What Happens After You Purchase a Carbon Credit — and Where Does the Money Go?

Cool Effect
Cool Effect
Published in
9 min readNov 6, 2023

If you’re here and reading this, it’s likely that you’re aware of carbon credits and what they do. But for those of you who don’t, allow us to refresh your memory a bit: a carbon credit (also sometimes called a carbon offset) is a measurement of greenhouse gas emissions reduced from a project or entity, that can be sold to compensate for emissions created somewhere else in the world.

And that “somewhere else in the world” phrase is key here. Because greenhouse gases are all mixed up in Earth’s atmosphere, it doesn’t matter where they’re reduced, so long as they’re actually reduced. Carbon credits are a way to provide a benefit to the climate and transfer that benefit from one entity to another, regardless of location. Whether you’re actively reducing emissions or helping facilitate a carbon emissions reducing project somewhere else on the planet, Earth feels your impact the same.

High quality carbon projects go the extra mile by also helping struggling communities create jobs, improve local infrastructure, and provide myriad health benefits. And while not all carbon credits are created equal, they all typically start in the same place.

So let’s explore where carbon credits come from, take a look at some different players they encounter during their lifecycle, check out what happens after you purchase them, and really dig into how you can ensure the credits you purchase are real, verified, and effective.

Methodologies, Developers, and Verifiers

Before a carbon credit becomes a carbon credit, it starts its life out as a reduction in emissions on the hunt for a methodology — it may not be the most romantic or inspiring way to begin one’s life, but that doesn’t mean it’s not an important one.

Carbon emission reductions happen all the time, but not every reduction in emissions qualifies as a credit. Before a carbon reduction is considered a carbon credit, it needs to meet a set of highly specific quality criteria based on methodologies specific to whatever kind of carbon project (energy, forests, livestock, etc.) created the reductions in the first place.

“Methodologies” may sound complicated, but they’re really just detailed procedures that providers can utilize to help quantify the impact of a carbon reduction. One methodology structure that’s often used, because it was one of the first around, is from the United Nations Clean Development Mechanism, or CDM. The function of methodologies is easy to grasp, but the methodologies themselves can, and should be quite complex, as every carbon project is different and requires one to take multiple variables into account in order to evaluate them accurately.

No two carbon projects are created equally — this picturesque carbon project in Brazil reduces 12,600 metric tonnes of carbon dioxide equivalents by recycling swine waste and converting it into compost.

Once you’ve evaluated the impact of a carbon reduction project using a methodology designed to do just that, you’re now ready to officially develop a project with that data in hand. Individuals or organizations that develop carbon projects are called, unsurprisingly, “Project Developers”.

Project developers start the process by applying to a standard for review of the project against the methodology. Developers not only design the project, taking into account both community benefits and total reduction, but also nurture the project through the many steps involved with gathering the scientific data and having it validated. Using those methodologies we mentioned, they then outline the project activities and establish a baseline assumption of emissions for reduction. Next up, they receive validation for their efforts in the form of a review and certification by an independent, third-party validator who acts on behalf of the standard.

All carbon credit programs require a third-party auditor to validate a project’s baseline as well as its projected and achieved emission reductions. Essentially, validation is the approval of carbon credit projects in their planning stages. It’s at this point projects must submit information on project design, including information on baseline scenarios, monitoring schemes and methodologies for calculating emission reductions. If your project has been validated, congratulations! It’s now ready to be officially registered and approved with a carbon credit program, indicating that it is now eligible to start generating carbon credits after it begins operation.

Once in operation, tree planting and forest management carbon projects like this one in India use carbon credits to help provide jobs, training, and additional benefits to the local communities — all while reducing carbon emissions.

But we’re not done yet. Once your project has been validated, you still need to verify it via a third party. From a high level, verification is the aptly named process of verifying that your project is actually doing what you say it’s doing — namely, that it’s reducing emissions. To get a bit more granular on what exactly this entails, we’ll let our friends at SEI walk us through it:

Third-party verifiers have two main responsibilities in the context of a carbon credit program. First, they perform project validation, which entails confirming that a proposed project meets a program’s eligibility criteria. Second, verifiers conduct project verification, which entails confirming that project monitoring data was collected in accordance with a program’s requirements, as well as reviewing calculations to confirm that the project’s GHG reductions were estimated according to the approved methodology/protocol. The verification process usually involves a site visit combined with auditing (or sampling) of monitoring data to confirm with “reasonable assurance” that the data are accurate.

Verifiers are generally paid by project developers, which creates aconflict of interest. To reduce the risk of bias, most carbon credit programs review verification arrangements, require verifiers to legally certify that they are free of conflicts, and limit the number of times that the same verifier can verify a project. Programs also regularly audit the work of verifiers to ensure their objectivity.

Verification is key when it comes to ensuring that data reported by projects is honest, transparent, and maintains its integrity. As such, it’s not typically a one-and-done type deal. Projects are regularly verified to ensure the integrity and quality of the data reported are upheld, and that accuracy, transparency, and consistency take center stage.

From methodology to validation to verification, this carbon credit has already been through a lot, and it hasn’t even been purchased yet.

