What are carbon credits and how do they work?

By Isaac OGANGA

Carbon credits are a transparent, measurable and results-based way for companies to support activities, such as protecting and restoring irrecoverable natural carbon sinks, like forests or marine ecosystems and scaling nascent carbon removal technology, that keep global climate goals within reach.

Companies get a set number of credits, which decline over time, and they can sell any excess to another company. Carbon credits create a monetary incentive for companies to reduce their carbon emissions. Those that cannot easily reduce emissions can still operate, at a higher financial cost.

If a company emits more carbon than its allowance, it can buy two different types of carbon credits — permits to pollute or reduction credits. Permits to pollute are hefty fees per excess metric ton those over-emitters can purchase from their government or other companies.

One carbon credit has a monetary value on the compliance and voluntary carbon markets of $40 to $80, on average.

Carbon credits are generated from projects around the world that pull Greenhouse Gases (GHGs) out of the atmosphere or keep emissions from being released. Each time a project verifies they have reduced, avoided, or destroyed one metric tonne of GHG, one carbon credit is created.

Carbon credits are most often created through agricultural or forestry practices, although a credit can be made by nearly any project that reduces, avoids, destroys or captures emissions.