What Are Carbon Credits - And How Do Businesses Use Them?

Most UK businesses come across carbon credits regularly now. Supply chain questionnaires, sustainability reports, investor pressure. The exposure is common. What is less common is a clear understanding of how they actually work, or what separates a credible credit from a poor-quality one.

Here is a plain-English explanation of how they work, where they come from, and what to look for in any provider.

What are Carbon Credits?

A carbon credit is a certificate representing the reduction, avoidance, or removal of one tonne of carbon dioxide equivalent (CO2e) from the atmosphere. Each credit is a standardised unit that can be bought, sold, and retired, and retiring a credit is the act of permanently removing it from circulation to claim the associated emissions reduction.

The terms carbon credit and carbon offset are often used interchangeably. Strictly speaking, carbon credit is the broader term covering both compliance and voluntary markets, while carbon offset more specifically refers to voluntary credits used by businesses to compensate for their own emissions. In practice, the distinction rarely matters for most buyers.

Where Do Carbon Credits Come From?

Carbon Credits are generated by projects that either prevent greenhouse gas emissions from occurring or actively remove CO2 from the atmosphere. The main project categories are:

Forestry and land use – avoiding deforestation (REDD+), reforestation, and improved forest management that increases carbon stored in trees and soil

Renewable energy – funding wind, solar, or hydro projects in developing countries where they displace fossil fuel generation that would otherwise continue

Methane capture – collecting and destroying methane from landfill sites, coal mines, or agricultural operations before it can escape into the atmosphere

Energy efficiency – distributing efficient cookstoves or lighting in communities reliant on biomass or kerosene, reducing both emissions and health impacts

Carbon removal – direct air capture, biochar, enhanced rock weathering, and ocean-based approaches that physically extract CO2 from the atmosphere

Independent verification is what gives a credit its value. Before a credit is issued, a third party confirms the emissions reduction is real, measurable, and additional. That last word matters: the project funding must be what made the reduction happen. Without it, the emissions would have continued.

How Are Carbon Credits Verified?

Verification is what separates a credible carbon credit from a worthless piece of paper. The main voluntary market standards are:

Verified Carbon Standard (Verra/VCS) – the largest voluntary carbon standard globally. Projects are assessed for additionality, permanence, and measurability before credits are issued and listed on the Verra registry.

Gold Standard – founded with WWF support and widely considered the most rigorous standard. All projects must demonstrate measurable sustainable development benefits beyond carbon reduction, such as improved livelihoods or biodiversity.

Plan Vivo – a specialist standard focused on smallholder and community land use projects, particularly in lower-income countries.

In compliance markets such as the UK Emissions Trading Scheme (UK ETS), allowances are issued under government-regulated frameworks with their own verification and audit requirements.

How Are Carbon Credits Traded?

Carbon credits move through two distinct markets:

Compliance markets cover businesses legally required to account for their emissions. Under the UK ETS, qualifying organisations in energy-intensive industries and the power sector must surrender allowances to cover their reported emissions each year. Allowances are allocated to participants or bought at auction, with prices determined by supply and demand.

Voluntary markets operate outside regulatory mandates. Businesses, charities, and individuals purchase credits to compensate for emissions voluntarily, whether to meet internal sustainability targets, support customer-facing net zero claims, or contribute to broader climate goals. Credits are sourced from project developers, brokers, or specialist trading platforms.

Once a voluntary credit has been purchased and used, it is retired on the relevant registry, creating a permanent public record that the credit has been claimed and cannot be resold.

What Affects the Price of a Carbon Credit?

Credit prices vary considerably across the voluntary market, and for good reason. A few factors drive the variation:

Project type – nature-based removal credits (reforestation, blue carbon) typically trade above avoided emissions credits. Technology-based removal (direct air capture) is currently the most expensive category

Certification standard – Gold Standard credits generally command a premium over VCS-only or uncertified credits

Vintage – older credits tend to trade at a discount; recently verified credits are preferred by most buyers

Co-benefits – projects with verified biodiversity, social, or community benefits attract higher prices from impact-focused buyers

In the current voluntary market, credits range from around £3 to £80 or more per tonne CO2e, depending on these factors. Prices at the low end nearly always indicate weak project quality or thin verification. Not always, but nearly always.

What to Look for in a Carbon Credit Provider

The voluntary market has no shortage of brokers, platforms, and project developers, and quality varies enormously. Before committing to any provider, get clear answers to these:

Are credits verified to a recognised standard (VCS, Gold Standard, or equivalent)?

Is each credit individually registered and retired on a public registry after purchase?

What evidence exists that the emissions reduction would not have happened without the project?

For land-based projects, how is long-term permanence protected if the forest burns or land use changes?

Does the provider publish retirement certificates so buyers can verify their credits have been retired?

If a provider can’t answer those questions clearly, or is offering credits well below market rates with no explanation, that’s reason enough to look elsewhere.

How This Connects to Your Energy Strategy

For most businesses, the most cost-effective starting point for reducing carbon exposure is not buying credits, it is reducing actual energy consumption and switching to lower-carbon supply contracts.

Both cut the emissions base that any offset programme has to cover. And unlike credits, they produce ongoing savings rather than recurring costs.

Catalyst works with businesses across the UK on energy procurement and cost management. If you want to understand your energy footprint before looking at the carbon credit market, we can help.

Speak to Catalyst about your energy and carbon strategy

Further Reading: What Is the UK Emissions Trading Scheme?, the mandatory compliance framework that operates alongside the voluntary carbon credit market and directly shapes UK electricity prices.