What are carbon credits?

Carbon credits are an important new instrument of climate finance.

The green-coloured piece of paper printed by the Reserve Bank of India and circulated by the government is worth 20 rupees. The person who possesses it can buy a packet of biscuits by transferring that value to the seller. There are different ways to acquire such pieces of paper. For example, people do different kinds of jobs to earn money. Carbon credits are similar. Just like possessing the green note means you possess 20 rupees of value, possessing one carbon credit gives you a licence to emit 1,000 kg of carbon dioxide (or equivalent).

You can earn a carbon credit by removing 1,000 kg of carbon dioxide from the environment and submitting the proof to a government or suitable certifying agency. Once they sign off, you can sell your credit to potential buyers. Governments around the world have decided which types of work can earn carbon credits, who can certify them, and who can buy them. Such projects include most renewable energy installations, certain forests, and carbon capture facilities. The Paris Agreement set up an international carbon market as part of helping countries meet their emissions targets.

An important problem with carbon credits is that the certifying agencies struggle to verify whether sellers have actually removed 1,000 kg of carbon dioxide. How countries can fix this problem is an important agenda item at the COP29 climate talks in Baku in November.