A carbon credit is a financial instrument that captures the economic value of a sustainability effort or the environmental impact of a business activity. A carbon credit enables sustainability projects like carbon offset projects to be economically sustainable. Various businesses & governments buy compliance carbon credits for compliance purposes. Voluntary carbon credit buyers purchase carbon credits to achieve net zero and financially support a carbon offset project. Carbon credit generation & validation vary by their financial models and objectives.

EU-ETS is a compliance credit program of the European Union (EU) that works on a ‘cap-n-trade’ model. The total available credits are fixed and are distributed among the member states. For example, the Netherlands receives around 220 million credits from this scheme. Industries like petroleum, ceramics, airlines, etc., are legally required to participate in the auction to purchase credits equivalent to their projected annual emission. The EU spends the money earned through the auction of EU-ETS on environmental projects.

If a business has lower pollution than expected, they can sell the unused emission credits, usually at a higher price. If a company needs more credits to meet its emissions, it must buy from the market. The general idea of these models is that the cost of the carbon credits will reach a point where many businesses will find it more feasible to invest more money into reducing their emissions than buying more credits.