What are carbon credits and how do governments and companies trade them?

Carbon credits are part of a global mechanism to manage greenhouse gas emissions that aims to limit climate change by reducing carbon dioxide (CO2) and other greenhouse gases released into the atmosphere. These credits are generated through various projects and initiatives such as renewable energy generation, tree planting, energy efficiency improvements and hydrogen capture and storage.

One carbon credit (CC) is equal to offsetting one tonne of carbon dioxide (CO2) or CO2-equivalent greenhouse gas. Credits can be used by companies or governments to offset their own emissions and meet the climate targets they have committed to.

The carbon credit market consists of two categories: a compliance market and a voluntary market. These have their own specificities and factors that influence the cost of the credit. In the first category, it is a policy instrument used by governments and public authorities to reduce carbon emissions. The cost in the voluntary market varies depending on the quality, size and location of the project. Supply and demand is not regulated and this leads to a potential increase in price. Thus, carbon credits can also become an investment.

From 11 to 22 November, the 29th UN Climate Change Conference, better known as COP29, was held in Baku, Azerbaijan. 24 hours after the formal conclusion of the programme, a closing session was convened, which adopted two decisions. These will pave the way for the Article 6 document of the Paris Agreement and are a major step towards carbon trading. Some of the climate decisions were postponed to COP30, to be held in Belem, Brazil, in November 2026.

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