critical for nature-based solutions, such as forestry projects, where carbon is actively stored.

A reversal is any event that releases stored carbon back into the atmosphere, directly compromising a project's permanence. This can be caused by unintentional factors such as wildfires, diseases, or floods, as well as intentional human activities, including illegal logging. To address this risk, credible standards require project developers to set aside a portion of their issued credits into a collective "buffer pool," which acts as a central insurance mechanism to compensate for any future reversals.

For most projects that avoid emissions, like renewable energy, reversal is not possible, as the climate benefit is permanent and cannot be negated by future events. These avoided emissions are considered “permanent". Reversal events are only a risk for projects where carbon is stored in carbon pools such as forest biomass or soil, where the carbon could potentially be lost in the future due to destruction of the forest or changes in soil management practices that release the stored carbon back into the atmosphere.

Leakage occurs when a project's activities unintentionally cause an increase in emissions elsewhere. For example, a forest conservation project that protects a specific area might simply displace logging activities to an adjacent, unprotected forest. This unintended consequence undermines the project's overall climate benefit.

To address leakage, standards require project developers to include extensive monitoring and mitigation measures in their design. This involves a rigorous assessment of potential displacement risks and the implementation of strategies to prevent or account for them, ensuring the project's climate impact is genuinely holistic and not negated by shifting emissions elsewhere.

The main criticisms and limitations of carbon credits are centered on their quality and their use. Concerns have been raised over historical examples of projects that were not truly additional (meaning the emissions reductions would have happened anyway) or that overestimated their emissions reductions, leading to questions of integrity.

A significant criticism and key limitation is the risk of greenwashing, where a company uses credits to avoid making genuine, internal emissions reductions. This practice can undermine a company's credibility and the overall goal of global decarbonisation.

These criticisms are now being met with a market-wide "flight to quality," as buyers, investors, and standard-setters are now doubling down on integrity. This shift highlights the need for companies to adopt a holistic approach: first, they must prioritise internal emissions reductions within their own operations, and second, they must commit to only purchasing high-quality, third-party-verified credits from reputable providers. This mitigates risks and ensures their climate claims are both credible and defensible.

Moreover, emerging regulations across the EU, US, and Australia on environmental claims and industry initiatives, such as ICVCM, VCMI and SBTi, are progressively addressing the topic of carbon credits quality and their use, enhancing the overall integrity of the market.

The diverse landscape of climate projects in the carbon market is fundamentally categorised by two key factors: a project's mitigation outcome (reduction, avoidance or removal) and whether it is nature-based or technology-based.

Reductions involve decreasing the amount of emissions from a specific source.

Avoidance projects prevent GHG emissions from entering the atmosphere in the first place. Nature-based avoidance projects include REDD+ (Reducing Emissions from Deforestation and Forest Degradation), which protects existing forests from being cut down. Technology-based avoidance projects are widespread and include renewable energy (building wind or solar farms to replace fossil fuel power), community and household initiatives like distributing efficient cookstoves to prevent emissions from burning wood, and waste-to-energy projects that capture methane from landfills and use it as a clean fuel source.

Removals actively sequester existing carbon from the atmosphere and store it durably. These are crucial for addressing hard-to-abate sectors. Nature-based removals include ARR (Afforestation, Reforestation, and Revegetation), which involves planting trees that sequester carbon as they grow, and agricultural projects that increase soil carbon storage. On the technology side, removals include biochar production, which stores carbon in a stable form, or innovative solutions like Direct Air Capture (DAC), which filters carbon from the air.

Co-benefits are the additional positive social, environmental or economic outcomes generated by a carbon credit project beyond its primary goal of reducing emissions. These can include:

• Environmental: Protecting biodiversity, improving soil health or restoring water ecosystems.
• Social: Creating local jobs, improving public health or empowering local communities.
• Economic: Stimulating local economies and providing new sources of income for project participants. Co-benefits are important because they demonstrate the holistic, sustainable impact of a project

To properly vet a carbon credit project, a buyer should go beyond simple price comparison and look at the project developer and the project's fundamentals.

