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Carbon Credits

What Are Carbon Credits?

Carbon credits are tradable instruments that represent a reduction in greenhouse gas (GHG) emissions or the removal of carbon from the atmosphere. Each credit typically equals one metric tonne of carbon dioxide (CO₂) or its equivalent.

In simple terms, a carbon credit allows one entity to compensate for its emissions by supporting environmental projects that reduce or remove emissions elsewhere.

How Do Carbon Credits Work?

  1. A project (such as renewable energy or reforestation) reduces or removes emissions
  2. The reduction is verified and converted into carbon credits
  3. Credits are issued by an authorized certification body
  4. Businesses or individuals purchase these credits
  5. The buyer “retires” the credits to offset their emissions or meet climate goals

Who Issues and Certifies Them?

Carbon credits are certified by:

  • Government-backed mechanisms
  • Independent carbon crediting programs (global standards and registries)

These bodies ensure that the emission reductions are real, measurable, and verified.

How Can Businesses Use Carbon Credits?

  • Offset unavoidable emissions
  • Strengthen ESG and sustainability reporting
  • Enhance credibility with investors and stakeholders
  • Participate in voluntary or compliance carbon markets

Carbon Credits vs Carbon Offsets – What’s the Difference?

Carbon credits and carbon offsets are often used interchangeably, but they operate through distinct mechanisms and serve different purposes within carbon markets.

Carbon Offsets (Voluntary Markets)

Carbon offsets represent emission reductions or removals generated by one entity and purchased by another to compensate for its own emissions. These typically arise from projects such as renewable energy, reforestation, or methane capture.

Offsets operate in a horizontal market where carbon value flows between companies. For example, if one company reduces or removes emissions as part of its operations, it can generate offsets that are then purchased by another company seeking to reduce its carbon footprint.

Offsets are commonly referred to as “offset credits”, which contributes to the overlap in terminology.

Carbon Credits / Allowances (Compliance Markets)

Carbon credits often referred to as carbon allowances function differently. They are issued under regulatory frameworks and effectively act as permits to emit.

When a company purchases a carbon credit (typically from a government or regulator), it gains the right to emit a specified quantity of greenhouse gases, usually one tonne of CO₂. These systems are part of compliance markets such as Emissions Trading Systems (ETS).

Here, carbon value flows vertically from companies to regulators. However, companies with surplus allowances can trade them with others, creating a secondary market.

India and its frameworks

India is steadily progressing toward a more structured and regulated carbon pricing ecosystem, aligned with its broader climate and sustainability objectives. As global focus on carbon markets and emissions trading intensifies, India is actively shaping a rate-based Emissions Trading System (ETS) alongside complementary voluntary carbon credit mechanisms. This evolving framework reflects the country’s increasing engagement in climate finance, a trend also highlighted in the State and Trends of Carbon Pricing 2025 by the World Bank, which acknowledges India’s growing influence among emerging economies in the development of global carbon pricing systems.