CAPITAL FLOWS: MARKET MECHANISMS
Carbon Credits
Standards, quality assessment, pricing, and best practice.
The detailed mechanics of carbon credit procurement.
In 30 Seconds
Carbon credits connect emitters with projects that reduce or remove carbon:
- 1 credit= 1 tonne of CO2 reduced, avoided, or removed
- Global MarketsCombined value ~$115B (2024) - primarily compliance markets
- IntegrityShift to CCP-labeled credits (Core Carbon Principles)
Key insight: Not all credits are equal. Quality varies enormously - from $2/tonne (questionable) to $400+/tonne (direct air capture). Understanding quality is essential for credible procurement.
Two Types of Carbon Markets
Voluntary Carbon Markets (VCM)
Companies choose to buy
- Size (2024)$0.5-4 billion
- RequirementEntirely voluntary
- Key buyersMicrosoft, Salesforce, Shell
Why they buy: Reputation, stakeholder pressure, genuine climate commitment, net-zero targets
Now merging with high-integrity standards (ICVCM, the Integrity Council for the Voluntary Carbon Market) to restore buyer confidence.
Compliance Carbon Markets
Governments require permits
- Size (2024)~$113 billion
- RequirementLegal obligation
- ExamplesEU ETS, UK ETS, California
How it works: Government caps total emissions, companies must buy/trade allowances. Penalties for non-compliance.
20-200x larger than voluntary markets (EU ETS = 80%+ of value).
How a Carbon Credit Is Born
From project development to retirement
Project Development
Someone develops a project: forest protection (REDD+), clean cookstoves, tree planting, or direct air capture
Methodology Selection
Project follows approved methodology specifying how to measure carbon impact and baseline
Validation & Verification
Third-party auditors verify the project is real and the carbon maths is correct
Registration & Issuance
Registry (Verra, Gold Standard) issues credits with unique serial numbers
Trading & Retirement
Credits trade until a company "retires" them to offset emissions - permanently removing from circulation
The Key Players
Carbon markets have a surprisingly complex ecosystem
Standard-Setters & Registries
The rule-makers and record-keepers
- Verra - Largest registry, 1.3B+ credits issued
- Gold Standard - Premium, strong SDG focus (WWF)
- ACR - American Carbon Registry (since 1996)
- CAR - Climate Action Reserve (North America)
Rating Agencies
The quality assessors
- Sylvera - Rates 300+ projects AAA-D
- BeZero Carbon - Rates 400+ projects
- Calyx Global - 1,000+ ratings, subscriber-funded
Project Developers
The ones building projects
- South Pole - 700+ projects, 50+ countries
- 3Degrees, Pachama, ClimatePartner
- Natural Capital Partners
Governance Bodies
The integrity watchdogs
- ICVCM - Integrity Council for the Voluntary Carbon Market; sets Core Carbon Principles (CCP)
- VCMI - Claims Code of Practice for responsible credit use
- PACM - Paris Agreement Crediting Mechanism (UN-backed)
The Quality Problem
Not all carbon credits are created equal. This is the biggest challenge.
What Can Go Wrong
Additionality Failure
The project would have happened anyway, without carbon credit revenue.
Example: Protecting a forest that was never actually threatened.
Over-Crediting
More credits issued than actual carbon benefit.
Example: Inflated baseline assumptions, optimistic projections.
Permanence Risk
The carbon doesn't stay stored.
Example: A forest burns down, releasing all "sequestered" carbon.
Leakage
Protecting one forest pushes deforestation elsewhere.
Example: Emissions happen anyway, just somewhere else.
Topical: ICVCM and CCP
The Integrity Council for the Voluntary Carbon Market (ICVCM) was created to address credibility problems in the voluntary market. Its Core Carbon Principles (CCP) define what high-integrity credits must meet, and CCP labels let buyers spot higher-quality credits across registries.
Topical: Paris Agreement Article 6
Article 6 is the Paris Agreement framework for international carbon cooperation. It has two market mechanisms and one non-market track: 6.2 allows bilateral trading of credits between countries (ITMOs), 6.4 creates a UN-supervised crediting mechanism (often called the Article 6.4 mechanism/PACM), and 6.8 covers non-market cooperation without trading.
How the Market Is Responding
- ICVCM Core Carbon Principles (CCP) labels are now the primary integrity benchmark
- Rating agencies (Sylvera, BeZero, Calyx) provide independent project-level due diligence
- Article 6 registries ensure unique tracking and prevent double-counting
- SBTi Corporate Net-Zero Standard V2.0 tightens rules on Scope 3 and removals (published 2026, mandatory from 2028)
What Does a Carbon Credit Cost?
