What is a carbon credit?
A carbon credit represents one tonne of CO₂ equivalent that has either been prevented from entering the atmosphere or removed from it. When a company buys a credit and retires it, it is claiming that the tonne of CO₂ associated with that credit has been offset. The practical consequence is that the company can subtract one tonne from its reported emissions.
This sounds straightforward. The problem is that the integrity of carbon credits varies enormously — from high-quality direct air capture credits backed by physical measurements to deeply questionable forestry credits based on unverifiable counterfactual baselines. An ESG analyst cannot treat all carbon credits as equivalent.
The Verra crisis of 2023
A 2023 Guardian/Zeit/SourceMaterial investigation found that over 90% of Verra's rainforest offset credits — the most widely used type — were 'phantom credits' that did not represent real carbon reductions. This triggered a collapse in voluntary carbon market prices and fundamentally damaged the credibility of offsetting as a net-zero strategy.
Compliance vs voluntary markets
There are two fundamentally different types of carbon markets, with very different quality characteristics.
| Dimension | Compliance Market (ETS) | Voluntary Market (VCM) |
|---|---|---|
| Participation | Mandatory — regulated entities must comply | Voluntary — companies choose to participate |
| Examples | EU ETS, California Cap-and-Trade, UK ETS | Gold Standard, Verra VCS, ACR, CAR |
| Price range | €50–€80/t CO₂ (EU ETS 2025) | $2–$200+/t depending on project type |
| Verification | Government-mandated third-party audit | Standard body verification (variable rigour) |
| Integrity | Generally high — legal penalties for fraud | Variable — major fraud and quality issues documented |
| Additionality | Built into cap design | Frequently contested — the core quality problem |
The four quality tests for a carbon credit
When evaluating whether a company's carbon credit strategy represents genuine climate action or greenwashing, apply four tests to each credit type they purchase.
1. Additionality
Would the emission reduction have happened without the carbon finance? A hydropower project in a country with mandatory renewable energy targets is not additional — it would have been built regardless. An avoided deforestation project in a region with a functioning economy but optional forest protection is more plausibly additional.
2. Permanence
Will the carbon storage last? Forestry projects are fundamentally at risk from wildfire, disease, drought, and policy change. The 2021 Bootleg Fire in Oregon burned through 1 million tonnes of forestry credits in weeks. Geological storage (CCS, DAC) offers permanence on century timescales. This is a genuine qualitative difference.
3. Measurability
Can the claimed reduction be verified against a credible baseline? The counterfactual problem — what would have happened without the project — is the hardest methodological challenge in carbon accounting. Satellite-monitored cookstove projects are more measurable than baseline deforestation rates in poorly governed forest regions.
4. No double counting
Has the same tonne been claimed by multiple parties? Under Article 6 of the Paris Agreement, host country Nationally Determined Contributions must make a Corresponding Adjustment when a credit is used by a company in another country. Many pre-2023 credits do not satisfy this requirement and are now considered non-Paris-aligned.
Credit types by quality tier
| Credit Type | Quality Tier | Key Risk |
|---|---|---|
| Direct Air Capture (DAC) | Highest | High cost ($200–$1000/t), limited scale |
| Bioenergy + CCS (BECCS) | High | Land use, energy intensity |
| Enhanced Rock Weathering | Medium-High | Permanence still under research |
| Cookstoves / Clean energy | Medium | Baseline methodology concerns |
| Reforestation (new planting) | Medium | Impermanence, time lag (decades to sequester) |
| REDD+ (avoided deforestation) | Low-Medium | Additionality, leakage, baseline inflation |
| Older renewable energy RECs | Low | Non-additional in most markets today |
ESG analyst framework
When reviewing a company's net-zero claim that relies on carbon offsets, ask these questions in order:
Carbon credit quality checklist
- What percentage of the net-zero claim is covered by actual emission reductions vs credits?
- What standard were the credits issued under (Gold Standard, Verra, ACR, compliance ETS)?
- What project types are being purchased — avoidance, reduction, or removal?
- Are the credits Paris-aligned with Corresponding Adjustments under Article 6?
- Are credits third-party audited by a recognised verifier?
- Is there a transition plan to phase out offsets as the company decarbonises operations?
- Are credit purchases disclosed at the vintage, project, and registry level?
The VCMI Claims Code
The Voluntary Carbon Markets Integrity Initiative (VCMI) published its Claims Code of Practice in 2023, which distinguishes between 'Core Carbon Claim,' 'Gold Carbon Claim,' and 'Platinum Carbon Claim' based on how much of the company's claimed offset is backed by high-integrity credits. Look for VCMI-aligned disclosures when assessing net-zero credibility.