Carbon Credits: What They Are, How They Work and Why They Matter
Carbon credits sound complicated, but the idea is simple: one tonne of CO₂ cut or removed, measured, verified and made tradable. Here's a plain-English guide to how the whole system works, from creation to retirement.
One unit = One tonne of CO₂e
All units require measurement and verification
The units expire once they have been utilized, so they cannot be utilized again
Quality is inconsistent, so diligence is important
Consider two factories; one reduces its emission way beyond the expectations while the other is having difficulty reducing it. How about compensating the first factory for its reduction while making the second factory compensate the first one for the extra effort?
This is precisely what the carbon credit idea is about. It takes a climate advantage and makes it quantitative, tradeable and accountable.
The idea now influences government regulations, net-zero strategy of companies and even careers. In this guide, we will take you through what carbon credits are, their process from creation to trading, sources, buyers and quality assessment. If you're keen to go deeper, eAsia Academy's Carbon Credits, Carbon Markets & Net-Zero Pathways certificate covers the full picture. You can also browse all our programs on the eAsia Academy home page.
01What Are Carbon Credits?
Carbon credits are tradeable certificates that demonstrate the reduction, avoidance, or removal of one tonne of carbon dioxide equivalent (tCO₂e).
There are two points to note here:
- "Equivalent" (CO₂e): Methane and other greenhouse gases have a much higher global warming potential than CO₂. All such activities need to be translated into CO₂ units for uniform measurement.
- "Tradeable": Once issued, every credit gets a unique serial number that gets registered somewhere. This makes it possible to sell, buy, and eventually retire – make it unavailable for trading.
This is perhaps the best way to understand a carbon credit: it's like a receipt of having done something good for climate change. It shows that a particular tonne of carbon was reduced/avoided/removed through a particular project and verified independently before being used up only once.
Carbon offsets are another term you'll often hear in this context. They are directly related to carbon credits: a credit is a certificate; an offset happens when this credit is retired.
02Process of Carbon Credits
Each carbon credit is generated through the same process in a total of five steps.
The Life Cycle of a Carbon Credit
1. Act
A project cuts or removes emissions.
2. Measure
Impact is calculated against a baseline.
3. Verify
An independent body checks the claim.
4. Issue
A registry issues serialised credits.
5. Retire
A buyer uses it and it is taken out of play.
- Step 1: Project reduces emissions or removes emissions – This may involve setting up a wind energy farm to replace fossil fuel power, methane capture from waste projects, or the protection and restoration of a forest.
- Step 2: Effectiveness is calculated – The effect of the project on the emissions is quantified by comparing it to a baseline that is the scenario if the project was not implemented. This difference is the climate effect and is calculated using an established method.
- Step 3: Third party verifies the effect – A third-party auditor verifies the data and the methodology. Without this verification, the credit is just a promise.
- Step 4: Registry registers the credits – The registry then issues the carbon credits with each having its own unique serial number for a single tonne of emission. This prevents double selling of one tonne.
- Stage 5: A buyer purchases and retires the credit – The buyer uses the credit to meet a legal obligation or a voluntary target. Then it is retired, meaning permanently removed from the market. This final step is what stops double counting.
Measurement, reporting and verification (MRV) runs through the whole chain, which is why it is a core focus of the carbon credits program.
03Types of Carbon Credits
Credits fall into two broad groups, depending on what the project actually does to the atmosphere:
| Aspect | Reduction / Avoidance Credits | Removal Credits |
|---|---|---|
| What it does | Prevents emissions which would otherwise be emitted | Pulls CO₂ out of the atmosphere |
| Typical examples | Renewable energy, methane capture, improved cookstoves, deforestation prevention | Tree planting, soil carbon, biochar, direct air capture |
| Permanence | Usually not the primary focus | Critical: how long is the carbon stored? |
| Cost pattern | Typically less | Generally higher, especially engineered removals |
| Best suited to | Emissions balancing in the short term | Neutralising hard-to-abate residual emissions |
Differences exist based on the manner in which credits are employed. Compliance credits are generated from obligatory programs like India’s CCTS or the EU ETS. Voluntary credits are purchased based on preference according to standards like Verra or Gold Standard.
04Where Carbon Credits Originate
Carbon credits are created through many different projects. The four most popular projects include:
Renewable Energy
Renewable energy projects involving solar, wind, and hydropower to offset fossil fuel-based energy production.
Forests & Land
Protecting, reforesting, or improved management of forests and soil.
Methane Capture
Methane collection from landfills, agriculture and other industries.
Clean Cookstoves
Improved cookstoves that reduce the burning of wood and reduce household emissions.
"Only as reliable as the project from which it originates, carbon credits are only worth half their value without knowing where they came from."
Projects differ in terms of cost, secondary benefits, and risks. A forest-based project might provide secondary benefits to biodiversity and community members, but has the risk of fire and logging. An industry-based methane project might produce very verifiable results and few side effects. Evaluating these trade-offs is a skill you build in the Carbon Credits, Carbon Markets & Net-Zero Pathways certificate.
Master Carbon Credits — With IIT Roorkee Rigor
The Advanced Certificate Program in Carbon Credits, Carbon Markets & Net-Zero Pathways covers how credits are created, verified, priced and traded, how India's carbon market works and how organisations plan for net-zero. eAsia committed for green future.
05Who Buys Carbon Credits and Why
Demand comes from several kinds of buyers, each with a different motive:
- Regulated industries: companies with legal emissions targets that need credits or certificates to stay compliant.
- Corporates with net-zero pledges: organisations balancing residual emissions they can't yet eliminate.
