Carbon credits explained: how the carbon market actually works in 2026

What a carbon credit is, how one gets made and verified, what makes it credible and where the market is heading. A working guide from a carbon project developer.

Photo by Noah Buscher on Unsplash

A carbon credit is a simple idea wrapped in a complicated market. One credit stands for one tonne of carbon dioxide kept out of the air or pulled back out of it. That part is clean. Everything around it gets messy: who issues credits, what makes one believable, why two credits wearing the same label can sell for wildly different prices.

The market spent 2024 in a hard reset and came out smaller, slower and far more focused on quality. This guide runs the whole chain from a single tonne to a retired credit and it answers the questions people actually ask, with a glossary at the end.

What is a carbon credit?

A carbon credit is a certificate that represents one tonne of carbon dioxide equivalent (CO2e) either kept out of the atmosphere or removed from it.

The “equivalent” matters. A credit can cover methane, nitrous oxide or other greenhouse gases, each converted into the amount of CO2 that would cause the same warming. So one credit is always one tonne of warming avoided or undone, whatever the gas.

A credit is not the project itself. It is the verified, registry issued unit that comes out the far end of the project once someone has proved the tonne is real. Buy a credit, retire it and you can count that tonne against your own emissions. The credit is the receipt, not the work.

How does a carbon credit get created?

A credit is created through a long verification chain that turns a climate project into units a registry will issue.

Eight steps from project idea to issued credit. Validation and verification are the two independent checks that make a credit count.

It runs roughly like this. A developer checks whether a project is feasible, then picks a methodology which is the approved recipe for measuring that kind of impact. The developer writes a project design document setting out the baseline, the expected reductions and how they will be measured. An independent auditor called a validation and verification body checks the design. A registry then registers the project. The project runs and gets monitored. The same kind of auditor comes back to verify the actual results against the baseline. Only then does the registry issue credits for the tonnes that were genuinely delivered.

Every credit gets a serial number and a vintage, the year the reduction or removal actually happened. That chain, design then independent check then registry issuance, is the whole reason a credit means more than a promise.

Voluntary or compliance: what is the difference?

There are two carbon markets. One is mandatory and one is by choice.

Compliance markets are built by governments. A regulator caps how much a set of companies can emit and those companies have to surrender allowances or eligible credits to cover what they release. The European Union Emissions Trading System is the largest example. Miss the cap and you pay.

The voluntary market is exactly what it sounds like. Companies and individuals buy and retire credits because they want to, to hit a net zero target, to cover emissions they cannot yet cut or to back climate projects they believe in. No law forces it.

The wall between the two is starting to come down. At COP29 in late 2024, governments finalised the rules for Article 6 of the Paris Agreement after nine years of talks, including a two tier registry that begins to merge the voluntary and compliance worlds. We expect that line to keep blurring.

Who sets the standards and who keeps the records?

A handful of standards write the rules and registries keep the ledger. They are not the same thing.

A standard owns the rulebook and the methodologies. A registry is the database that tracks each credit from issuance to retirement so it cannot be sold twice. Often one organisation does both.

The names you will see most are Verra, which runs the Verified Carbon Standard and issues the largest share of credits and Gold Standard, known for tight rules and strong community co-benefits. Then there is the United Nations system, the older Clean Development Mechanism and its successor, the Article 6.4 mechanism now taking shape under the Paris Agreement. Beyond those sit the American Carbon Registry, ART, which handles jurisdictional forest programmes, Plan Vivo, the Global Carbon Council, Cercarbono, BioCarbon Registry and newer specialists like Isometric built for durable removals. Each has its own methodologies, fees and reputation.

What kinds of carbon projects are there?

Carbon projects fall into two camps. Some avoid emissions that would otherwise happen. Others remove carbon that is already in the air.

Avoidance and reduction covers protecting forests from being cleared, building renewable energy in place of fossil power, handing out efficient cookstoves and capturing gas from landfills. The carbon stays unburned or the methane never escapes.

Removal goes the other way and takes carbon back out. That includes planting and restoring forests, building soil carbon, making biochar, pulling CO2 straight from the air with machines and speeding up natural rock weathering.

Two more splits matter. Nature based projects work with land and ecosystems, while engineered projects use technology. And the market separates land use projects, often grouped under the label AFOLU, from everything else.

How much does a carbon credit cost?

There is no single price and the gap is enormous. Ecosystem Marketplace put the market’s volume weighted average at $6.34 a tonne in its latest report, down from $6.71 the year before, a number held down by a large stock of older low priced credits. The average hides the real story. Credits that buyers trust sell well above it. Engineered removals like direct air capture run into the hundreds of dollars a tonne. Same nominal tonne, wildly different prices.

The spread comes from a few things. Removals cost more than avoidance. Newer vintages beat older ones. An independent quality rating lifts the price, as do real co-benefits like jobs, clean water or protected habitat. The standard behind the credit matters too. A buyer is not really paying for a tonne. They are paying for how confident they can be that the tonne is real and confidence is not evenly distributed.

What makes a carbon credit “high integrity”?

A high integrity credit is one where the tonne is real, additional, permanent and counted only once.

