How Carbon Credits Work
From Article 6.2 bilateral agreements to CORSIA aviation offsets — how international carbon credits flow through global carbon pricing mechanisms.
Page 5 of 5 · 15 min readArticle 6.2 bilateral agreements signed
States participating in CORSIA (2026)
CORSIA credit demand projected by 2035
|
1
|
The Carbon Credit LifecycleFrom project conception to permanent retirement, every carbon credit follows a rigorous four-stage journey. |
A carbon credit is a verified certificate representing one tonne of CO₂ equivalent that has been reduced, avoided, or removed from the atmosphere. Think of it like currency: you can buy, sell, trade, and retire these credits to offset emissions. But unlike regular currency, each credit must be created, validated, monitored, and issued through a standardised process before it can be used.
|
1. Project Development
Design emissions reduction or removal activity. Define baseline, additionality, and methodology. |
2. Validation
Independent auditor reviews methodology. Confirms project meets registry standards. |
3. Monitoring & Verification
Track emissions reductions annually. Third-party verification confirms actual reductions. |
4. Issuance & Retirement
Credits issued to registry. Buyers retire credits to offset emissions permanently. |
Key Carbon Credit Registries
| Registry | Market Share | Focus |
| Verra (VCS) | ~80% | Voluntary market leader |
| Gold Standard | ~10% | SDG alignment focus |
| American Carbon Registry (ACR) | ~5% | US-focused |
| Climate Action Reserve (CAR) | ~3% | North America focus |
| Others | ~2% | Niche registries |
Avoidance vs Removal Credits: Price Difference
| Credit Type | Definition | Typical Price | Example |
| Avoidance | Prevent emissions that would otherwise occur | $6–24/tonne | Renewable energy displacing fossil fuels |
| Removal | Remove CO₂ already in the atmosphere | $150–177/tonne | Direct air capture, nature-based reforestation |
Think of it Like Currency
A carbon credit is a verified certificate representing one tonne of CO₂ equivalent that has been reduced, avoided, or removed from the atmosphere. The lifecycle ensures integrity: projects are validated before they start, monitored while running, verified by independent auditors, and only then issued as tradeable credits that can be retired to offset real emissions.
|
2
|
Article 6 of the Paris AgreementThe international framework enabling countries to cooperate on carbon credits and prevent double-counting. |
Article 6 is the Paris Agreement's mechanism for international cooperation on emissions reductions. It establishes rules for trading carbon credits between countries while preventing the same reduction from being claimed twice. There are two main pathways: Article 6.2 (bilateral arrangements) and Article 6.4 (multilateral crediting mechanism).
Article 6.2: Bilateral Cooperative Approaches
Two or more countries negotiate directly to transfer emissions reduction credits. When Country A (buyer) purchases an ITMO from Country B (seller), Country B must report these transfers in its national greenhouse gas inventory and make "corresponding adjustments" to prevent double-counting.
Key Concepts:
- ITMOs (Internationally Transferred Mitigation Outcomes): The tradeable credits that cross borders under Article 6.2.
- Corresponding Adjustments: Both countries adjust their emissions inventories to ensure the same reduction isn't claimed twice.
- Bilateral Agreements: Each country pair negotiates terms, pricing, and verification independently.
Corresponding Adjustments Explained
When Country A buys an ITMO from Country B, Country B must add those emissions back to its own inventory. This prevents double-counting — the same reduction cannot be claimed by both parties for their climate targets.
Article 6.4: Paris Agreement Crediting Mechanism
A centralised mechanism under UN oversight that certifies emissions reductions from projects in any country. Successor to the Clean Development Mechanism (CDM), Article 6.4 now allows credit trading to any country that participates, not just developed nations.
Key Facts:
- 1,389 CDM projects are transitioning to Article 6.4 framework.
- A 5% baseline adjustment ensures environmental integrity; not all claimed reductions are issued as credits.
- One global registry prevents double-issuance and ensures transparency.
Major Article 6.2 Bilateral Agreements
Deal Size: 160,000 tCO₂e. Project: Renewable energy and cookstove distribution. Significance: Landmark Article 6.2 transaction showing South-South cooperation and emerging market leadership in carbon trading.
Deal Size: 500,000+ tCO₂e expected. Project: Nature-based forest conservation. Terms: Premium pricing reflecting removal quality.
Deal Size: 3 million tCO₂e. Project: Energy efficiency in industry. Historic Note: First verified ITMO transfer under Article 6.2, demonstrating operational framework.
Coverage: 31 partner countries. Approach: Bilateral agreements with technology transfer and capacity building. Volume: 100+ million tCO₂e credited since 2013.
Deal Size: 8 million tCO₂e phased. Project: Waste-to-energy and methane reduction. Status: Framework agreement with ongoing implementation.
