Understand Carbon Credits
Environmental Defense Fund
Carbon credits represent the reduction or removal of greenhouse gases (GHG) and are purchased by companies to support sustainability goals. If integrity, quality, and transparency are at the center of this procurement process, carbon credits can have a range of benefits for your company and for the planet.
Voluntary carbon markets have seen significant growth in recent years, with many companies turning to carbon credits to supplement and enhance their science-aligned decarbonization strategies. When done with integrity, carbon markets can increase climate ambition, reduce the cost of climate action, drive investment toward emission reduction and removal projects, foster innovation in mitigation technologies, and support sustainable development outcomes for Indigenous Peoples and local communities. Businesses can take immediate action to support climate outcomes through carbon credits—but they must put integrity, quality, and transparency at the center of a procurement strategy.
What is Carbon Credit?
A carbon credit is an emissions unit issued by a carbon crediting program that represents a reduction or removal of greenhouse gases. Businesses often purchase carbon credits in the voluntary carbon market (i.e., outside of mandatory or regulatory markets such as emissions trading systems) and retire them to support a range of climate, sustainability, and nature goals. Note that while “credit” and “offset” are often used interchangeably, these terms are not the same. A “credit” refers to the unit issued as a result of verified emissions reduction or removal activities while “offset” refers to the act of balancing or compensating for an organization’s emissions with carbon credits.
Carbon credits can be generated by a wide range of activities. Currently, most carbon credits in the global market are generated from natural climate solutions—for example, conserving or restoring critical ecosystems like mangroves, tropical forests, and peatlands. These natural ‘carbon sinks’ are key to achieving net zero emissions as they draw down carbon from the atmosphere. It is estimated that natural climate solutions can provide 20% of all the emissions reductions we need by 2050 to keep average global warming under 2°C.1 These projects can provide additional benefits, such as biodiversity preservation and support for local communities.
Projects and programs that generate carbon credits can also be technological in nature—like emerging technologies for direct air capture that suck carbon dioxide directly out of the atmosphere. Both reduction and removal credits play an essential role in achieving global climate goals.
Not All Carbon Credits Are Created Equal
Unfortunately, voluntary carbon markets have faced challenges with the underlying environmental and social quality of carbon credits, and determining quality in the market can be challenging. Yet maintaining the integrity of carbon credits is essential to ensure that they represent genuine climate benefits and provide positive outcomes for Indigenous peoples and local communities. Businesses must exercise due diligence when selecting carbon credits, choosing those that meet or exceed key environmental, economic, and social quality criteria.
See “Understanding carbon credit quality” for more information on quality and due diligence.
Using Carbon Credits Responsibly
It is crucial to emphasize that carbon credits should never be a substitute for a company’s own emissions reductions. They should complement a science-aligned decarbonization strategy rather than replace it.
There are two primary roles for carbon credits: on the path to net zero, and in the future when companies are achieving their net zero goals. On the path to net zero, credits can be used to compensate for unabated emissions. Even if companies are making adequate progress towards their science-aligned goals, there will likely be substantial remaining emissions that companies can take responsibility for. At net zero achievement, carbon removal credits come into play to balance any remaining emissions that cannot be abated. While there is growing interest in carbon removal technologies, it’s crucial not to overlook the importance of financing nature-based solutions.
Companies can consider making additional claims based on the use of carbon credits, including carbon neutral claims, or claims that their investments contribute to global net zero goals. Initiatives like the Voluntary Carbon Market Integrity Initiative (VCMI) have developed rulebooks on credible use of high-quality carbon credits, and associated climate claims.2
How Should Companies Proceed?
- Scale up investments in high-quality credits: It’s essential to invest in high-quality carbon credits that meet or exceed key environmental and social quality criteria. By doing so, companies can maximize their climate impact and contribute to sustainable development.
- Conduct robust due diligence: Before purchasing credits, companies should conduct thorough due diligence to ensure the credits meet the necessary criteria. This includes assessing their environmental and social integrity and verifying their alignment with recognized standards.
- Be transparent: Transparency is key in substantiating claims related to carbon credit procurement. Companies should report information related to their credit purchases transparently in publicly available annual corporate sustainability reports.
- Make clear and responsible claims: When making claims about carbon credits, companies should ensure that they are clear, responsible, and aligned with their sustainability goals. It’s important to avoid misleading or exaggerated statements and provide accurate information.
- Pursue a balanced portfolio: Instead of relying solely on carbon removal credits, companies should aim for a balanced portfolio that includes both reduction and removal credits. This approach ensures a comprehensive and holistic strategy for addressing emissions.