Carbon credits are tradable certificates created to help organizations manage emissions they cannot fully reduce today. One credit equals one metric ton of carbon dioxide equivalent (CO₂e) and comes from verified projects that reduce or remove emissions. Companies buy these credits to offset or inset unavoidable emissions, and each credit is recorded in a registry and retired after use to prevent double counting.
What Is a Carbon Credit?
A carbon credit is a standardized unit used in the climate sector to record verified emission reductions, avoidance or removals. It functions as a tradable instrument, allowing emission reductions achieved in one location to be accounted for by another organization.
Carbon credits exist because many sectors face practical limits in reducing emissions immediately due to technology, infrastructure, or cost constraints. By converting verified climate outcomes into transferable units, carbon credits enable emissions management while long term reduction measures are developed.
For example, a factory that cannot fully reduce process emissions may use carbon credits generated from a renewable energy project to offset its remaining emissions.
How do Carbon Credits Work?
Carbon credits follow a defined process so emission reductions can be measured and recorded correctly. This process explains how carbon credit verification works, from calculating emission reductions to issuing and retiring credits. Each step uses approved rules and checks so carbon credits can be used reliably in both compliance and voluntary markets, including those in India.
| Stage | What Happens |
| Project Development | An emission reduction, avoidance or removal activity is designed and implemented, such as renewable energy generation, methane capture, or energy efficiency improvement |
| Measurement and Reporting | Emission reductions are calculated using standardized procedures and scientific formulas (methodologies) and monitoring protocols |
| Registration | The project activity is submitted to the respective carbon registry (like Cercarbono, Verra, Gold Standard etc.) for registration |
| Validation and Verification | Independent third party auditors (VVB) review project data, methodologies, and calculations |
| Issuance | Verified emission reductions are converted into carbon credits and recorded in an official registry with unique serial numbers |
| Trading | Carbon credits are transferred between buyers and sellers through registries or marketplaces |
| Retirement | A carbon credit is permanently cancelled in the registry after use |
Types of Carbon Markets
Carbon credits operate in two main market structures. Both exist to address emissions but serve different regulatory and organizational needs.
Compliance carbon markets
Compliance markets are created by government regulation(s). Companies operating in regulated sectors must meet emission limits or purchase these emission limits or “allowances” from other regulated sectors to remain compliant. Carbon credits are allowed to a limited extent to offset these emission limits.
Typical characteristics
- Participation is mandatory
- Prices are influenced by policy design
- Buyers are regulated emitters such as power producers or industrial plants
Voluntary carbon markets
Voluntary markets allow organizations and individuals to participate in the carbon markets by choice. These markets support voluntary corporate climate commitments and sustainability reporting.
Typical characteristics
- Participation is optional
- Pricing is market driven
- Buyers include businesses, institutions, and individuals
Comparison of carbon markets
| Aspect | Compliance Market | Voluntary Market |
| Regulation | Government mandated | Voluntary participation |
| Examples | EU ETS, California’s Cap-and-Trade Program, Indian CCTS | Corporate sustainability programs |
| Buyers | Regulated emitters | Businesses and individuals |
| Pricing | Policy driven | Market driven |
What types of Projects Generate Carbon Credits?
Carbon credits are generated from projects that can prove measurable and verifiable reductions, avoidance or removals of greenhouse gas emissions. These projects follow approved scientific methods, approved Methodology by Carbon Standard and are assessed through third-party verification to ensure that each credit represents real climate impact. The project type determines how emissions are reduced, avoided, or removed.
1. Nature based projects
Nature based projects focus on increasing or protecting natural carbon sinks. These projects rely on biological processes to absorb carbon dioxide from the atmosphere.
a) Afforestation and reforestation
These projects involve planting trees on degraded or unused land. Carbon credits are issued based on the amount of carbon absorbed as trees grow over time. Long term monitoring is required to ensure permanence.
b) Soil and land management
Improved farming and land use practices increase carbon stored in soil. Carbon credits are calculated by comparing soil carbon levels before and after project implementation.
Nature based projects are common in voluntary markets and are often used by companies to support broader sustainability goals alongside direct emission reductions.