Article 6.2 Agreements by Country (2026)
|
3
|
International Carbon Credits in PracticeHow Singapore, Japan, and South Korea operationalise carbon credit frameworks. |
Three Asia-Pacific markets exemplify how countries integrate carbon credits into their climate strategies. Each uses international credits differently: Singapore leverages them to offset high domestic costs, Japan emphasises technology transfer, and South Korea caps them to prioritise domestic action.
Singapore's International Carbon Credit (ICC) Framework
- Carbon Tax: SGD 45/tonne (2026–27); rising to SGD 80 by 2030.
- ICC Allowance: Companies may offset up to 5% of emissions via international credits.
- Eligibility Criteria: Credits must meet international standards (Verra, Gold Standard, CAR, ACR, ART TREES, Global Carbon Council).
- Contracted Volume: 2.175 million tCO₂e of international credits already contracted as of early 2026.
- Strategic Role: Fills gap between domestic reduction ambitions and high abatement costs, especially in oil refining and petrochemicals.
Japan's Joint Crediting Mechanism (JCM)
- Partner Countries: 31 developing nations signed bilateral agreements.
- Dual Crediting Model: Both Japan and the host country can count reductions toward climate targets (different from Article 6.2 corresponding adjustments).
- Technology Transfer Focus: Prioritises Japanese clean tech deployment (renewable energy, energy efficiency, waste management).
- Issued Credits: 100+ million tCO₂e since 2013; ~15–20 million per year in recent years.
- Economic Impact: Supports Japanese manufacturers competing globally on emissions performance.
South Korea's K-ETS Phase 4 (2026–2030)
- Total Emissions Cap: 2.5 billion tonnes across all sectors.
- International Credit Conversion: Purchases international credits at 1:1 ratio for conversion into Korean Carbon Units (KCUs) for domestic use.
- Credit Limit: Facilities capped at ~3–5% of compliance obligations via international credits.
- Market Signal: Strong incentive to reduce first; international credits only supplementary.
- Compliance: All major industrial facilities must participate.
Three Frameworks Compared
| Framework | Country | Mechanism Type | Int'l Credit Limit | Price Signal |
| ICC | Singapore | Carbon tax + credits | 5% of emissions | SGD 45/tonne |
| JCM | Japan | Bilateral tech transfer | Flexible (15–20M/yr) | Market-driven |
| K-ETS P4 | South Korea | Cap & trade + conversion | 3–5% of compliance | KRW 30,000–50,000/t |
|
4
|
CORSIA — Aviation's Carbon MarketThe Carbon Offsetting and Reduction Scheme for International Aviation, mandating offset purchases for emissions growth above a baseline. |
CORSIA is aviation's sector-wide carbon market. Airlines must offset emissions growth above 85% of their 2019 baseline. This creates a massive demand signal for carbon credits: CORSIA offsets are projected to exceed 1 billion tonnes by 2035.
How CORSIA Works
- Baseline: Each airline's annual baseline is set at 85% of its average 2018–2020 emissions.
- Emissions Above Baseline: Growth emissions (2019 baseline) must be offset 100% via carbon credits.
- Eligible Credits: Airlines can purchase from approved registries (Verra, Gold Standard, CAR, ACR, ART TREES, Global Carbon Council).
- Retirement: Purchased credits are retired; cannot be double-used or traded again.
- Annual Reporting: Airlines report compliance to national aviation authorities; penalties for non-compliance.
CORSIA Implementation Timeline
| Phase | Period | Participation | Key Feature |
| Pilot Phase | 2021–2023 | Voluntary (72 states) | Testing mechanisms, low penalties |
| Phase 1 | 2024–2026 | 130 states (80% of aviation) | Offset requirement begins |
| Phase 2 | 2027–2035 | All ICAO states mandatory | Full implementation, increasing offsets |
CORSIA Eligible Emissions Units (CEUs)
| Registry | Type | Primary Markets |
| Verra (VCS) | Voluntary market credits | Global, largest pool |
| Gold Standard | SDG-aligned credits | Development-focused projects |
| Climate Action Reserve (CAR) | North American credits | US, Canada, Mexico |
| American Carbon Registry (ACR) | US-focused credits | United States |
| ART TREES | Nature-based removal credits | Global, premium pricing |
| Global Carbon Council | Verified high-quality credits | Multi-registry, emerging markets |
Projected CORSIA Credit Demand (Million Tonnes/Year)
CORSIA Demand Beyond 1 Billion Tonnes by 2035
Phase 1 (2024–26) will see cumulative offsets reach ~150 million tonnes. Phase 2 (2027–35) ramps up dramatically as all aviation participants become mandatory. This creates unprecedented demand, potentially exceeding supply from current voluntary carbon credit sources — a key driver for Article 6 bilateral agreements and CDM successor mechanisms.
Navigate Carbon Markets With Confidence
Climate Decode provides comprehensive carbon market intelligence, compliance advisory, and residual emission procurement across 16 global markets.