Carbon Credits: What They Are and How They Work

As COP29 made clear, climate change is threatening ecosystems, economies, and communities across the world. As greenhouse gas (GHG) emissions from human activities speed up global warming, action is needed to slow these emissions and lessen their impact.

Carbon credits have emerged as a somewhat useful tool, allowing businesses and individuals to offset emissions that are difficult to eliminate entirely. By investing in projects that reduce or remove GHGs from the atmosphere, carbon credits can be a useful tool when used correctly.

Carbon credits are particularly relevant as the UK works towards meeting its net zero targets as they’re an impactful tool which can help drive progress.

What Are Carbon Credits?

A carbon credit is a certificate that represents the reduction or removal of one metric tonne of carbon dioxide (CO2) or an equivalent amount of other greenhouse gases. These credits are generated by projects that actively contribute to lowering atmospheric GHG levels. These projects include renewable energy installations, forest conservation, and waste handling, all of which either prevent emissions or absorb CO2 already in the atmosphere.

The generation of carbon credits follows two primary approaches:

Emission Reduction Projects: These initiatives, like wind or solar farms, replace fossil fuels and lower emissions.
Carbon Removal Projects: Examples include reforestation efforts or technologies that capture CO2 directly from the air.

In the UK, carbon credits operate within two distinct markets:

Compliance Market: This market is governed by regulations like the UK Emissions Trading Scheme (UK ETS). Industries with capped emissions, such as aviation, can purchase credits if they exceed their limits.

Voluntary Market: In this space, businesses and individuals purchase carbon credits to offset their carbon footprint. This is often part of corporate social responsibility initiatives or personal goals. It helps people and businesses contribute to climate solutions even without regulatory obligations.

How Do Carbon Credits Work?

The process of carbon credits involves a structured system that ensures effectiveness. Here’s how it works step by step:

Generation
Carbon credits originate from projects that reduce or remove greenhouse gas emissions. These projects vary widely, from renewable energy installations to reforestation and methane capture initiatives. Each project undergoes rigorous assessment to determine its potential for GHG reduction or sequestration.
Verification and Issuance
Independent auditors validate the results of these projects to ensure they achieve measurable and additional reductions in emissions. Once verified, the reductions are converted into carbon credits, which are issued to the project developers. Globally recognised standards, such as Verra’s Verified Carbon Standard (VCS), are used to maintain credibility and accountability.
Trading
Carbon credits are bought and sold in various marketplaces. Businesses or entities with surplus credits (due to lower-than-expected emissions) can sell them to others needing to offset their emissions. This creates a dynamic market that incentivises reductions while allowing flexibility for participants.
Retirement
To claim an offset, a carbon credit must be retired, meaning it is permanently removed from circulation and can no longer be traded or used. Retirement is recorded in public registries, making sure there’s transparency and prevents double counting.

Types of Carbon Offset Projects

Carbon offset projects come in various forms, each with distinct methods for reducing or removing greenhouse gas emissions. Some of the most common project types include:

Renewable Energy
Projects that replace fossil fuel energy sources with renewable options such as wind, solar, or hydroelectric power. These projects significantly reduce emissions by cutting dependence on coal, gas, and oil.
Forestry and Land Use
Reforestation, afforestation, and conservation projects aim to absorb CO2 from the atmosphere. These projects are highly effective for offsetting emissions.
Methane Capture
Methane, a potent greenhouse gas, is captured from landfills, agricultural operations, or industrial processes. It’s either destroyed or repurposed as energy. By targeting methane, these projects prevent emissions that would otherwise contribute to global warming.
Peatland Restoration
In the UK, peatlands are focused on due to their ability to store large amounts of carbon. Restoring degraded peatlands not only sequesters CO2 but also enhances biodiversity and supports water regulation. The Peatland Code is a UK-specific standard.

If you’d like to see an example carbon offsetting portfolio from 5D Net Zero, visit our carbon offsetting page for more information.

Are Carbon Credits Important?

