Carbon credits: how they work and why they are important for businesses

With the Kyoto Protocol, a system to regulate greenhouse gas emissions based on the trading of emission quotas was established: the carbon market. This tool was later confirmed with the Paris Agreement, aligned with the goal signed by European member states to achieve climate neutrality by 2050. The carbon market stimulates emission reductions and sustainable technological development to combat the climate crisis.

What are carbon credits and how do they work?

In the carbon market, the currency of exchange is carbon credits, certificates equivalent to one ton of CO2 not emitted or absorbed.

A carbon credit is generated by implementing a project that reduces or removes CO2 emissions. Examples of these projects include:

• Replacing outdated, inefficient technologies with more modern and energy-efficient ones.
• Generating renewable energy (e.g., through photovoltaic plants).
• Reforestation activities.

It is essential that the credits are certified by an independent verification standard and that a third-party entity (auditor) validate that the reductions have been correctly measured and accounted for.

The generated credits are then entered into a carbon credit registry, a digital system that tracks all transactions, from creation to final compensation. The registry contains information such as the amount of CO2 reduced or removed, the project’s location, the certifying body, and the validity period.

Once certified, the credit can be traded and purchased. This typically occurs when a company, unable to reduce its emissions further, decides to offset the remaining impact by purchasing carbon credits.

When a credit is used to offset emissions, it is “cancelled” or “retired” from the registry. This ensures that the same credit cannot be sold or used more than once and officially records the compensation of emissions.

The carbon credit market: mandatory, national and voluntary

In the carbon market, each party is authorized to release a pre-assigned amount of greenhouse gases (emission quotas, measured with carbon credits), which can be sold or traded with other countries that have exceeded their limits.

For example, a country with an emissions cap can earn emission reduction units in the carbon market through an emissions removal project in another area.

The carbon credit market is not singular and is regulated within three main sectors:

• Institutional (Compliance): This is the only regulated mandatory market for companies with emission reduction obligations. In Europe, the institutional market is known as the EU ETS, the European Emission Trading System, which applies to industries and aviation.
• National: These include markets regulated at the national level. Not all member states have one. Companies that do not fall under the ETS but wish to enter the carbon market must join the national market if one exists.
• Voluntary: Several voluntary instruments coexist, which companies can join when they are not legally required, as they do not fall under the EU ETS or are not part of a member state with a recognized national market. Voluntary instruments are international protocols. Some of the most well-known include VSC-Verra, Gold Standard, and Plan Vivo, which work with carbon credits, while FSC-ES works with positive impact environmental claims.

Carbon credits and environmental claims

Two tools can be identified to certify the removal of CO2 by forests: environmental claims and carbon credits. In both cases, a party, such as a company, always sponsors forest projects generating certificated removals. Environmental claims are not transferable but are allocated through direct sponsorship, unlike credits, which are tradable within the market, as they are purchased by investors and resold.

Both environmental claims and carbon credits require a certifying body. In the case of claims, however, the body—such as FSC—verifies not only the CO2 removed by trees but also all five ecosystem services, including water cycle regulation, biodiversity conservation, soil preservation, and recreational services, thus focusing on the overall health of the forest.

Our Contribution

At Etifor, we support companies in removing CO2 through reforestation, conservation, and new forest planting projects. Thanks to our expertise and international certifications, we ensure that every project generates positive and measurable environmental impacts, contributing to emission reductions and the protection of biodiversity and ecosystems.