Carbon credits explained: What are they and how do they work?

Crista Buznea

Crista Buznea

In this guide we’ll cover:

  • What are carbon credits?
  • How do carbon credits work?
  • How are carbon credits created?
  • How are carbon credits bought and sold?
  • How much are carbon credits worth?
  • Why should a business consider buying carbon credits?
  • Are carbon credits a good investment for businesses?
  • Are carbon credits tax deductible?
  • How Ecologi can support your business’ carbon reduction strategies

The climate challenge requires a range of innovative solutions. As businesses work to decarbonise their value chains they must also invest in emission avoidance or removal projects beyond their own operations, the SBTi refers to this as “beyond value chain mitigation“.

Reducing operational emissions is key, but it can take time. So while on the journey to net-zero it’s also important for businesses to make a more immediate impact by funding high quality climate action today. Purchasing carbon credits helps businesses do just that.

Purchasing carbon removal credits is particularly beneficial towards the end of the net-zero journey, because once a business has reduced its emissions by at least 90%, it can use these carbon credits to balance its remaining, unavoidable emissions and reach net-zero.

Net-zero

What are carbon credits?

Carbon credits provide funding (‘carbon finance’) to projects in exchange for activities which avoid or remove emissions from our atmosphere, while also achieving other benefits such as community development, protecting vulnerable ecosystems or installing energy-efficient technology. When your business purchases carbon credits it directly funds these projects, and after purchase that credit is permanently retired so it can’t be reused.

They are referred to as either ‘Carbon Avoidance’ and ‘Carbon Removal’ credits. Each carbon credit represents one metric tonne of greenhouse gas emissions that’s been avoided e.g. through switching to renewable energy, or removed from the atmosphere, e.g. by locking carbon safely away through the production of Biochar.

How are carbon credits created?

The process begins with project developers designing projects with the aim of avoiding or removing carbon dioxide/ carbon dioxide equivalent emissions.

When the developer establishes their project – such as a solar power plant – they can opt to go through a stringent assessment methodology developed by a carbon standards organisation (like the Gold Standard and the Verified Carbon Standard), to assess the real-world reductions of emissions which will be caused as a result of the project activity.

This impact is measured in tonnes of carbon dioxide (tCO2) or tonnes of carbon dioxide equivalent (tCO2e). Carbon dioxide equivalent refers to a unit of measurement that is used to standardise the climate effects of various greenhouse gases based on their global warming potential over a specific timeframe. The tonnes of carbon dioxide equivalent that has been reduced (or removed) by the project activity, is represented by a ‘carbon credit’ which is issued to the project developer. The carbon credit is often considered as a permit or licence to emit that one tonne of carbon dioxide (or carbon dioxide equivalent).

How do carbon credits work?

Carbon credits are generated through various emission reduction or removal projects, including afforestation, biochar, blue carbon removal and renewable energy production

These projects are rigorously assessed and verified to ensure that they result in real and measurable emissions reductions. Once validated, the projects are issued carbon credits proportional to the amount of CO2 equivalent emissions they prevent or remove from the atmosphere.

Carbon credits are issued to projects by carbon standards, which are organisations that set criteria for how projects can earn credits. There are several carbon standards, and each one has its own set of criteria. 

Verified Carbon Standard - Gold Standard - puro.earth

At Ecologi, we work with three carbon standards: 

Verified Carbon Standard includes the Climate, Community and Biodiversity Standard (CCBS) and the Sustainable Development Verified Impact Standard (SDVista) certifications.

Gold Standard assesses projects based on their contributions to the UN Sustainable Development Goals (SDGs), as well as emissions avoidance or removal.

Puro Standard is a dedicated standard for carbon removal credits (which actively absorb existing emissions out of the atmosphere through natural or technological processes).

How are carbon credits bought and sold?

Carbon credits are bought and sold on the Voluntary Carbon Market (VCM) through various platforms and exchanges, similar to how stocks are traded. Businesses can purchase carbon credits either directly from project developers, through brokers, or on carbon credit trading platforms.

Trading carbon credits can happen in both voluntary and compliance markets. In the voluntary market, businesses purchase credits voluntarily to balance their emissions, demonstrate environmental responsibility and meet their sustainability goals. 