What Affects Price
- Project typeRemoval > Avoidance
- Quality ratingAAA commands premium
- Co-benefitsBiodiversity, community add value
- VintageRecent worth more
- RegistryGold Standard premium
Rough Price Ranges (2024)
How Companies Should Use Carbon Credits
The Mitigation Hierarchy
The mitigation hierarchy supported by VCMI and SBTi Corporate Net-Zero Standard V2.0:
Best Practices
Do
- • Set science-based targets first - credits don't replace reduction
- • Prioritize quality over quantity
- • Diversify project types
- • Use rating agencies for due diligence
- • Be transparent - disclose what you're buying and why
- • Focus on removals for net-zero claims
Don't
- • Buy cheap credits to avoid hard decarbonisation
- • Assume all credits are equal
- • Claim “carbon neutral” without reduction context
- • Put all eggs in one basket
- • Buy purely on price
- • Skip due diligence
Common Criticisms (And Responses)
"Carbon credits are just greenwashing"
The concern: Companies buy cheap credits instead of reducing emissions.
The nuance: Done badly, yes. Done well, credits fund real climate projects AND companies reduce emissions. The VCMI Claims Code guides responsible use: credits should supplement, not replace, decarbonization.
"REDD+ forests aren't really saving carbon"
The concern: High-profile investigations found some forest projects over-credited.
The nuance: Some projects were poor quality. But rating agencies now flag these. The market is learning. Not all forest projects are bad - due diligence matters.
"The market is unregulated"
The concern: No government oversight means anything goes.
The nuance: It's self-regulated through standards bodies. ICVCM is adding a quality layer. It's imperfect, but improving. Compliance markets show regulation is possible.
Quick Reference
Key Terms
| Term | Meaning |
|---|---|
| Additionality | Would the project have happened without credit revenue? |
| Article 6 | Paris Agreement rules for international carbon trading cooperation between countries |
| Article 6.2 | Bilateral carbon trading agreements between two countries (operational 2026) |
| Article 6.4 | UN-backed international carbon market mechanism (PACM), still developing |
| Carbon credit | Certificate representing 1 tonne CO2 reduced/removed |
| CBAM | Carbon Border Adjustment Mechanism - EU tariff on carbon-intensive imports (active Jan 2026) |
| CCP | Core Carbon Principles - ICVCM quality label for high-integrity carbon credits |
| CORSIA | Carbon Offsetting and Reduction Scheme for International Aviation (mandatory 2027) |
| ICVCM | Integrity Council for the Voluntary Carbon Market - sets quality rules for high-integrity credits |
| ETS | Emissions Trading System - government-run compliance carbon market (e.g., EU ETS, UK ETS) |
| Leakage | Does protecting one area push emissions elsewhere? |
| Offset | Using a credit to compensate for emissions elsewhere |
| PACM | Paris Agreement Crediting Mechanism - the UN centralized carbon trading system under Article 6.4 |
| Permanence | Will the carbon stay stored long-term? |
| REDD+ | Reducing Emissions from Deforestation and Degradation |
| Registry | System to track, issue, and retire carbon credits (e.g., Verra, Gold Standard, national registries) |
| Retirement | Permanently removing a credit from circulation after use |
| VCM | Voluntary Carbon Market |
| VCU | Verified Carbon Unit (Verra's credit) |
| VER | Verified Emission Reduction (Gold Standard's credit) |
| Vintage | The year a credit was issued |
Carbon Markets in 2026: What's Changing
Article 6 Now Operational
Bilateral agreements (6.2) infrastructure live. Singapore-Indonesia-Rwanda implementation agreements signed. UN mechanism (6.4) developing for 2026-27 scaling.
CORSIA Aviation Offsetting
Mandatory from 2027. Airlines preparing procurement strategies, driving demand for aviation-eligible high-quality credits.
Market Convergence
Voluntary and compliance markets merging. Governments (Singapore, South Africa, Indonesia) now allow voluntary credits for compliance, creating government-backed demand.
CCP Supply Surge
The arrival of CCP-labeled credits is standardizing high-integrity benchmarks across voluntary and compliance markets.
Technology & AI
Registry interoperability, AI-powered due diligence, transparency platforms reducing procurement time from 12-18 months to weeks.
EU CBAM Fully Applicable
Since Jan 1, 2026, tariffs on carbon-intensive imports create pressure for global emissions measurement and reduction.
SBTi Net-Zero Standard V2.0
Published 2026, mandatory from 2028, with stricter Scope 3 and removal requirements.
Removal Acceleration
Shift toward durable removals (Biochar, DAC) as net-zero targets approach and quality scrutiny increases.
The Bottom Line
Carbon credits aren't perfect. They've had scandals, quality issues, and greenwashing concerns. But they're also channeling billions to climate projects, creating price signals for carbon, and evolving rapidly with better standards. For companies serious about climate, understanding how to navigate carbon credit procurement is becoming essential.
Disclaimer: This content is for general educational and informational purposes only. It does not constitute financial, investment, legal, or tax advice and should not be relied upon as such. Pandion Studio does not provide regulated investment advice. For specific guidance on your circumstances, please consult appropriately qualified professionals.