What is a carbon credit?
A carbon credit is a unit representing the reduction or avoidance of one tonne of CO₂ equivalent. It is the basic building block of the carbon market, whether regulatory or voluntary. In practical terms, a credit is generated when a project proves, in a verified manner, that it has avoided or sequestered one tonne of CO₂ that would otherwise have been emitted or remained in the atmosphere.
These credits can then be sold to companies or individuals who wish to offset their own emissions, or to regulatory market participants who must cover their emission obligations. It is this ability to "monetize" emission reductions that underpins the entire logic of carbon markets.
The two main types of carbon markets
The regulatory market: the EU ETS
The European Union Emissions Trading System (EU ETS) is the largest regulatory carbon market in the world. Launched in 2005, it covers approximately 40% of total EU emissions, including those from power plants, major industries (cement plants, steelworks, refineries), and since 2012, intra-European air transport.
The principle is that of "cap and trade":
- A cap: the EU sets a maximum volume of authorized emissions each year for the covered sectors. This cap decreases progressively each year.
- Allowances: each company receives or purchases allowances corresponding to its allocated cap. One allowance = 1 tonne of CO₂.
- Trading: companies that emit less than their allowances can sell them to those that need more.
- Compliance obligation: each year, companies must surrender a number of allowances equal to their actual emissions. Failure to do so results in a fine of 100 euros per tonne.
"The European carbon market is the EU's main climate policy instrument. Its operation ensures that emission reductions happen where they are cheapest." — European Commission
The evolution of the carbon price in Europe
The ETS allowance price has followed a remarkable trajectory: long depressed at around 5-10 euros per tonne due to an insufficiently tight cap, it began a spectacular rise from 2018, reaching historic levels of 80-90 euros per tonne in late 2021-early 2022, before stabilizing between 60 and 80 euros. This rise reflects a progressive tightening of the European regulatory framework under the Green Deal.
The voluntary market: when companies choose to act
Alongside the regulatory market, the Voluntary Carbon Market (VCM) allows companies and individuals to offset their emissions on a voluntary basis, without legal obligation. This is the market where credits from forestry, energy efficiency, or renewable energy projects — the kind you can buy to offset your personal footprint — are traded.
This market has experienced explosive growth: from less than one billion dollars in 2020, it reached 2 billion dollars in 2021 before undergoing a correction following revelations about the quality of certain credits in 2022-2023. Analysts estimate that it could return to sustained growth with a stricter regulatory framework.
How does a project generate carbon credits?
The certification process step by step
Generating carbon credits is a long, costly, and rigorous process for serious projects:
- 1. Project design: the developer defines the activity, geographic area, and methods for reducing or sequestering carbon
- 2. Standard selection: Gold Standard, VCS, Plan Vivo, or Label Bas-Carbone depending on the nature and location of the project
- 3. Writing the Project Design Document (PDD): a technical document detailing the methodology, baseline scenario, additionality calculations, and risks
- 4. Validation (ex-ante): an accredited third-party auditor examines the PDD and validates the methodology before the project begins
- 5. Implementation: the project is launched and emission reductions begin
- 6. Verification (ex-post): after a defined period (typically 1 to 5 years), the auditor verifies the reductions actually achieved based on field measurements
- 7. Credit issuance: the standard validates and registers the credits in its public registry
- 8. Sale and retirement: the credits are sold and "retired" (marked as retired) from the registry to prevent any double counting
The baseline scenario: the heart of the calculation
The calculation of emission reductions is based on a comparison between the actual project situation and a "counterfactual" scenario: what would have happened without this project? This baseline scenario is the most delicate and debatable aspect of any carbon certification. If the baseline is poorly calibrated — for example, if the deforestation that would have occurred without the project is overestimated — the credits generated do not correspond to any real reduction.
Main project categories and their specificities
- REDD+ (Reducing Emissions from Deforestation and Forest Degradation): forest protection projects in tropical countries. Highly debated in terms of additionality and permanence.
- Afforestation/Reforestation: planting trees on degraded land. Easier to measure but with high permanence risks (fires, diseases).
- Renewable energy: solar panels, wind turbines, biomass in countries without access to clean energy. Additionality sometimes questionable in countries where renewables are developing rapidly anyway.
- Energy efficiency: improved cookstoves, insulation, LED lighting in developing countries. Often Gold Standard certified, with strong social co-benefits.
- Methane capture: recovery and destruction of methane from landfills or mines. Very effective (methane is 25 times more warming than CO₂ over 100 years).
- Direct Air Capture (DAC): direct capture of CO₂ from ambient air using industrial technologies. The most expensive (200-500 euros per tonne) but the most "permanent" and most additional.
Carbon credit pricing: a wide disparity
Prices on the voluntary market vary enormously depending on:
- Project type: a REDD+ forestry credit can sell for 5-15 euros, a Direct Air Capture credit for 300-500 euros
- Certification: a Gold Standard credit generally sells for 2 to 3 times more than an equivalent VCS credit
- Co-benefits: a project that contributes to biodiversity, clean water access, or local development commands a price premium
- Vintage: recent credits are generally more expensive than older ones (vintage premium)
- Location: projects in the Amazon or Africa are often cheaper than projects in Europe or North America
To learn more about carbon offsetting and best practices, see our reference guide: Carbon offsetting: the complete guide to understanding and taking action.
Challenges and the future of carbon markets
Carbon markets face several structural challenges:
- Credit quality: the REDD+ credit scandal of 2023 shook confidence in the voluntary market and pushed for a reform of standards
- Article 6 of the Paris Agreement: this framework, finalized at COP26 in Glasgow, defines the rules for international carbon credit exchanges between states, but its implementation remains complex
- Double counting: preventing the same credit from being counted by both the host country and the foreign buyer remains a major technical and political challenge
- Carbon pricing: many economists and scientists believe that the current carbon price — even at 70-80 euros in the European ETS — is still too low to trigger the investments needed for decarbonization
To understand how to distinguish good projects from bad ones and avoid greenwashing, see: The best certified carbon offset projects in 2024.
Conclusion: an imperfect but necessary tool
Carbon markets — regulatory and voluntary — are imperfect tools, but probably essential to the climate transition. They channel financial flows toward emission reduction projects and create economic value for CO₂ that would otherwise remain unpriced. The key is to continuously improve their quality and rigor, so that every credit traded corresponds to a real emission reduction in the physical world.