The compliance market on the other hand operates within regulated emissions trading schemes, where businesses must acquire a sufficient number of credits to comply with regulatory requirements.

How much are carbon credits worth?

The carbon credits price fluctuates based on factors such as market demand and regulatory frameworks. The forces of demand and supply apply, just as they do with other commodities traded in financial markets. The credibility of the emission reduction project, its co-benefits beyond emissions avoidance or removal reduction, the scale and location of the project, and the technologies used, will also all influence credit pricing.

The carbon credit price can range from around ÂŁ3 to ÂŁ50 per tonne (or even higher for innovative removals technology) of carbon dioxide equivalent (CO2e) on the voluntary carbon market.

Verified Afforestation, Reforestation and Revegetation ARR projects

Why should a business consider buying carbon credits?

Investing in carbon credits offers numerous benefits for your business:

Environmental responsibility: By purchasing carbon credits, your business can demonstrate its commitment to mitigating climate change, supporting climate impact and assisting the transition to a more sustainable and resilient future.

Brand reputation: The purchase of carbon credits on the journey to net-zero can enhance a company’s reputation and drive competitive advantage by appealing to environmentally-conscious consumers.

Investor appeal: Contributing to carbon avoidance and removal projects through the purchase of carbon credits can appeal to environmentally-responsible investors, attracting investment capital to the business.

Risk management: Investing in carbon credits can hedge against future regulatory changes or carbon pricing mechanisms, reducing the financial risks associated with carbon emissions.

Employee engagement: Supporting climate impact by buying carbon credits can engage employees and foster a sense of pride and purpose among staff members.

Are carbon credits a good investment for businesses?

Financially supporting carbon avoidance and removal projects through the purchase of high-quality carbon credits is crucial for our transition to net-zero, as it decreases the amount of greenhouse gases entering our atmosphere. 

Ultimately, the decision to invest in carbon credits will be led by a businesses sustainability goals, regulatory environment and financial considerations. 

Carbon credits can offer great environmental benefits and enhance corporate reputation, but not all carbon credits are created equal. Like all markets, there will be some carbon credits that are low quality, but there are also many high-quality carbon credits that finance real, verifiable emissions avoidance and removals. Businesses should carefully assess the credibility and impact of the projects associated with the credits before making investment decisions.

At Ecologi, we only work with carefully selected partners, and all of our projects are verified and high quality. 

Are carbon credits tax deductible?

In the UK the purchase of carbon credits can be tax deductible under certain circumstances. However, tax regulations can vary, and the deductibility of carbon credits depends on factors such as the purpose of the investment, the nature of the business, and compliance with the relevant tax laws and regulations. 

Businesses should consult with tax professionals or legal advisors to determine the tax implications of carbon credit investments specific to their situation.

How Ecologi can help you fund high-quality carbon credits

At Ecologi, we understand that carbon markets can be complicated and hard to navigate. Our expert team can consult with your businesses and help you take the right steps to choose the highest quality projects when you purchase carbon credits. 

We select the projects we support according to our climate impact regionalisation strategy, which focuses on directing funding towards locations and projects with the greatest potential impact. We will only ever support high-quality projects that meet our strict criteria and are verified by the Gold Standard, Verified Carbon Standard or Puro Standard.

The projects we support, which you can fund through our Impact Shop or through our automations and integrations, are also independently scrutinised by organisations like our friends at Sylvera.

We’re committed to trust and transparency, which is why we never re-trade carbon credits (we only retire them ourselves) and publish all carbon credit retirements on our Public Impact Ledger.

Read our guide to funding high-quality carbon credits

📁 Download the guide here

How Ecologi can support your carbon reduction strategies

We’re your trusted partner in taking climate action, offering a range of products and services to businesses of all sizes. From calculating your company’s carbon footprint, to tree planting and reforestation, to funding certified carbon avoidance and reduction projects via our Impact Shop, we’re here to support your entire climate journey. 

If you’re looking for a custom climate impact solution, or for those who are not sure where to start, our team of experts can create a tailored solution to suit your needs. 

Speak to our team about funding high impact, high integrity climate solutions

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