Carbon Credits Explained: A Guide for UK Businesses
Carbon Credits Explained: A Guide for UK Businesses
Carbon credits are the currency of carbon markets — but what are carbon credits, how do voluntary carbon markets differ from the UK emissions trading scheme, and what should UK businesses know before buying carbon credits? This guide provides carbon credits explained in practical terms, covering compliance and voluntary systems, carbon credit schemes UK organisations encounter, and the quality criteria that separate credible purchases from greenwashing risk.
Pair this guide with our carbon offsetting overview for the broader strategic context.
Last updated: 24 June 2026 | Reviewed by Sustainability Editor
What are carbon credits?
A carbon credit is a tradable certificate representing one tonne of carbon dioxide equivalent (CO₂e) either removed from the atmosphere or avoided through an approved project. Credits are issued after verification and retired when used to offset emissions.
Key takeaways
- Carbon credits operate in two distinct systems: compliance markets (e.g. UK ETS) and voluntary carbon markets.
- One credit = one tonne CO₂e reduced or removed, but quality varies significantly between projects.
- UK businesses in covered sectors must comply with the emissions trading scheme — voluntary credits do not substitute for this.
- Before buying carbon credits, complete reductions first and apply quality criteria: additionality, permanence, verification.
- UK forestry schemes (Woodland Carbon Code, Peatland Code) offer domestically verified removal credits.
- See carbon offsetting for how credits fit a broader climate strategy.
What are carbon credits?
Definition
A carbon credit (or carbon offset credit) represents a quantified greenhouse gas benefit — one metric tonne of CO₂ equivalent — from a project that either:
- Avoids emissions that would otherwise have occurred (e.g. replacing fossil fuel generation with renewables)
- Reduces emissions from an existing source (e.g. capturing methane from landfill)
- Removes CO₂ from the atmosphere (e.g. afforestation, direct air capture)
Credits are issued by registries under recognised standards, traded (in voluntary markets), and retired when an organisation uses them to offset its own emissions.
How credits differ from allowances (UK ETS)
| Term | System | Meaning |
|---|---|---|
| Carbon credit | Voluntary market | Offset from a project, purchased voluntarily |
| Allowance (permit) | UK ETS | Government-issued right to emit 1 tonne within compliance cap |
Businesses outside UK ETS sectors typically encounter voluntary credits. Covered installations must surrender UK ETS allowances — not voluntary offsets — for compliance.
Compliance vs voluntary carbon markets
UK Emissions Trading Scheme (UK ETS)
The UK ETS is the UK’s cap-and-trade emissions trading scheme, administered by DESNZ and the Environment Agency. It replaced UK participation in the EU ETS following Brexit.
Who participates:
- Power stations and industrial installations above thresholds
- Aviation (domestic UK flights)
- Waste incineration (from 2028 under current expansion plans)
How it works:
- Government sets a cap on total emissions in covered sectors
- Installations receive or purchase allowances
- Each year, operators surrender allowances matching their verified emissions
- Allowances trade on secondary markets, setting a carbon price signal
UK ETS vs voluntary credits:
| Feature | UK ETS | Voluntary carbon market |
|---|---|---|
| Mandatory? | Yes, for covered installations | No |
| Units | Allowances | Project-based credits |
| Purpose | Regulatory compliance | Voluntary offsetting, neutrality claims |
| Price driver | Auction + market trading | Project type, quality, demand |
| Use for corporate claims | Compliance reporting | Carbon neutral / residual neutralisation |
Most UK SMEs are not UK ETS participants. They engage with voluntary carbon markets if they purchase offsets.
Voluntary carbon markets
The voluntary carbon markets connect project developers with corporate buyers. Major registries include:
- Verra (Verified Carbon Standard / VCS)
- Gold Standard
- American Carbon Registry
- Woodland Carbon Code (UK)
- Peatland Code (UK)
Market value has grown substantially, but quality concerns have prompted integrity initiatives including the Integrity Council for the Voluntary Carbon Market (ICVCM) and its Core Carbon Principles (CCP) label.
Carbon credit schemes UK businesses should know
International programmes
| Standard | Typical projects | Considerations |
|---|---|---|
| VCS (Verra) | Renewables, forestry, cookstoves | Large volume; scrutinise individual projects |
| Gold Standard | Renewables, efficiency, WASH | Strong sustainable development criteria |
| Plan Vivo | Community forestry | Smallholder focus |
UK domestic schemes
| Scheme | Type | Verification |
|---|---|---|
| Woodland Carbon Code | UK forestry removal | UK Forestry Standard compliance |
| Peatland Code | UK peatland restoration | IUCN UK Peatland Programme |
UK-based credits offer geographic traceability and support domestic nature recovery — relevant for organisations with UK-focused sustainability narratives.
The Carbon Trust recommends rigorous due diligence on any credit purchase, regardless of standard.
Buying carbon credits: a step-by-step process
Step 1: Measure and reduce first
Calculate your carbon footprint and implement reduction strategies before purchasing credits. The SBTi does not permit offsets to meet near-term reduction targets.
