The Lifecycle of a Carbon Credit: From Project Design to Market Trading

As the world accelerates efforts to reduce greenhouse gas emissions, carbon credits play a critical role in mobilising finance towards credible carbon mitigation and removal projects. But what exactly goes into creating a carbon credit, and how does it move from an environmental project to the trading floor of an exchange?
Let’s break down the lifecycle of a carbon credit step by step.

1. Project Design & Development

The journey of a carbon credit begins with the development of a carbon reduction or removal project. These projects can take various forms, such as reforestation, renewable energy, methane capture, or improved agricultural practices. Developers must ensure that their project meets internationally recognised carbon standards, such as Verra’s Verified Carbon Standard (VCS) or the Gold Standard. Many other registries and standards exist, each with its own methodologies and requirements.

2. Validation & Registration

Once a project is designed, it undergoes a rigorous validation process to ensure it meets the eligibility criteria set by a recognised carbon registry. Independent third-party auditors, known as Validation and Verification Bodies (VVBs), assess the project’s methodology, expected emissions reductions, and additionality (i.e., ensuring the project would not have happened without carbon finance). If approved, the project is officially registered with a carbon standard body.

3. Monitoring & Verification

Carbon projects must continuously monitor their emissions reductions over time. Regular verification by an accredited third party ensures that the project is delivering the promised reductions. Only after verification can carbon credits be issued—each credit representing one metric tonne of CO₂e reduced or removed.

4. Issuance of Carbon Credits

Once verified, the project developer applies for the issuance of carbon credits, which are recorded in a carbon registry. Registries are responsible for ensuring credits are properly tracked and accounted for.

5. Selling & Trading Carbon Credits

After issuance, carbon credits can be sold in either the voluntary or compliance carbon markets. Project developers may sell credits directly to corporations seeking to offset their emissions, through brokers, or via carbon exchanges. Platforms like ACX (AirCarbon Exchange) provide a digital marketplace where credits can be traded efficiently with transparent pricing.

6. Retirement of Carbon Credits

Once a carbon credit is purchased for offsetting, it is retired in the registry, meaning it can no longer be traded. This ensures that each credit is used only once to compensate for emissions. With ACX, buyers can directly retire their credits through their ACX account without needing their own registry accounts and receive a registry-issued retirement certificate.

The lifecycle of a carbon credit involves a process of project development, validation, issuance, and trading before it ultimately serves its purpose—offsetting emissions. As markets evolve, improved transparency and standardization will continue to enhance the credibility and impact of carbon credits in the fight against climate change.