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What are Carbon Credits and How Do They Work?

Updated: Mar 31

In a world increasingly concerned with climate change, carbon credits have emerged as a key tool in the effort to reduce global carbon emissions. But what exactly is a carbon credit, and how does it work in practice? This blog post aims to demystify carbon credits, making the concept accessible without delving into overly complicated jargon.


What is a Carbon Credit?

A carbon credit symbolizes a significant environmental achievement: the removal of one ton of carbon dioxide from the atmosphere. This innovative approach empowers businesses and individuals to contribute positively towards a greener planet, encouraging investments in projects and technologies that actively reduce atmospheric CO2 levels. By purchasing carbon credits, entities can offset their own emissions, effectively taking responsibility for their carbon footprint while supporting global sustainability efforts. 

The Mechanics of Carbon Credits

Some carbon credits are part of a broader strategy known as cap-and-trade programs. In this cap-and-trade Governments or international bodies set a cap on the total amount of greenhouse gases that can be emitted. Entities such as companies are then allocated carbon credits or can purchase carbon credits up to the cap limit. If they emit less than their allotment, they can sell their excess credits to other companies that are struggling to stay under their emission limits. Carbon credits can also be used by individuals and businesses to take part in the green economy through a viable financial instrument. Purchasing these credits supports various initiatives, from renewable energy to ocean clean-up, allowing contributors to actively participate in global efforts against climate change.

Types of Carbon Markets

There are two main types of carbon markets: compliance and voluntary. Compliance markets are regulated by mandatory national, regional, or international carbon reduction regimes. In contrast, voluntary markets allow companies, organizations, and individuals to purchase carbon credits voluntarily to offset their emissions for corporate social responsibility reasons or to achieve carbon neutrality. In the compliance carbon market, notable players include government-regulated schemes such as the European Union's Emissions Trading System (EU ETS), which targets large emitters within the EU. On the voluntary side, organizations like Verra and the Gold Standard play a crucial role by certifying carbon reduction projects and ensuring their environmental integrity. These entities help bridge the gap between ambitious carbon reduction goals and tangible, verifiable environmental action, enabling participants across the globe to contribute meaningfully to climate change mitigation.

The Role of Carbon Offset Projects

Carbon offset projects are essential to the carbon credit system. These projects generate carbon credits by taking actions that reduce, remove, or avoid greenhouse gas emissions. Examples include reforestation, renewable energy projects like wind or solar farms, and methane capture from landfills. For a project to qualify, it must prove that the emissions reductions are real, measurable, additional (meaning they wouldn't have happened without the project), and permanent. Often times these projects benefit the world in a variety of ways other than emissions reduction. Reforestation can lead to biodiversity and habitat restoration while methane capture from landfills can prevent our communities from unpleasantries. 

Benefits and Challenges

Carbon credits offer a flexible way for entities to manage their emissions and contribute to global environmental goals. They support projects that might not otherwise receive funding, from forest conservation to renewable energy development. However, the system is not without its challenges. Critics argue about the effectiveness of carbon credits in actually reducing emissions, concerns about the verification of emission reductions, and the potential for greenwashing.


Carbon credits represent a critical, albeit complex, mechanism in the fight against climate change. They embody the principle that environmental responsibility can be shared and managed across borders and industries. As the system continues to evolve, it is hoped that improvements in transparency, regulation, and technology will address current shortcomings, making carbon credits an even more effective tool for achieving a sustainable future.

Understanding carbon credits is crucial for businesses, policymakers, and individuals alike, as we all have a role to play in mitigating climate change. By participating in carbon markets, whether compliance or voluntary, entities can contribute to a larger, global effort to reduce emissions and promote sustainability.

As the world moves towards more ambitious climate targets, the importance of carbon credits is likely to grow. Their ability to translate environmental challenges into actionable, market-driven solutions offers a path forward. However, for this potential to be fully realized, ongoing scrutiny, improvement, and commitment from all stakeholders are essential.


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Founded in December 2023, Forevergreen is a project determined to help the average American reduce their impact on the earth. We hope to help individuals take part in fighting climate change by offsetting their carbon footprint.

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