2. Avoided and reduced emission projects
These projects prevent emissions that would have occurred under normal operations. They are widely used in industrial and infrastructure sectors.
a) Renewable energy projects
Solar, wind, and small hydro projects generate carbon credits by replacing fossil fuel based electricity. Emission reductions are calculated using regional grid emission factors.
b) Energy efficiency improvements
Projects that reduce energy use in factories, buildings, or transport systems generate carbon credits by lowering fuel or electricity consumption.
Avoided emission projects are widely used in carbon credits in India due to their clear measurement methods and relevance to manufacturing and infrastructure.
3. Carbon removal technology projects
Carbon removal projects focus on extracting carbon dioxide from the atmosphere and storing it for long durations.
a) Direct Air Capture and Storage (DACCS)
These systems use chemical processes to capture carbon dioxide directly from ambient air and store it underground or in stable materials.
b) Biogenic Carbon Capture and Storage (BECCS)
Bioenergy with Carbon Capture and Storage (BECCS) is a carbon removal approach where biomass absorbs CO₂ from the atmosphere during growth, and the CO₂ released during bioenergy production is captured and permanently stored. When sustainably sourced and properly verified, BECCS results in a net removal of atmospheric carbon dioxide while generating energy..
How Are Carbon Credits Verified and Tracked?
Carbon credit verification ensures that each credit represents a real and measurable climate benefit. This process relies on strict quality principles and transparent tracking systems.
Core principles of carbon credit verification
- Additionality: The emission reductions are not business-as-usual, but an “additional” practice.
- Permanence: The emissions reduction or removal must last over time.
- Leakage: Emission reductions in one area should not cause emission increases elsewhere.
- Independent verification: Third parties verify and validate project data and calculations.
How registries maintain transparency
Registries assign serial numbers to every carbon credit. These numeric records track ownership, transfers, and retirement, which prevents double counting and supports audit readiness.
Carbon credit quality framework:
| Quality Principle | Meaning |
| Permanence | Emissions reduction must last |
| Leakage | No indirect emission increase |
| Verification | Third party validation |
| Registry | Prevents duplication |
Carbon Credits vs Carbon Offsets
The distinction between carbon offset vs carbon credit lies in how emissions reductions are created versus how they are used. A carbon credit is a verified and quantified unit that represents one metric ton of carbon dioxide equivalent reduced, avoided, or removed through an approved project. It exists independently as a tradable certificate within carbon markets.
A carbon offset is not a separate unit. It refers to the accounting or reporting action taken when an organization applies a carbon credit to compensate for its own emissions. Offsetting occurs only at the point where a credit is claimed and retired against measured emissions.
How do the two concepts relate?
Carbon credits provide the measurable supply of emissions reductions. Carbon offsets describe the demand side use of those credits by organizations seeking to balance emissions that remain after reduction efforts.
Carbon credit and offset comparison:
| Aspect | Carbon Credit | Carbon Offset |
| Definition | Verified unit representing emissions reduction, avoidance or removal | Application of a carbon credit to balance emissions |
| Role | Creates measurable climate impact | Enables emissions accounting and claims |
| Measurement | Based on project level verification | Based on organizational emissions |
| Ownership | Buyer holds the credit until retirement | Buyer applies the benefit after retirement |
How Automobile Manufacturers Use Carbon Credits
Automobile manufacturers operate across complex production and supply networks where emissions are spread across multiple entities and geographies. Carbon credits are used to manage emissions that cannot be reduced immediately through design, process, or supplier changes. Their use is closely tied to Scope 3 emissions, regulatory preparedness, and structured sustainability reporting.
Managing Scope 3 emissions
Vehicle manufacturing depends on raw materials, component suppliers, logistics providers, and end of life vehicle handling. Many of these emissions fall outside direct operational control. Carbon credits allow manufacturers to address these emissions while longer term supplier decarbonization programs are implemented. This is particularly relevant for emissions linked to material recovery and vehicle disposal, where structured mechanisms such as ELV Carbon Credits connect recycling outcomes with measurable emission reductions.
Supporting supply chain decarbonization
Carbon credits are often used alongside supplier engagement programs to balance emissions during transition periods. Manufacturers may use credits while investing in cleaner technologies, alternative materials, and improved logistics efficiency. This approach allows progress toward emissions targets without delaying operational continuity.
