If you are wondering how carbon markets work: they trade credits, each usually worth one metric ton of CO2, either under a legal cap or voluntarily. Whether those credits are real is the hard part.
This explainer sits within our climate news coverage.
| Item | Value |
|---|---|
| Size of one carbon credit | Usually one metric ton of CO2 |
| Voluntary carbon market value in 2023 | US$723 million (down from US$1.9 billion in 2022) |
| Cap-and-trade systems in place in 2023 | 36 |
| Revenue from selling emissions allowances | A record US$74 billion |
| Article 6 rulebook finalised | At COP29 in 2024 |
These figures come from Eco-Business and RECOFTC. They can change, so check the sources before you rely on them.
What carbon credits and offsets actually are
A carbon credit lets a government or company cut emissions without slashing them directly, by funding projects that reduce or capture carbon elsewhere. According to Eco-Business, in a report dated Dec. 6, 2024, one credit usually corresponds to one metric ton of carbon dioxide that was captured or kept out of the atmosphere.
Projects that generate credits include:
- Forest restoration that captures carbon from the atmosphere.
- Forest protection that stops trees being destroyed.
- Renewable energy and methane capture projects.
The carbon offset market is a subset of the wider carbon market. As RECOFTC explains, it focuses on credits from projects that reduce, remove or avoid emissions, which buyers can use to compensate for their own emissions.
How compliance markets and cap-and-trade work
In a compliance market, governments set legal limits on emissions, so companies must buy credits if they exceed their cap. The system has government oversight and enforceable rules, which makes it a regulated market, as RECOFTC notes.
The most common design is cap-and-trade. In simple terms, it runs like this:
- A government sets a legal cap on greenhouse gas emissions for a sector.
- Companies that exceed the limit buy allowances from others that still have headroom.
- Money flows towards the companies that can cut emissions more cheaply.
The International Carbon Action Partnership counted 36 cap-and-trade systems in place in 2023, with revenues from allowance sales hitting a record US$74 billion, Eco-Business reported in December 2024. The largest is the European Union Emissions Trading System, and in some systems companies can also buy offset credits from outside projects.
Some governments put a price on carbon through a tax rather than trading, and our carbon tax explained guide covers how that route differs.
Voluntary carbon markets and why they shrank
In the voluntary carbon market, companies buy offset credits even when no law obliges them to. They tend to do this to offset future emissions in advance or to compensate for emissions already released.
Those credits are mostly provided by independent institutions such as Verra and Gold Standard, which are expected to set standards and verify that projects really captured or avoided carbon. Eco-Business reported that the market shrank sharply to US$723 million in 2023 from US$1.9 billion in 2022, according to Ecosystem Marketplace, amid scandals over business practices and carbon claims.
The voluntary market is optional and therefore largely unregulated, which is why its credibility depends so heavily on the standard setters. Several developers have been accused of selling credits that failed to avoid emissions or capture carbon, a problem the same report calls an integrity crisis.
How Article 6 connects national carbon trading
Article 6 of the 2015 Paris Agreement sets out how countries can cooperate to reach their climate goals. It was agreed in principle in 2015 but took years to settle, and negotiators finalised the rulebook at COP29 in Baku in 2024, according to RECOFTC’s piece of 30 April 2025.
The rulebook covers two routes:
- Article 6.2: bilateral trading between countries.
- Article 6.4: a UN-supervised market open to both countries and corporations.
A first deal under the bilateral route had already happened by the time of the Eco-Business report: a Thai electric bus operator sold a credit to a Swiss fossil fuel group, after launching a fleet of electric buses.
To avoid double counting, the rules call for “corresponding adjustments” to host-country inventories, according to the Model Diplomat glossary as of its June 22, 2026 review.
As of RECOFTC’s April 2025 piece, the launch of Article 6.4 could significantly reshape global carbon trading in 2025, though its success depends on equity and integrity.
How each government uses these tools differs, so our climate policy by country overview is a useful next step.
Why are carbon offsets so controversial?
The core objection is that offsets can delay real cuts. RECOFTC says the market has been criticised for letting high-emitting and wealthier countries and corporations keep polluting while buying credits, rather than reducing emissions at source.
Supporters see it differently. Eco-Business reports that exponents say credits help fund climate action in places such as the Amazon rainforest, and are needed in industries like steel and cement production where emissions are hard to cut.
There are also fairness worries. RECOFTC says it remains uncertain whether safeguards and fair benefit-sharing will reach Indigenous peoples and local communities.
Buyers are reacting too. With greenwashing under scrutiny, many companies are shifting towards insetting, nature-based solutions and direct emissions reductions, which RECOFTC says further weakens demand for offsets.
How can you judge the quality of a credit?
Critics argue many offset projects fail tests of additionality, permanence or accurate baselines, according to the Model Diplomat glossary. Companies also want guarantees of social co-benefits before they buy voluntary credits.
When you read about a credit, ask these questions:
- Does an independent registry or standard verify it?
- Does the project pass tests of additionality and permanence?
- Does it carry a recognised quality label?
- Are local communities protected and paid fairly?
The Integrity Council for the Voluntary Carbon Market released its Core Carbon Principles-labelled methodologies in early June 2024, though RECOFTC adds that uptake has been slow and trust remains fragile. Verra’s programme gained ICVCM approval in early May 2024, and in April 2025 the French government committed to support credits aligned with the Core Carbon Principles.
Frequently asked questions
What is the difference between compliance and voluntary carbon markets?
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Compliance markets are set by law, with legal caps that force companies to buy credits if they exceed them. Voluntary markets are optional, and companies or individuals buy credits to offset emissions, usually as part of sustainability goals.
Is one carbon credit always one ton of CO2?
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Usually. Eco-Business reported in December 2024 that one credit typically corresponds to one metric ton of CO2 captured or prevented from entering the atmosphere.
What does Article 6 of the Paris Agreement do?
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It sets out how countries can cooperate on climate goals, including through carbon credit trading. As of RECOFTC’s April 2025 piece, negotiators had finalised its rulebook at COP29 in 2024.
Do carbon offsets let companies keep polluting?
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Critics say they can, because buyers may purchase credits instead of cutting emissions at source. Supporters answer that credits fund climate action and help in hard-to-abate industries, so the quality and use of each credit matter.