Step 2: Define your purchase purpose
| Purpose | Credit type typically needed |
|---|---|
| PAS 2060 carbon neutrality | Verified avoidance or removal credits |
| Event offsetting | Calculated scope for specific activity |
| Net zero residual neutralisation | Permanent removal credits (SBTi criteria) |
| CSR / contribution | Any verified project — but do not overclaim |
Step 3: Set quality criteria
Evaluate credits against:
- Additionality — project dependent on credit revenue
- Permanence — durability of carbon storage (critical for forestry)
- Leakage — emissions displaced, not eliminated
- Verification — independent third-party audit
- Registry — credits issued and retired on a public registry
- CCP label — where available, indicates ICVCM quality threshold
Step 4: Select a procurement route
| Route | Pros | Cons |
|---|---|---|
| Direct from registry/project | Transparency | Requires expertise |
| Offset broker | Convenience, portfolio options | Broker fees; variable quality |
| Integrated service (travel, events) | Simple | Often opaque project detail |
Step 5: Retire and document
Retire credits on the registry so they cannot be resold. Retain retirement certificates and disclose volume, standard, and project type in reporting.
Pricing and market dynamics
Voluntary credit prices vary:
- Avoidance credits (renewables, efficiency): often £3–£15/tCO₂e
- Nature-based removals (forestry): £10–£30/tCO₂e
- Engineered removals (DAC, biochar): £100+/tCO₂e
Price reflects perceived quality, project costs, and demand — not guaranteed climate impact. Always verify project documentation.
UK ETS allowance prices are set by auction and secondary market trading — check current DESNZ published data for compliance cost benchmarks.
Risks and greenwashing considerations
- Double counting — buyer and host country both claiming the same reduction
- Non-additional projects — credits funding activity that would happen anyway
- Reversal — forest fires or harvesting releasing stored carbon
- Overstated baselines — projects claiming inflated “business as usual” emissions
- Claiming compliance — voluntary credits do not satisfy UK ETS obligations
UK businesses making offset claims must comply with the CMA Green Claims Code. See also what is greenwashing.
UK ETS in more detail
Sectors currently covered
The UK ETS applies to:
- Power generation — fossil fuel power stations above capacity thresholds
- Energy-intensive industry — steel, cement, chemicals, and similar sectors
- Aviation — UK domestic flights and flights from the UK to the EEA
- Maritime (from 2026, per current government plans) — domestic voyages and UK port stays
Allowance allocation
Installations receive free allowances (to protect competitiveness) and/or purchase allowances at government auction. The cap decreases over time, tightening the carbon budget for covered sectors.
Implications for supply chains
Even if your business is not a UK ETS participant, your suppliers in covered sectors face a carbon price. This cost may flow through to your procurement prices — understanding UK ETS helps interpret supplier cost pressures and carbon surcharges.
UK ETS and net zero
UK ETS drives decarbonisation in the heaviest industrial emitters. Corporate buyers should not confuse ETS compliance by suppliers with their own voluntary offsetting obligations. Your scope 3 includes supplier emissions — engaging suppliers on their decarbonisation plans is more impactful than buying voluntary credits to compensate.
Credit registries and retirement
When buying carbon credits, verify the registry:
| Registry | Credits |
|---|---|
| Verra Registry | VCS credits |
| Gold Standard Registry | GS credits |
| UK Land Carbon Registry | Woodland Carbon Code, Peatland Code |
| UK ETS Registry | Compliance allowances (not voluntary) |
Retirement permanently removes credits from tradable supply. Obtain retirement certificates with unique serial numbers for your records and external reporting.
How carbon credits fit net zero planning
| Stage | Role of credits |
|---|---|
| Near-term (to 2030) | Reduction through operations — not credits |
| Medium-term | Credits may support carbon neutrality milestones |
| Net zero date | Permanent removal credits for residual emissions only (≤10% under SBTi) |
Read carbon neutral vs net zero and create your net zero strategy for the full framework.
Frequently asked questions
What are carbon credits in simple terms?
Certificates representing one tonne of CO₂e reduced or removed by a verified project. Companies buy and retire them to offset emissions they still produce.
What is the UK ETS?
The UK Emissions Trading Scheme is a mandatory cap-and-trade system for energy-intensive industries and aviation. Operators must surrender allowances matching their emissions. It is separate from the voluntary offset market.
Can I use voluntary credits for UK ETS compliance?
No. UK ETS requires surrender of UK ETS allowances, not voluntary carbon credits.
How do I know if carbon credits are legitimate?
Check the registry, verification standard, additionality evidence, retirement record, and whether CCP labels apply. Avoid credits with opaque project documentation.
Are UK Woodland Carbon Code credits good quality?
They provide UK-verified forestry removals with permanence monitoring requirements. Like all nature-based credits, they carry reversal risk — but the standard includes buffer pools and long-term management plans.
Should small businesses buy carbon credits?
Only after reducing emissions where practical. SMEs often achieve meaningful cuts through renewable energy and efficiency before needing credits.
Conclusion
Understanding what are carbon credits — and how they differ from UK ETS allowances — is essential for UK businesses navigating voluntary carbon markets. Buy credits with rigour, retire them transparently, and treat them as a supplement to reduction — not a substitute.
Related guides:
- Carbon offsetting — strategy, controversies, and quality criteria
- Net zero guide — where credits fit the climate hierarchy
- How to reduce your carbon footprint — reduction first
Sources
- UK Emissions Trading Scheme — GOV.UK (DESNZ)
- Carbon Trust
- Woodland Carbon Code
- Integrity Council for the Voluntary Carbon Market
- Science Based Targets initiative — Net Zero
- CMA — Green Claims Code
This article is for general guidance only. It does not constitute legal, financial, or environmental consultancy advice.