Carbon Credits

A carbon credit represents one tonne of carbon dioxide equivalent (CO₂e) that has been reduced or removed from the atmosphere. Credits are independently verified and tradable, meaning they can be bought and sold between organisations as part of climate commitments or compliance obligations.

Carbon credits are issued across two distinct market types. Compliance markets are mandatory and regulated by national or international frameworks, such as the EU Emissions Trading System (EU ETS) or the UK ETS, where companies with legal emissions limits must hold sufficient credits to cover their output. The voluntary carbon market operates separately, allowing organisations to purchase credits to support their climate commitments beyond what regulation requires.

There are also different types of carbon credits: 

• Avoidance credits represent emissions that have been prevented from occurring, for example by protecting a forest that would otherwise have been cleared or by installing renewable energy in place of fossil fuel generation. 
• Removal credits represent CO₂ that has been actively extracted from the atmosphere, through approaches such as reforestation, soil carbon sequestration, or direct air capture technology.

The distinction between carbon removals and carbon avoidance matters for net zero claims. Removal credits are generally preferred over avoidance credits because they actively take carbon out of the atmosphere rather than simply preventing new emissions from entering it.

Whether a credit is removal or avoidance, two qualities determine how much weight it can carry in a net zero strategy: permanence, meaning the carbon stays stored and is not re-released, and additionality, meaning the project would not have happened without the credit funding it.

In a credible net zero strategy, carbon credits address residual emissions: the portion of a company's footprint that cannot yet be eliminated through operational changes or supply chain improvements. They sit alongside reduction efforts, not in place of them. Using credits as a substitute for reduction, rather than a complement to it, is increasingly challenged by regulators, investors, and standard-setters.

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