Carbon Credits: what are they and how do they work?


A carbon credit is a digital certificate that proves a company or an environmental project (forest conservation projects, reforestation of devastated areas, clean energy, biomass, etc.) prevented the emission of 1 ton of CO2 (carbon dioxide) in a given year. In other words, carbon credits are immaterial assets.


Carbon credits are audited by international institutions and registered with Verra, a foundation that regulates the global monopoly registration of voluntary credits.


As they are already certified, carbon credits from the voluntary market last forever until they are consumed or canceled by someone (or a company) that wants to compensate for their greenhouse gas emissions.


Carbon credits are intangible assets (similar to mileage points or brands) so therefore, they are digital certificates. Most credits are traded and quoted in US dollars.

CO2 = carbon dioxide. During photosynthesis, a process in which plants generate glucose (their food), plants absorb CO2 from the air and use solar energy through their leaves to break down CO2 (one carbon atom and two oxygen atoms) and the water (or H2O, two hydrogen and one oxygen atom) absorbed by their roots and leaves. Plants thus generate new glucose molecules (C6H12O6) and use them to generate energy to grow. As a result of photosynthesis, plants release O2 into the air, also vegetables and algae in the ocean absorb CO2 and release oxygen (O2).

However, deforestation and forest fires hinder this process. When we burn or cut trees down, CO2 is released into the atmosphere. Methane (CH4) is also released, a powerful greenhouse gas that’s up to 30 times more polluting than CO2. Furthermore, most of our global economy is based on the generation of energy by burning non-renewable fuels (such as oil, coal, and natural gas). All this burning of fossil fuels, which are essentially carbon atoms, releases huge amounts of CO2 into the atmosphere. The CO2 absorbs heat from the sun, leading to the greenhouse effect and the warming of the planet.

When the presence of CO2 is higher than normal in the air, the heat from the sun’s rays is absorbed by the atmosphere and the planet gets warmer. In other words, our greenhouse gas emissions and our reliance on oil and coal for our transportation and energy are warming up the planet and leading to drastic climate changes.

We have to put a price on carbon emissions. That’s why it’s called carbon credit!

What is the difference between compensating greenhouse gas emissions and buying carbon credits?

‍Carbon credits work in a similar way to oil, bars of gold, or diamonds. Suppose that you wanted to speculate on oil or gold, but there were no commodity markets for it (such as carbon credits and diamonds). If you think oil or gold could go up in value, but that there was no market to invest in the commodity, you would buy barrels of oil, bars of gold, or diamond stones and leave it at home, sit on the couch, and wait.

Neither oil, gold, and diamonds (and carbon credits) expire or rot. In theory, you can keep them forever in your home.

Let’s look at the difference that purchasing and neutralizing/offsetting carbon credits can make. Residents of a big city emit an average of 2 tons per year. Higher-income residents emit closer to 10 to 20 tons per year, but if someone purchases $400 of carbon credits at $40 per ton, they buy 10 tons of carbon credits, or the equivalent of 1 year of personal greenhouse gas emissions.

There are huge advantages to buying carbon credits over gold, diamonds, and oil: when you buy oil, the money is indirectly financing bloody dictatorships in the Middle East, Venezuela or Nigeria. When you are buying diamonds and gold, the money is probably going to corrupt dictatorships in Africa and Latin America.

However, when you buy carbon credits from the Amazon forest, your money is going directly and indirectly to managers of forest conservation projects, clean energy projects, and environmentally conscious companies that follow international standards. Therefore, there’s social, community and environmental impact beyond the forest itself.

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