What is a carbon credit

A carbon credit is a tradeable certificate representing one metric tonne of carbon dioxide equivalent (tCO2e) that has been either prevented from entering the atmosphere or actively removed from it. The credit is issued by an independent registry after a third-party auditor confirms that the underlying project delivered a real, measurable emission reduction. Once retired, the credit is permanently cancelled and cannot be resold, transferred, or reused.

How a carbon credit works in practice

Every carbon credit follows a lifecycle with distinct stages: project development, validation, monitoring, verification, issuance, and retirement. Each stage involves different actors and serves a specific gatekeeping function.

Consider a landfill gas capture project. A landfill that would otherwise vent methane into the open air installs equipment to capture and destroy the gas. A project developer writes a Project Design Document (PDD) describing the baseline scenario (venting) and the project scenario (capture and destruction). An accredited third-party auditor, known as a Validation and Verification Body (VVB), reviews the PDD and confirms the methodology is sound. After the project operates for a monitoring period, the VVB returns to verify the actual emission reductions achieved. Only then does the registry (Verra, Gold Standard, or another recognized body) issue credits, each carrying a unique serial number tied to a specific vintage year and project.

When a buyer acquires that credit and retires it against its own emissions inventory, the registry marks the serial number as retired. The retirement is public, traceable, and irreversible.

Voluntary market versus compliance market

Carbon credits circulate in two distinct markets:

• Compliance markets are created by regulation. A government or supranational body sets an emission cap, allocates or auctions allowances, and obligates covered entities to surrender enough allowances to match their emissions. The EU Emissions Trading System (EU ETS) is the largest example. Credits in compliance markets are often called “allowances” rather than “credits,” though the unit still represents one tonne of CO2e.
• Voluntary markets operate outside regulatory mandates. Companies, organizations, or individuals purchase credits to offset emissions that are not subject to a compliance obligation. The registries most associated with the voluntary market are Verra (which issues Verified Carbon Units, or VCUs) and Gold Standard (which issues Gold Standard Verified Emission Reductions, or GS VERs).

The distinction matters because credits from one market are generally not fungible with credits from the other. A VCU cannot be surrendered in the EU ETS, and an EU allowance is not typically retired through Verra.

Key quality criteria

Not all carbon credits carry the same credibility. The market broadly evaluates credits against five principles:

• Additionality: the emission reduction would not have occurred without the carbon finance incentive.
• Permanence: the reduction or removal is not easily reversible. Forest projects, for example, face reversal risk from fire or illegal logging, which is why registries require buffer pools of credits held in reserve.
• No leakage: the project does not simply shift emissions to another location.
• Conservative quantification: the baseline and reduction calculations use cautious assumptions.
• Unique claim: the same tonne is not counted by more than one party (the problem commonly called “double counting”).

The Integrity Council for the Voluntary Carbon Market (ICVCM) codified these principles into its Core Carbon Principles (CCPs), which function as a quality benchmark for voluntary credits.

How it applies in Brazil

Brazil is one of the largest sources of voluntary carbon credits globally, driven by projects in avoided deforestation (REDD+), reforestation, and renewable energy across the Amazon and Cerrado biomes.

The Brazilian regulated carbon market was established by federal law (Law 15.042/2024), which created the Brazilian Emissions Trading System (SBCE, Sistema Brasileiro de Comércio de Emissões). The SBCE covers entities whose greenhouse gas emissions exceed a threshold set in the legislation and operates under the oversight of the designated national authority. Implementing regulations are still being developed to define operational details such as allocation methods, reporting obligations, and the role of voluntary credits within the compliance framework.

International professionals working with Brazilian operations should note that project-level carbon credits generated in Brazil and registered on international voluntary registries (such as Verra) are separate instruments from the allowances that will circulate under the SBCE. How, or whether, voluntary credits will be accepted for compliance obligations under the SBCE depends on forthcoming regulation. Until that regulatory detail is finalized, companies should treat voluntary credits and compliance instruments as distinct categories with different legal standing.

Brazil also has obligations under Article 6 of the Paris Agreement, which governs international transfers of mitigation outcomes between countries. When a credit generated in Brazil is used by a foreign buyer, the question of “corresponding adjustment” arises: Brazil must decide whether to adjust its national emissions inventory so the same reduction is not counted toward both Brazil’s NDC (Nationally Determined Contribution) and the buyer’s offset claim.

The most common mistake

The most frequent confusion is treating a carbon credit as proof that the buyer’s own emissions decreased. It is not. A retired credit means the buyer financed an emission reduction or removal that happened somewhere else. The buyer’s operational emissions remain unchanged. This distinction is critical for corporate disclosure: most reporting frameworks (including the GHG Protocol) require that a company’s Scope 1, 2, and 3 inventory be reported before any offset is applied, not after. Credits may appear in a separate line or footnote, but they do not reduce the reported inventory itself.

A related error is conflating a credit with a “carbon removal.” Many credits on the market represent avoided emissions (preventing deforestation, capturing methane) rather than removal of CO2 already in the atmosphere. Removal credits, such as those from direct air capture or biochar, represent a physically different climate intervention and typically trade at a significant price premium.

Understanding this difference is not academic. Regulators, investors, and rating agencies increasingly scrutinize whether a company’s net-zero claim relies on avoidance credits, removal credits, or a combination, and whether those credits meet recognized quality standards.

Primary sources: Verified Carbon Standard program (Verra, 2026); The Core Carbon Principles (ICVCM, 2023); Law 15,042 of 11 December 2024, creating the SBCE (Planalto, 2024); Paris Agreement, official text (United Nations Treaty Collection, 2015).