- Airlines: carriers subject to offsetting requirements for growth in international emissions under CORSIA.
- Investors and traders: participants who buy, hold and sell credits as market instruments.
- Individuals and small businesses: buyers who voluntarily offset travel or events.
Credible climate strategies follow one rule: reduce first, offset what remains. Credits work best as a complement to cutting your own emissions, not a substitute for it.
06Advantages and Disadvantages
Carbon credits come with both excitement and doubt. A balanced perspective is essential.
The argument for carbon credits
- They assign a value to carbon and make reducing carbon emissions financially beneficial.
- They channel funds into climate initiatives, sometimes even in places where it would have been difficult to finance them.
- They are flexible and enable emissions reductions wherever it is most economical to do so.
- They have co-benefits, including clean air, employment and biodiversity.
The issues are:
- Is the reduction going to happen anyway? This relates to additionality.
- Over-crediting – is the baseline too lenient?
- Permanence and leakage: Can the stored carbon leak out, or emissions move to somewhere else?
- Double counting: Will the same reduction get counted more than once?
- Greenwashing: Are the credits being used to make it look as though you're making efforts to fight climate change when you aren't really reducing your emissions?
Integrity Council for the Voluntary Carbon Market and its Core Carbon Principles, for example, try to increase standards. The advice for the buyers is obvious: buy verified and transparent credits and don't exaggerate the impact of those credits.
07Carbon Credits in India: The CCTS
India has developed its own carbon trading market, which revolves around the Carbon Credit Trading Scheme (CCTS). It was made possible through the Energy Conservation (Amendment) Act, 2022 and notified in 2023.
- How does it work: Covered entities are provided with targets of greenhouse gas intensity, that is emissions per unit of production. Those that achieve the target generate tradable Carbon Credit Certificates (CCCs); while those failing to do so need to buy them.
- What kind of entities are included: Around 490 covered entities are from seven energy-intensive sectors (aluminium, cement, chlor-alkali, pulp and paper, petroleum refining, petrochemicals and textiles).
- Which authority is responsible for its implementation: CCTS is administrated by the Bureau of Energy Efficiency and its targets are notified by the Ministry of Environment, Forest and Climate Change.
- Offset facility: Projects in other non-mandatory sectors may apply to offset facility and generate carbon credits.
The scheme is still evolving, so check the latest Bureau of Energy Efficiency notifications for trading rules, timelines and pricing before making decisions. Understanding these mechanics is a major part of eAsia Academy's carbon markets certification.
08Career Options in Carbon Credits
With the rise of carbon pricing comes an array of career options:
- Carbon Accounting Analyst: developing an emissions inventory and measuring performance against targets.
- MRV/Verification Officer: collecting and verifying the data on which credits rely.
- Carbon Project Developer: developing, registering, and implementing emission reduction/removal projects.
- Carbon Credit Trader / Carbon Credit Portfolio Manager: buying, selling, and managing a portfolio of credits.
- Sustainability/ESG Officer: tying up carbon strategies with corporate reports.
- Climate Finance Expert: financing decarbonization and carbon projects.
Whichever direction you choose, knowing how credits are created, verified and traded gives you an edge in every one of these roles. Start with the carbon credits program, or browse more options at eAsia Academy.
09Carbon Credits via eAsia Academy
Problems companies encounter in regards to carbon include issues like inconsistent information, ambiguity in terms of goals, and uncertainty when it comes to choosing credits. But the issue is not a lack of intent but a lack of capability. The Advanced Certificate Program in Carbon Credits, Carbon Markets & Net-Zero Pathways builds that capability. Delivered with an IIT Roorkee academic partnership, it covers how carbon markets work, how credits are created and evaluated, how India's market is taking shape and how organisations plan for net-zero.
At eAsia Academy, we believe a sustainable future is built by professionals who understand both the science and the market. eAsia committed for green future means investing in careers that last as much as in a greener economy. Ready to get started? Explore the carbon credits program today or visit eAsia Academy to learn more.
FAQs
A carbon credit is an official certificate representing a single tonne of carbon dioxide equivalent (tCO₂e) that has been reduced, avoided or removed. It is tradable and can eventually be retired by an individual who claims this carbon benefit.
The project avoids or removes more emissions than would occur otherwise according to a specific baseline. This impact is measured, independently verified and registered, and credits are issued. Individuals buy those credits and then retire them, ensuring that the same tonne will not be retired twice.
A carbon credit is the actual certificate. A carbon offset is the practice of retiring a carbon credit in order to neutralize one's own emissions. These two concepts are frequently used interchangeably. A carbon credit is the tool and the carbon offset is its application.
Price varies significantly depending on the type of the project, location, standard, vintage and quality of the credits. Removal credits tend to be more expensive than avoidance credits, while compliance market prices are established by rules and scarcity.
Carbon credits from a well-reputed standard can genuinely bring climate benefits to the environment; however, not all are up to the mark. Poor baseline, over-crediting, and non-permanence have eroded trust in carbon projects, hence the need for due diligence and integrity.
India’s carbon credit trading scheme is the CCTS, and it was formed by India through the Energy Conservation (Amendment) Act, 2022. Industry players who have intensity reduction targets will generate Carbon Credit Certificates when they achieve their targets, and those who fail will buy these certificates.
Learn carbon accounting, MRV, trading protocols, and how to evaluate carbon projects. The Advanced Certificate Program in Carbon Credits, Carbon Markets & Net-Zero Pathways provided by eAsia Academy in collaboration with IIT Roorkee is for working professionals new to the industry.