The climate problem depends on 2 things – industries that save emissions and industries that are creating emissions. So, shouldn’t the first category benefit? And shouldn’t the second one pay? This inherently, is the philosophy behind carbon credits. The company that saves carbon emissions can generate credits. The company that creates emissions that buy them at a price. Since it’s a tradable commodity, the instrument has a price and is therefore referred to as ‘currency’.
Now if it’s so straight forward, why doesn’t every company do it? Why is it not ‘THE’ currency? Why isn’t it regulated? And more importantly, why isn’t it compulsory?
Well, the answer is simple. It’s complicated!
Let’s go back in history to understand the evolution. While carbon credits emerged in the 1990s as a market-based tool to reduce greenhouse gas emissions, it was only the 1997 Kyoto Protocol that formalised the concept, allowing countries to trade emission reductions. Each credit represents one metric ton of CO₂ avoided or removed. In the 2000s, voluntary markets grew alongside compliance markets. The 2015 Paris Agreement spurred global interest, emphasizing carbon trading to meet climate goals.
So how do we generate a carbon credit?
A carbon credit is generated by a project that verifiably reduces, removes, or avoids one metric ton of CO₂ or equivalent greenhouse gases. Common projects include reforestation, renewable energy, methane capture, and energy efficiency. The project follows a recognized methodology and undergoes validation by an accredited third-party verifier. Once emissions reductions are monitored and verified, the data is reviewed by a registry, which issues carbon credits. These credits can then be sold in compliance or voluntary markets. This may sound simple, but it’s not because –
- The project first needs to save emissions using a verified methodology. Often times there are unique and new ways of saving emissions for which no methodology exists!
- A third party accreditor is required for verification which is a very time taking and costly affair.
- The project itself undergoes monitoring for a whole year! So it may be some time before you can get even one credit
- Registration has its own fees and there are many private carbon registries. Often, Verra and Gold Standard are preferred, but the process is not standardised.
- Once you’ve generated the credit, where will you sell them? Exchanges are very new and demand is much lower than the supply available. So you may not even have a buyer for the credit!
What does a carbon credit look like? It’s a piece of paper, like a physical certificate that is traded. This causes a lot of security issues like –
- Fraud and Double Counting – Paper-based credits can be easily duplicated, altered, or resold, increasing the risk of fraudulent claims. Without a centralised system, the same credit could be sold to multiple buyers, undermining trust and environmental integrity.
- Lack of Transparency – Physical documentation limits traceability. Buyers cannot independently verify the origin, verification status, or retirement of the credit, which is essential to prove the offset has been used and not reused.
- Security and Loss – Paper documents are vulnerable to physical damage, loss, or theft. If the only proof of a credit is a piece of paper, ownership may be irrecoverable in case of misplacement.
An opinion is never complete without an appropriate example. There is a forest in a private patch of land. It is being managed by a forest management company. Can credits be issued? For it is a forest with trees that are absorbing the Co2 from the environment. The answer is yes! You haven’t planted any new trees, and yet credits can be issued against a long standing forest. Now who can issue them? The owner of the land or the management company? Again the answer is any of them can. Can both? Right now, yes. Some of this can be made simpler by digitalisation of registries and even blockchain to ensure traceability and avoidance of double counting.
So why aren’t carbon credits – issuance and purchase – mandatory?
Because global climate policies vary and rely on national commitments rather than universal enforcement. The Paris Agreement allows countries to set voluntary targets, leading to inconsistent regulations. Many governments prioritise direct emission reductions over offsetting, and some lack the infrastructure to manage carbon markets. Additionally, concerns over credit quality, verification, and potential misuse make mandatory adoption politically and ethically complex.
Despite all these challenges, the future of carbon credit market is positive. With more countries and companies committing to net-zero targets, demand for high-quality carbon credits is expected to surge. According to some forecasts, the voluntary carbon market could grow from $2 billion in 2021 to $50–$250 billion annually by 2030.