This handy checklist will help you understand what to ask before purchasing carbon credits. It's worth noting that not meeting one of these criteria does not necessarily disqualify a project. The final decision depends on your credit preferences, price sensitivity, risk tolerance and ability to manage risks. Quality and integrity aren't about avoiding risk; they're about managing it well.

• What is the project type? What are its common co-benefits, and how is its integrity assured?
• Which standard was applied? Has this standard or program been assessed by an organisation like the ICVCM against Core Carbon Principles (CCP label)?
• What role did the carbon asset developer play? Did they implement extra quality checks and assessments?
• Has an independent third-party rating agency reviewed this project? If so, what was the rating?

To talk about carbon credits and climate claims credibly, companies must move beyond general promises and align with global frameworks and standards. This is critical in an era of increasing legal and public scrutiny.

Companies should adhere to the mitigation hierarchy and follow the guidance of leading bodies. For example, the VCMI (Voluntary Carbon Markets Integrity Initiative) Claims Code of Practice provides a clear rulebook for how companies can use carbon credits alongside their decarbonisation journey. Companies should also consider aligning with the ICVCM's (Integrity Council for the Voluntary Carbon Market) Core Carbon Principles (CCPs), which set a new global benchmark for high-integrity carbon credits.

Beyond voluntary frameworks, companies must also be mindful of mandatory regulations. In the EU, the Empowering Consumers for the Green Transition Directive will set new standards for environmental claims. This directive is designed to protect consumers against misleading 'green' claims, including unfair claims about carbon offsetting. While in the US, the SEC's climate disclosure rules mandate greater transparency in climate-related reporting.

The best communication is therefore clear, factual, and backed by auditable data, demonstrating how external investments in carbon credits complement a science-based decarbonisation plan and do not simply serve to offset a company's footprint.

To avoid greenwashing, companies must be transparent and follow best practices that are increasingly being codified by global standards. It's a key principle of a high-integrity climate strategy.

First, companies must prioritise internal emissions reductions and make a public commitment to decarbonise their business in line with science-based targets, such as those validated by the Science Based Targets initiative (SBTi). Aligning with the SBTi's guidance and Standard can be an effective way to demonstrate that methodologies sitting behind targets are robust and reputable, which may assist with mitigating against greenwashing risks.

Second, a company's investment in credits must be in high-quality projects that are rigorously validated and verified. This means selecting credits that meet strict criteria like additionality, permanence, and robust monitoring.

Finally, companies must communicate transparently about their climate action. The VCMI's (Voluntary Carbon Markets Integrity Initiative) Claims Code of Practice offers a clear roadmap for this, advising companies to make a public commitment to their decarbonisation pathway and to clearly separate internal reductions from external investments. This ensures that their claims are factual, auditable, and do not mislead stakeholders into thinking their climate impact has been "solved" by simply purchasing credits.

There is a growing shift in corporate language from "climate neutrality" to "climate contribution" because of the public perception of greenwashing. The term "climate neutrality" can be misinterpreted as a company having zero impact, even when it is still emitting. The phrase "climate contribution" or “funding climate action" more accurately reflects the reality that companies are investing in climate projects that deliver tangible, external benefits to the planet. This new language is more honest, transparent, and reflects a growing maturity in corporate climate leadership.

South Pole is the world's leading carbon asset developer and climate consultancy.

Since 2006, South Pole has been a trusted partner and advisor to governments, public sector organisations, and leading businesses on their decarbonisation journeys. South Pole serves over 1,000 clients across the world, and its global team of experts has helped many Fortune 500 businesses implement comprehensive strategies that help build resilience and turn climate action into long-term business opportunities. In line with its mission to deliver true climate impact for all, South Pole has used the power of markets to help channel climate finance to over 850 projects in more than 50 countries across the globe.

Read more about us here

As a leading carbon project expert and climate consultancy, South Pole has helped channel finance to over 850 climate action projects in renewables, forestry, agriculture, industry, households and public institutions, spanning the globe.

In line with its mission to deliver true climate impact for all, South Pole has used the power of markets to help channel climate finance to over 850 projects in more than 50 countries across the globe. To date, these projects have helped reduce over 220 million metric tonnes of CO2 emissions, accelerated low-carbon transformations across several sectors, and provided measurable benefits to communities vulnerable to climate change. Find out more here.