Carbon credits can serve as a useful tool in the global effort to combat climate change, addressing emissions that are specifically difficult to eliminate entirely. At 5D Net Zero, we like to discuss with our clients genuine ways to reduce emissions, and use our carbon offsetting portfolio as a last resort to those final emissions that couldn’t be reduced enough. Here are some positives to purchasing carbon credits:

Achieving Net Zero Goals
For both businesses and individuals, achieving net zero emissions requires reducing their carbon footprint as much as possible and offsetting the rest if there’s any left.
Encouraging Emission Reductions
The carbon credit market incentivises innovation and efficiency by placing a cost on emissions. Organisations that exceed their reduction targets can generate income by selling surplus credits, creating financial motivation to go beyond compliance.
Supporting Environmental Projects
Revenue from carbon credit purchasing funds projects that deliver environmental benefits, such as restoring ecosystems, protecting biodiversity, and improving air and water quality. These projects often have additional social impacts in the areas they take place, like creating jobs and supporting local communities.

Criticisms and Challenges of Carbon Credits

It’s not just positivity which surrounds carbon credits and offsetting. While carbon credits are a promising tool for addressing climate change, they are subject to criticism. It’s important to understand these concerns before you buy carbon offset credits:

Risk of Misuse
It’s possible that carbon credits could be relied on as an excuse to avoid making necessary changes to operations, treating them as a “license to pollute” rather than a last resort after reducing emissions.
Double Counting
Without a proper structure, the same carbon credit could be claimed by multiple people or businesses, undermining the system’s integrity.
Equity Concerns
Some may argue that wealthier nations and corporations might overuse carbon credits to offset emissions, leaving the burden of climate change more on vulnerable communities.

Choosing High-Quality Carbon Credits

Because of these concerns, it’s important to pick high quality carbon credits when you’re looking to offset. To ensure that the credits you buy deliver real benefits, you should make a careful selection, like so:

Certification Under Robust Standards
- Verified Carbon Standard (VCS): Focuses on ensuring the GHG reductions are additional, permanent, and verifiable.
- Woodland Carbon Code: A UK-specific standard that emphasises forestry projects with carbon sequestration benefits.
- Peatland Carbon Code: Supports projects restoring peatlands, crucial for carbon storage and biodiversity.
Transparency and Accountability
High-quality credits are issued and tracked via well known registries that make sure of transparency. Buyers can verify that their credits have been retired and are not being reused by other parties, which is one of the risks listed above.
Additionality
Credits must represent actions that would not have occurred without the funding from credit sales. This makes sure that offset projects provide real benefits to GHG reduction efforts.

By prioritising high-quality credits, businesses and individuals can ensure that their investments contribute to combating climate change while keeping ethical and environmental standards in mind.

At 5D Net Zero, our carbon projects are compliant with United Nations Sustainable Development Goals and the Verified Carbon Standard. Visit our offsetting page for more information.

Carbon Credits: Conclusion

Carbon credits can be a genuinely powerful tool for offsetting those final residual emissions you or your business may be producing. Verified projects offer a pathway to reduce global GHG levels while promoting co-benefits such as biodiversity conservation and economic development.

Having said this, it remains important to note that the effectiveness of carbon credits depends on their responsible use. It’s important for businesses and individuals to prioritise reducing their direct emissions before potentially turning to offsets. It’s also important to make sure that the credits purchased adhere to standards of the highest quality.

Carbon Credits FAQs:

What are carbon credits, and how do they help fight climate change?
A carbon credit is a certificate representing the reduction or removal of one metric tonne of CO2 or equivalent greenhouse gases (GHGs). They help fight climate change by funding projects like renewable energy, reforestation, and methane capture, making sure individuals and businesses can offset emissions they can’t eliminate directly.
How do carbon credits work in the UK?
In the UK, carbon credits operate within two markets:

Compliance Market: Regulated under the UK Emissions Trading Scheme, where businesses must meet specific emissions caps or purchase credits.
Voluntary Market: Individuals and organisations purchase credits to offset emissions voluntarily, often as part of sustainability goals.

What types of projects generate carbon credits?
Common projects include renewable energy installations, reforestation, peatland restoration, and methane capture. These projects either reduce emissions or remove CO2 from the atmosphere.
How can I ensure the carbon credits I purchase are high quality?
Look for credits certified by robust standards, such as:

Verified Carbon Standard (VCS) for global projects.
Woodland Carbon Code for UK forestry projects.
Peatland Carbon Code for peatland restoration.
Ensure the credits are tracked via reputable registries to guarantee transparency and avoid double counting.

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To start the process, just use our calendar to book a discovery call.