How Carbon Credits Work

Carbon Credits are issued to projects that scientifically prove that a certain amount of carbon dioxide, or equivalent emissions, are removed or avoided due to the nature of the project.

Once the credits are issued, they are assessed and certified by Verra or Gold Standard, where they are then listed on the their respective registries. Companies and organisations can approach sellers with specific requirements of the type of project they would like to buy. The price is agreed on buy the two parties, which differs from standard commodities, where they are traded on a supply and demand basis on the open market.

Several factors can influence the prices of carbon offsets, such as:

  • Location

  • Verification level (Gold Standard or Verra)

  • Extra environmental, economic and social benefits

  • Development costs

  • Avoidance or removal - removal projects tend to be more expensive

  • Project age (vintage)

  • Current market trends

So, how do they make money?

The developer of the initial project will usually benefit from at least one other source of revenue, in addition to the carbon credits generated. For example, Developer A develops a wind farm project in Kenya. The developer’s main revenue stream will come from selling the project to a local electricity grid operator, as the project provides electricity to the grid. However, as the project proposes a clean energy source in comparison to, say, a coal power plant, the developer can apply for carbon credits. This is because a coal plant is very carbon intensive, while a wind farm produces renewable energy. As the carbon that would be emitted from a coal plant is avoided by developing a wind farm instead, they could be eligible for carbon credits.

These credits can then be sold to organisations who wish to offset their emissions, via brokers or directly. They can be traded and sold within countries or internationally.

Carbon Credit Vs Carbon Offset

These two terms are often used interchangeably, and there is often confusion as to the difference between the two. Below we explain the subtle difference of the two terms.

Carbon Credit

As previously mentioned, carbon credits are issued to project developers that avoid or remove harmful carbon dioxide emissions. One tonne of carbon dioxide removed or avoided results in one carbon credit. These credits can be sold and traded to other organisations.

Carbon Offset

When a carbon credit is sold to an individual or organisation for the purpose of them reducing their emissions, it becomes an offset. The offset is moved to a register for credits that are retired and can no longer be traded.