Carbon Credits: How They Work and Why They Matter

A Starter's Guide to Understanding Carbon Credits

In 2020, the most severe annual reduction in global carbon emissions was recorded as a consequence of the global COVID-19 pandemic. However, this drop was only temporary, as in 2021, global CO2 emissions swiftly rebounded to a higher level than before the pandemic, surging by 6.3%.

Global carbon emissions
Global carbon emissions (Liu Z. et al., 2023)

Today, we continue to emit additional carbon emissions each year. Unless we halt the addition of more emissions into the atmosphere than we can eliminate, global temperatures will continue to rise. However, in order to align with the Paris Agreement's 1.5°C scenario, carbon emissions have to be drastically reduced, so that the worst effects of climate change are avoided. Companies and organizations will need to use every tool at their disposal to achieve these substantial emission reductions. In addition, carbon removal through nature-based and technical solutions becomes an essential part in Net-Zero strategies.

The IPCC states that Carbon Dioxide Removal (CDR) “is required to achieve global and national targets of net zero CO2 and greenhouse gas emissions. CDR cannot substitute for immediate and deep emissions reductions, but is part of all modelled scenarios that limit global warming to 2° or lower by 2100.”

But before we dive deeper into carbon removals and reduction measures in our next blog articles, we want to give you a quick introduction into carbon credits.

We will answer the following questions:

  • What are carbon credits and which types do exist?
  • Who is involved in the process of creating a carbon credit?
  • What are the challenges of carbon credits?
  • Why should organizations invest in high-quality climate projects?

What are carbon credits and which types do exist?

Carbon markets are separated into voluntary and compliance markets. In this article, we are deep diving into the voluntary carbon markets, leaving out compliance markets such as the European Emission Trading System (EU ETS). In a nutshell, carbon credits are measurable and verifiable emission reductions from certified climate action projects. These projects can fall into two different types of credits in the voluntary carbon market: avoidance credits and removal credits.

Avoidance credits are associated with projects that aim to avoid or reduce emissions production. For example, initiatives that focus on avoiding deforestation contribute to avoidance credits. These projects prevent the release of greenhouse gases into the atmosphere that would have occurred if the deforestation had taken place.

On the other hand, removal credits are linked to projects that lower existing emissions. These projects employ different approaches to achieve emission reductions. Nature-based solutions, such as afforestation, involve introducing trees to previously unforested areas, thus sequestering carbon dioxide from the atmosphere. Technology-based solutions, such as renewable energy generation, help reduce emissions by replacing fossil fuel-based energy sources.

Both avoidance and removal credits equal one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas reduced, sequestered or avoided. As soon as the credit is retired in the registry of the respective project’s carbon standard, it is no longer tradable.

Who is involved in the process of creating a carbon credit?

The process of creating a carbon credit involves multiple stakeholders who play crucial roles in ensuring the credibility and effectiveness of the projects. Firstly, project developers identify initiatives that can result in verifiable emission reductions or removals. These developers can be private companies, non-profit organizations, or even government entities. They develop projects in the areas of renewable energy, reforestation, or energy efficiency improvements, among others. It must be proven that these projects meet stringent quality criteria. This requires a methodology that is specific to the type of project involved. Project developers like Pina Earth are responsible for the CO2 calculation, project documentation and validation process.

The implementation of the project is then carried out by the project owner. Once a project is implemented, independent third-party auditors or verifiers come into play. They assess the project's adherence to specific standards and methodologies, verifying the claimed emission reductions or removals. These auditors ensure the accuracy and transparency of the data and calculations associated with the project. Their expertise and impartiality are vital in maintaining the integrity of carbon credits.

At Pina Earth, this process begins with the first contact to the forest owner. In close collaboration, the project area is defined, the forest inventory is reviewed, and the required forest adaptation measures are determined. As soon as the project contract is signed between Pina Earth and the forest owner, Pina Earth simulates the potential of the carbon sink. After the project plan is finalized, independent auditors are consulted. All our projects are audited by TÜV Nord. Currently, our projects are certified under the ISO standard 14064-2. In the future, Pina Earth will also develop projects under the German standard "Wald-Klimastandard", a carbon standard for national ecosystems founded by the Ecosystem Value Association e.V.