Unpack that and you get the tests every serious buyer now applies. Additionality means the climate benefit would not have happened without the carbon finance. Permanence means the stored carbon will not quietly reverse or there is a buffer reserve to cover it if it does. Robust measurement, no double counting, independent validation and verification and real social and environmental safeguards round it out.

There is now a shared reference point for all of this. The Integrity Council for the Voluntary Carbon Market publishes the Core Carbon Principles. By October 2025 more than 51 million credits carried CCP approved methodologies, about 4 percent of the prior year’s volume, with far more in the pipeline. Governments are starting to write these principles into their own rules. On the buyer side, the Voluntary Carbon Market Integrity Initiative sets out how a company can actually claim the credits it retires without overstating things.

What does it mean to retire a credit?

A credit only does its job when it is retired.

Retirement means permanently cancelling the credit in the registry so no one else can ever use it. The serial number gets marked retired and the tonne is spoken for. That is the moment an offset claim becomes legitimate. Before retirement, a credit can change hands many times.

This is also why retirements are the truest signal of demand in the market. A credit sitting in a trader’s account might get resold. A retired credit has been used for its purpose and is gone.

How big is the market and where is it going?

The market is smaller than the headlines suggest and changing shape quickly.

Ecosystem Marketplace, the longest running tracker of the voluntary market puts annual retirements at roughly 180 to 200 million tonnes since 2021. In 2024 traded volumes fell about 25 percent, yet prices slipped only 5.5 percent and retirements barely moved. That gap is the whole story. It was a quality reboot and not a collapse. Older, weaker methodologies wound down while a higher integrity market scaled up underneath.

Dollar figures vary wildly depending on what gets counted, from a couple of billion in traded value to estimates many times higher once compliance volumes and projections are folded in, so treat any single number with care. The direction is clearer than the size. Integrity is leading, removals are rising and the voluntary and compliance markets are converging now that the core Article 6 rulebook has moved from negotiation into implementation.

What are the main criticisms and how is the market responding?

The market earned a lot of its criticism. It is also fixing the worst of it.

The complaints are real. Some older projects, especially certain avoided deforestation and renewable energy methodologies issued far more credits than the climate benefit justified. Additionality has been hard to prove. Stored carbon can reverse when a forest burns. And companies have sometimes used cheap credits to look greener than they were.

The response has teeth. The Integrity Council raised the bar and rejected entire categories of legacy renewable methodologies. Independent ratings agencies now grade credits the way bond analysts grade debt, so quality is visible before you buy. And bodies like the Science Based Targets initiative are tightening what a company is allowed to claim. None of this makes the market perfect. It does make it harder to hide a bad credit, which is the point.

How long does it take to develop a carbon project?

Most carbon projects take 12 to 24 months to reach their first issuance and plenty take longer.

The time goes into the parts buyers never see. Choosing the right methodology, running the baseline study, gathering field data, sitting in the validation queue and then waiting through a monitoring period before anything can be verified. Forestry projects can keep issuing credits for decades while other types run on shorter cycles.

This is where a developer’s work actually concentrates. From our own project work at KMS, the timeline is set by the field surveys and the baseline and not by the paperwork. The forms are the easy part. Getting the measurement right on the ground is what takes the year.

Glossary

CO2e: Carbon dioxide equivalent. A common unit that converts other greenhouse gases into the amount of CO2 that would cause the same warming.

Additionality: Proof that the climate benefit would not have happened without carbon finance. The core test of a real credit.

Baseline: The emissions that would have happened without the project. Credits are measured against it.

Leakage: Emissions that simply move elsewhere because of a project, such as logging shifting to the next valley. It gets deducted.

Permanence: Whether stored carbon stays put. Forests can burn so permanence is a genuine risk.

Vintage: The year the reduction or removal actually happened. Older vintages usually sell for less.

MRV: Monitoring, reporting and verification. The process that proves what a project delivered.

VVB: Validation and verification body. The independent auditor that checks a project first on paper then in the field.

Retirement: Permanently cancelling a credit in the registry so it cannot be used again. The point at which an offset claim becomes real.

Buffer pool: A shared reserve of credits that standards hold back to cover reversals like fire or disease.

Co-benefits: Gains beyond carbon such as jobs, clean water or biodiversity.

Corresponding adjustment: An accounting step under Article 6 that stops two countries counting the same tonne.

Sources

• Ecosystem Marketplace, State of the Voluntary Carbon Market 2025. Market size, retirements and the $6.34 average. https://www.ecosystemmarketplace.com/publications/2025-state-of-the-voluntary-carbon-market-sovcm/
• Integrity Council for the Voluntary Carbon Market, the Core Carbon Principles. https://icvcm.org
• UNFCCC, Article 6 of the Paris Agreement. https://unfccc.int
• Voluntary Carbon Market Integrity Initiative, the Claims Code of Practice. https://vcmintegrity.org
• Science Based Targets initiative, the Corporate Net Zero Standard. https://sciencebasedtargets.org
• Verra, the Verified Carbon Standard. https://verra.org
• Gold Standard. https://www.goldstandard.org

This guide was written by Kanaka Management Services (KMS Group), a carbon project developer and carbon markets consultancy that has worked across Verra, Gold Standard, the UN mechanisms and REDD+ since 2007, with projects across several continents. More at kms-group.com and on LinkedIn.