Brokers, Buyers, and Providers

To understand how carbon credits are used and exchanged, it’s important to understand the distinction between the two available carbon markets:

Mandatory, or Compliance, Carbon Markets (CER)

Like the name implies, the mandatory market isn’t an optional one. Anyone legally required to offset their emissions does so via this marketplace. Mainly, we’re talking about countries and governments here — essentially anyone that’s adopted the emission limits established by the Kyoto Protocol and the United Nations Convention on Climate Change (UNFCCC).

Voluntary Carbon Markets (VER)

Unless you’re currently running a country, this is likely where you first heard of carbon credits. The voluntary carbon market (which Cool Effect is a part of) allows businesses, organizations, and individuals to offset their unavoidable emissions by voluntarily purchasing carbon credits emitted by projects targeted at removing or reducing GHG from the atmosphere.

While the compliance markets are regulated by mandatory national, regional, or international carbon reduction organizations, the voluntary market has multiple standards in place, each with its own slightly different focus. Some are limited to types of carbon projects, some are limited by locations, some are essentially carbon (pun intended) copies of compliance systems, and so on.

This avoided nature loss project in Alaska is verified through standards set by the American Carbon Registry, amongst others.

It’s within these markets that Brokers, Providers, and Buyers operate.

Brokers/Traders:

Born out of the compliance market, brokers essentially serve as matchmakers, pairing an organization, business, or individual with a carbon project ready to sell their credits. Brokers typically don’t ever actually own any credits themselves — they simply facilitate the sale, usually for a commission. Traders operate very similarly, but they often purchase large amounts of carbon credits from developers, then typically sell those directly to buyers.

Non-Profit and For-Profit Providers:

One key point of differentiation between types of providers involves their approach to supporting carbon projects as a whole. When selecting carbon projects, non-profit providers primarily gravitate towards projects that offer more than just reduced emissions as an end goal. By placing an emphasis on additional carbon project end benefits like improved local infrastructures, increased job opportunities for locals, or direct financial support in places that need it most, they’re able to support those who have most often been hit hardest by the impacts of climate change.

For-profits approach things slightly differently, as their name implies. Their primary focus is making a profit, which unfortunately means that there are often brokers and traders out there using hidden fees and secret markups in order to improve their bottom line at the expense of the planet.

Buyers:

No matter the provider, you still need buyers to decide to take carbon action, evaluate carbon programs, and purchase carbon credits. In the voluntary market, these are most often organizations, businesses, or individuals rather than industrial entities or governments.

Now that our credit is ready to meet a buyer, let’s talk about a tricky subject: pricing. Carbon credits can typically range from less than $1 to around $150 per tonne of carbon dioxide equivalent (CO₂e). Most prices for well managed and regularly verified projects tend to be between $5 and $25 per tonne. The reason for the wide range of pricing is due to the wide range of carbon projects out there.

In purely technical terms, a carbon credit is expected to reflect the costs to implement the project, the amount of infrastructure required to execute the project or whether real, additional reductions of GHG emissions occurred. Pricing can also often sometimes reflect whether or not additional benefits are included in your purchase, like project social and environmental benefits, project location, age of credits, or even project type. Providers may also charge processing fees or commissions in addition to the credit’s price.

When you donate to a project on our platform, more than 90% of your contribution goes directly to projects like this community biogas one in rural China.

With a Cool Effect project, more than 90% of each dollar you donate goes directly to helping our projects, with a fee of 9.87% to help us cover credit charges, research, and possible registration fees.

Here’s a breakdown of where that 9.87% goes:

1.5% Research Fee

2–4% Credit Card Fee

Registry Fee (where applicable)

Remainder for Cool Effect Administration Fee

With so many variables involved in pricing, it’s crucial that providers remain extremely transparent when sharing this information with buyers. The key to a thriving carbon market, one filled with people ready to purchase carbon credits and reduce carbon emissions, is trust — and there’s no trust without transparency. It’s why since Day 1, Cool Effect has put transparency at the forefront of everything we do, from our pricing to our administrative fees, to our rejection of hidden markups, to our guarantee that every single project on our platform has been thoroughly vetted and triple-verified. It’s an approach we call “Carbon Done Correctly,” because it’s exactly that.

Now that our credit has been purchased, we’re now at the last phase of its lifecycle — retirement. No gold watch here, this is when carbon credits are purchased and taken out of circulation once their specific greenhouse gas reductions are verified. As much as we love reusing and recycling, carbon credits are a one time deal. Once a credit is retired, it cannot be transferred or used. All that transparency, those rigorous standards, and needs for verification are particularly important here to avoid something called “double counting,” a situation in which a single greenhouse gas emission reduction or removal is counted more than once (usually by multiple parties) towards achieving mitigation targets or goals.

From methodology to retirement, a carbon credit’s lifecycle may seem like a simple, straightforward process, but in reality it’s a complicated, regimented process that requires many different stakeholders to ensure these credits do the good for the planet — and its people —that they’re intended to.

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Cool Effect
Cool Effect

We’ve reduced over 8 million tonnes of carbon emissions. And we’re just getting started.