What is the critique of carbon credits?

While carbon credits have gained recognition as a tool for addressing climate change, they are not without challenges. One significant challenge is the establishment and maintenance of robust monitoring, reporting, and verification (MRV) systems. MRV is crucial for accurately quantifying emission reductions or removals and ensuring the credibility of carbon credits. Developing standardized and reliable MRV methodologies that can be applied across different projects and sectors can be a daunting task. It requires careful consideration of various factors, such as baseline emissions, project boundaries, and leakage, to accurately measure the net impact of a project.

Furthermore, many stakeholders are concerned that the use of carbon credits could hinder, delay, or even replace efforts by companies to reduce their emissions within their operations and supply chains. The lack of clear and transparent guidance regarding the voluntary use of carbon credits to support credible claims hinders investors and consumers from effectively directing capital and leveraging their purchasing power to drive meaningful change. It is essential to strike a balance between utilizing carbon credits as a valuable tool for emission reductions and ensuring that they are not used as a substitute for proactive emission reduction measures.

Why should companies invest in carbon credits?

In contrast to these concerns, a study by Trove Research in 2023 has shown that companies already purchasing carbon credits are more likely to accelerate their emission reduction efforts compared to those that haven't invested in the voluntary carbon market yet. The voluntary purchase of carbon credits creates a financial linkage, with emissions being tied to a price within these companies. Consequently, this expenditure becomes reflected in their annual budget, providing a tangible incentive to strengthen internal business cases for emission reduction. As a result, companies are motivated to cut costs and decrease their environmental impact. Additionally, the study revealed that engaging with carbon credits leads companies to take their climate impact more seriously, prompting increased investments in mitigation strategies.

In recent years, companies increasingly set themselves Net-Zero targets aligned with the Science-Based Targets initiative (SBTi). When companies commit to Science-Based Targets, they set ambitious goals to reduce their greenhouse gas emissions in line with what the scientific community believes is necessary to limit global warming to well below 1.5 degrees Celsius above pre-industrial levels. Carbon credits can play a significant role in helping companies achieve these targets, especially in sectors where it is challenging to eliminate emissions entirely. By purchasing carbon removal credits, companies can compensate for their remaining emissions and meet their Net-Zero goals, demonstrating their dedication to taking meaningful climate action.

Lastly, the demand for carbon credits creates direct private financing to new climate-action projects that would not otherwise get off the ground. This stimulates the growth of sustainable initiatives, facilitates emission reductions beyond what individual companies can achieve, and fosters innovation in the fight against climate change. Through this mechanism, carbon credits become a key driver of highly needed investments in climate projects, amplifying their positive impact on the environment and society.

Which trends can be expected for carbon credits?

In conclusion, if used correctly, carbon credits on the voluntary market serve as a valuable tool in addressing climate change and promoting sustainable practices. By using carbon credits effectively and transparently, we can incentivize real change and encourage the transition to a low-carbon economy.

While challenges exist, there is growing recognition of the importance of addressing these issues. Stakeholders are actively working towards developing standardized and further improved methodologies, clear guidelines, and transparent reporting mechanisms to enhance the integrity and effectiveness of carbon credits.

According to the estimations by the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) the demand for carbon credits is poised for an extraordinary surge, with a potential increase of 15 times or more by 2030 and an astonishing factor of up to 100 by 2050. This positive development points to a fundamental shift in the voluntary carbon market, whose value is expected to rise to an impressive $50 billion or more by 2030.

Many companies around the world seek to understand how they can use carbon credits as a part of their climate strategies in a way that is accepted by investors, civil society, government regulators, and policymakers. On our blog, we will dive deeper into topics such as effective communication of climate contributions as a company and why we need regional projects to mitigate climate change. Stay tuned for more informative articles to support your journey toward a greener and more sustainable future.

“Nature-based solutions are available today, they are affordable and highly scalable. I’m proud that Pina Earth makes credible climate action real.”

Leos Bloch, Lead Business Development at Pina Earth


Liu, Z., Deng, Z., Davis, S. et al. Monitoring global carbon emissions in 2022. Nat Rev Earth Environ 4, 205–206 (2023).