What Are Carbon Credits?
Carbon credits are special permits that give companies or governments the right to release a limited amount of greenhouse gases (GHGs), like carbon dioxide, into the atmosphere. Each carbon credit allows the holder to emit one metric ton of carbon dioxide or its equivalent in other harmful gases. These credits are sometimes referred to as “carbon allowances.”
The main purpose of carbon credits is to help lower the total amount of harmful emissions released into the air, which contributes to climate change.
How Do Carbon Credits Work?
The carbon credit system works like a pollution budget. Countries are given a specific number of credits by international organizations like the United Nations. Each country then distributes these credits to local companies, which must track and report how much they emit every year.
If a company goes over its allowed emissions, it has to buy extra credits. If it emits less than allowed, it can sell the extra credits on a carbon market or exchange. This trading system is called “cap-and-trade.”
Carbon Credits in the United States
While cap-and-trade programs remain controversial in the U.S., some states have embraced them. According to the Center for Climate and Energy Solutions, 13 U.S. states use market-based systems to cut emissions. Eleven of these states are in the Northeast and have joined together to create a shared carbon-reduction program known as the Regional Greenhouse Gas Initiative (RGGI).
California’s Program
In 2013, California launched its own cap-and-trade program. It covers large-scale polluters like power plants, factories, and fuel suppliers. California’s program is one of the biggest in the world—only the European Union, South Korea, and China have larger systems.
The Clean Air Act
The U.S. has regulated air pollution since the Clean Air Act of 1990, which introduced the first cap-and-trade system—though it called the permits “allowances.” This system helped cut sulfur dioxide emissions from coal power plants, which were the main cause of acid rain in the 1980s.
The Inflation Reduction Act
Passed in August 2022, the Inflation Reduction Act is a major U.S. law aimed at fighting inflation, reducing the federal deficit, and cutting carbon emissions.
This law provides large financial rewards to companies that capture and store carbon emissions. It raised tax credits from $50 to $85 per ton for companies that store carbon underground, and from $35 to $60 per ton for those that reuse captured carbon in products or energy production.
The goal is to make carbon capture more financially attractive and encourage investment in clean technology.
Who Can Sell Carbon Credits?
Only businesses and governments can buy or sell regulated carbon credits. However, carbon offsets—a similar concept—can be traded on voluntary markets. These are available to anyone, including individuals and small companies.
To sell offsets, a person or business must take part in a certified environmental project, such as reforestation (planting trees) or renewable energy generation. For example, landowners can join programs that pay them to preserve forests or store carbon in the soil, then sell the resulting credits.
Why Do Companies Buy Carbon Credits?
Companies buy carbon credits to legally release more greenhouse gases than they’re otherwise allowed. Some also buy voluntary carbon offsets to meet their environmental goals, especially as pressure grows from the public and investors to become “carbon neutral” or reach net-zero emissions.
For many companies, cutting all emissions isn’t realistic. So instead, they invest in projects that remove or reduce emissions elsewhere—like protecting forests or funding clean energy—so they can balance out the pollution they can’t avoid.
Global Carbon Credit Agreements
Kyoto Protocol
In 1997, the Kyoto Protocol created a global framework for reducing emissions. Countries that signed the treaty agreed to specific reduction targets. Richer countries, known as “Annex 1,” could trade extra credits if they stayed below their limits. This system was called the Emissions Reduction Purchase Agreement (ERPA).
Developing nations could earn Certified Emission Reduction (CER) credits through sustainability projects under the Clean Development Mechanism (CDM). These credits could then be sold to industrialized countries.
The first phase of the Kyoto Protocol ended in 2012. The U.S. exited the agreement in 2001.
Paris Climate Agreement
The Paris Agreement, signed in 2015 by over 190 nations, built on the goals of Kyoto and allowed continued emissions trading between countries. Although the U.S. exited the deal in 2017 under President Trump, it rejoined in 2021 under President Biden—only to withdraw again in 2025 under Trump’s return.
COP26 in Glasgow
At the COP26 summit in 2021, nearly 200 countries agreed on the rules for Article 6 of the Paris Agreement. This part of the deal allows countries to meet their climate goals by buying carbon offset credits from other nations.
The new agreement included several measures to ensure fairness and effectiveness:
- No tax on credit trading between countries
- 2% of all credits are canceled to prevent overuse
- 5% of trading revenue goes to help poorer nations adapt to climate change
- Older credits from 2013 onward were allowed into the new system—about 320 million credits
Countries like Brazil, rich in forests, expect to benefit from selling these credits.
Where Does the Money from Carbon Credits Go?
When a business sells a carbon credit, it gets the money directly. When someone buys a carbon offset, the money funds the project or organization running the emissions-reduction program—such as a tree-planting initiative or wind farm.
Are Carbon Credits a Good Thing?
Regulated carbon credits are generally considered a useful tool to help reduce emissions. They give businesses financial reasons to pollute less. Voluntary carbon offsets are also beneficial, although they focus more on balancing emissions rather than cutting them completely.
Some critics argue that offsets may give polluters a way to avoid making real changes. Still, they are seen as an important part of the solution when used responsibly.
How Much Is a Carbon Credit Worth?
The price of a carbon credit changes based on location, supply, demand, and current policies. In 2024, carbon credits were expected to cost around:
- $42 per ton in California
- $76 per ton in Europe
The Bottom Line
Carbon credits are part of a global effort to cut greenhouse gas emissions by putting a price on pollution. Under this system, companies get a limited number of credits and can buy or sell them based on their needs.
This market-based approach motivates businesses to reduce emissions in a way that is measurable and transparent. Those that can’t cut pollution entirely can still stay in business—though at a financial cost—by purchasing credits or offsets.
This creates an incentive to adopt cleaner, greener practices and invest in the fight against climate change.
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