ESG Reporting Frame Work

Carbon Credit: A Comprehensive Guide

The global urgency to reach Net Zero emissions is on a fast pace, promoting the exploration of innovative solutions such as carbon credits trading programs. These initiatives enable the exchange of credits to be traded between organisations and countries and serve as a solution to the ongoing emission issue. While each country is crafting its carbon trading programmes and building trading markets, the broader goal remains consistent: Building markets where the organisations and the countries can inter-trade the credits to maintain carbon offset levels necessary for achieving Net Zero emissions.

But, What are Carbon Credits? What are offsets? What is the concept of Decarbonisation? Let’s understand what are these terms and why is it necessary for us to know about them.

What Are Carbon Credits?

Carbon credits are the key component of carbon trading programmes, a system designed to reduce greenhouse gas emissions. Carbon credits are essentially a universal unit of measurement for the reduction or removal of one metric ton of carbondioxide (CO2) or its equivalent from the atmosphere. Carbon credits are the points assigned to each entity representing the emissions they are allowed todo. These credits can be traded between organisations, governments, and countries to incentivize activities which reduce greenhouse gas emissions.

There is another term usually interchanged or confused with carbon credits which is “Carbon Offsets”. While both terms sound similar and might also be confused with one another they have a subtle difference between them let’s understand the difference between them.


Difference Between Carbon Credits and Carbon Offsets:


Let's say there are two organisations, Company A and Company B, both emitting greenhouse gases (GHGs) into the atmosphere increasing their carbon footprint. Company A decided to invest in renewable energy sources and reduce its carbon emissions directly. As a result, Company A earned carbon credits for reducing emissions.

Mean while, Company B continues emitting GHGs as usual but decides to purchase carbon credits to compensate for its emissions. It invests in projects such as reforestation or renewable energy, which remove equal amounts of GHGs from the atmosphere which refers to carbon offset.


In this scenario:

Company A earns carbon credits for directly reducing its emissions.

Company B purchases carbon credit to compensate for its emissions without acting on them directly.

The difference is that carbon credits are earned through direct emission reductions, while carbon offsets involve compensating for emissions through external projects. Hope that clears up the doubt.

These are the two methods of reducing ongoing emissions. Now let’s focus on the concept of decarbonisation.


What is Decarbonisation?

Global decarbonisation or the reduction of carbon emissions on the globe is the major concern that the carbon credit program addresses.

Decarbonisation refers to the process of reducing carbon dioxide (CO2) emissions, ultimately aiming to reach a state where there are no net emissions of CO2 into the atmosphere.

Decarbonisation is crucial in the fight against climate change because CO2 is a major greenhouse gas responsible for global warming and climate disruption. The process of decarbonisation or reducing carbon emissions from day-to-day activities not only saves the environment but also helps organisations, governments and countries to earn carbon credits.


What are Carbon Credit Marketplaces?

Carbon Credit trading can incentivize businesses and governments and help them avoid getting in trouble for emitting Green House Gas beyond their assigned limits.

Carbon credit Marketplaces are set up for trading these special tokens called carbon credits. In these markets, organisations that emit less than their assigned limit in an assigned period can sell out the remaining credit limit to organisations emitting more than their assigned limit to maintain the level of emissions in the environment.

These Carbon Credits trading markets can be of two types:

  • Voluntary Carbon Markets
  • Compliance Carbon Market

Ina voluntary carbon market organizations, and governments can purchase carbon credits to offset their carbon footprint. This market is not regulated by any governing body and is voluntary.

Mean while, In a compliance carbon market, participants buy and sell carbon credits or carbon offsets to comply with rules or regulations imposed by regulatory or governance organizations.


The compliance carbon market works on a cap and trade idea where each organisation that aims to meet the emissions limit is assigned a cap or limit. These limit sare monitored by the regulatory bodies and to comply with these regulatory bodies organisations have to participate in these marketplaces.

However, in voluntary markets, organisations can participate on their will if they plan on offsetting their emissions to slide the economy towards sustainable practices.


What are the benefits of carbon credits?

There are a certain number of benefits that we get from the concept of carbon credits. A few of them are:


Reduction in Emissions: The primary benefit of carbon credits is the reduction in greenhouse gas emissions. By incentivizing the actions that help organisations lower their emissions or invest in offsetting projects, carbon credits facilitate the overall reduction of CO2 and other greenhouse gases in the atmosphere.

Economic Incentives: Carbon credits create economic incentives for businesses to adopt cleaner technologies and practices. Companies that innovate and reduce their emissions can earn credits, which they can then sell on carbon markets. This encourages investment in sustainable solutions and rewards environmentally responsible behaviour.

Promotion of Renewable Energy: Carbon credit programs often promote investment in renewable energy sources By supporting projects that generate clean energy, carbon credits contribute to are duction in the use of fossil fuels, which are major contributors to greenhouse gas emissions.


Sustainable Development: Many carbon offset projects, such as reforestation, sustainable agriculture, and clean water initiatives, not only reduce emissions but also support sustainable development goals.

Global Cooperation: Carbon credits promote international cooperation in addressing climate change. By creating a mechanism for trading emissions reductions across borders, carbon markets enable countries to collaborate on achieving their climate targets more cost-effectively. This helps to bridge the gap between developed and developing nations in tackling climate change.


What makes Carbon Credits unlikely to succeed?


Although, these carbon credit and offsetting schemes claim to be beneficiary there might be some reasons due to which these won’t be able to succeed to the estimated level:

  • Complexity of Calculation: Carbon offsetting relies on the assumption that an equivalent (or greater) amount of CO2 is being removed than the amount being produced. But in most cases, carbon offsetting projects overestimate their impact. This is because there’s no standardised system for determining what counts as a carbon offset, or how to measure it.

  • Lack of Individual participation: Carbon Credit schemes or Carbon  Offsetting Schemes only let organisations and governments participate in the programme while leaving out individuals who are not part of the organisation. This negligence of counting in the emissions generated by individuals leads to miscalculation and doesn’t allow the regulatory bodies to identify the actual number. Governments of different developing and developed countries like India are working on crafting their own Green Credit Programmes that allow individuals to participate in offsetting emissions by incentivizing them to participate in environment-friendly activities.

  • Carbon offsetting projects will take too long to action: Suppose you plant 100000 trees today. Will these trees grow within a week, a month, or a year? No right? This is the reason that carbon credits or offsetting may take too long to work and that too the predicted level of reduction in emission or offsetting of emissions may vary according to various factors.

  • Greenwashing: Believe it or not, one of the biggest reasons the carbon credits programme or carbon offsetting schemes might not work is organisations claiming to have offset a certain amount of emissions without actually offsetting them.



Inconclusion, carbon credits and trading programs represent innovative solutions aimed at mitigating greenhouse gas emissions and addressing the urgent need to achieve Net Zero emissions globally. These programs incentivize emission reductions and promote investment in sustainable practices and projects. However, apart from their potential benefits, several challenges and limitations exist that hinder their success.

The complexity of calculating carbon credit, the lack of individual participation, the time it takes for offsetting projects to yield results, and the risk of greenwashing by organizations come forward as risks to the effectiveness of carbon credit schemes.

Also, the absence of standardized systems for measuring and verifying carbon offsets may lead to inaccuracies and lesser credibility of these programs.