Strengthening ESG and compliance readiness
Carbon credits support emissions disclosure under ESG frHow do you verify a carbon credit?ameworks by providing verifiable data for emissions that remain after reduction efforts. They also help manufacturers prepare for evolving carbon regulations by establishing internal systems for emissions measurement, verification, and reporting. Carbon credits function as a transition tool and do not replace the need for direct emissions reduction.
How Organizations Can Manage Carbon Credits and How MMCM Supports This?
Effective use of carbon credits depends on accurate data handling, traceability, and documentation. As carbon markets expand, especially for carbon credits in India, organizations face increasing pressure to demonstrate ownership, proper retirement, and audit readiness across the credit lifecycle.
Managing ownership and retirement
Organizations must track when carbon credits are issued, transferred, and retired. Clear ownership records are necessary to ensure that credits are not claimed more than once. Retirement records form the basis of legitimate offset claims and emissions disclosures.
Ensuring verification and audit readiness
Carbon credit verification requires organizations to maintain documentation related to project validation, third party audits, and registry records. These records must be accessible for internal review and external assurance processes. Gaps in documentation can weaken sustainability reporting and regulatory compliance.
Aligning reporting and supply chain data
Carbon credits are increasingly linked to broader sustainability and regulatory reporting requirements. Organizations must align credit data with emissions inventories, supplier disclosures, and compliance filings. This becomes more complex when emissions data spans multiple stakeholders across the value chain.
MMCM supports these operational requirements by enabling structured documentation workflows, and traceability across vehicle material recyclates and embedded emissions. Its platform helps align sustainability data across stakeholders and supports compliance and audit processes, including integration with an end-to-end solution for rvsf
Conclusion
Carbon credits operate as a market based tool for addressing emissions that remain after practical reduction limits are reached. A single credit corresponds to a verified amount of carbon dioxide equivalent and is issued, tracked, and retired within structured market systems.
Use of carbon credits spans both compliance and voluntary carbon markets, supporting emissions accounting and sustainability reporting. Credibility relies on carbon credit verification, transparent registries, and strict controls on ownership and retirement.
Paired with direct reduction actions, carbon credits help organizations manage transition periods responsibly.
FAQs
One carbon credit represents the verified reduction, avoidance, or removal of one metric ton of carbon dioxide equivalent. It is issued after emissions impact is measured and independently verified. The credit can be traded and later retired to account for emissions that cannot be reduced immediately.
Carbon credits in India are currently used mainly on a voluntary basis. Mandatory compliance mechanisms under Indian CCTS (Carbon Credit Trading Scheme) have already been levied on the regulated sectors.. Some additional sectors may also face future obligations, with rest organizations carbon credits to meet sustainability goals under the voluntary carbon market of India.
The price of a carbon credit varies widely depending on project type, location, market demand, and verification standard. Prices can range from a few dollars to much higher values per credit. Compliance market prices are often policy driven, while voluntary market prices are market driven.
Carbon credits are issued by recognized registries after a project’s emissions reductions are independently verified. Registries record each credit with a unique serial number and track ownership, transfers, and retirement. Verification bodies validate project data, but registries handle issuance and lifecycle tracking.
Carbon credit verification is carried out by independent third party auditors. They review project design, monitoring data, and emissions calculations against approved methodologies. Successful verification confirms that reductions are real, measurable, and additional, allowing credits to be issued in a registry.
Additionality is the basis for a carbon credit project verification. For proving additionality, a project must show that it goes beyond business as usual activities. This principle ensures carbon credits represent genuine climate impact rather than actions that would have happened anyway.
Permanence depends on project type. Some projects, such as geological carbon storage, offer long term permanence. Others, such as forestry projects, require ongoing monitoring to manage reversal risks. Rules like buffer reserves and monitoring periods are used to address permanence concerns.
Yes, organizations often use carbon credits to offset Scope 3 emissions that occur outside direct operational control. These include emissions from suppliers, logistics, and product end of life. Carbon credits help manage these emissions while longer term reduction strategies are developed.
When a carbon credit is retired, it is permanently removed from circulation in the registry. It cannot be traded or reused. Retirement allows an organization to apply the credit against reported emissions and ensures that the same emissions reduction is not claimed twice.
Carbon credits are widely recognized across several international markets through established standards and registries. Acceptance depends on the credibility of the verification process and registry used. While rules vary by country and market, verified carbon credits are commonly used worldwide.
