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Carbon credits in the UK: What they are and how they work

Understand what carbon credits are and their role in the UK market. Learn about benefits, risks, and market dynamics to help make informed decisions.

26/02/2025 · 6 minute read

The carbon credits market is a significant talking point in UK climate discussions — and not always for the right reasons. A widely reported media investigation alleging many offsets were worthless and could even make global heating worse has led to increased scrutiny of the carbon credit certification process and a shift away from certain types of credits.

Organisations considering buying and generating carbon credits to offset carbon emissions should be aware of the associated risks and how they can be mitigated. Here, we explore the concept of carbon credits, the distinctions between the UK’s regulated and voluntary carbon markets, and related issues. The next article in our three-part series will explore the risks associated with carbon credits and how they can be mitigated.

What is a carbon credit?

A carbon credit is an instrument representing the reduction, removal, or prevented release of greenhouse gases by technological or natural means. There are three main outcomes for projects creating carbon credits:

Avoided emissions: The emissions that might have occurred had a project not been funded determine the credits. A presumed baseline that reflects what would have happened in the absence of the project can be established using contextual information, historical data, and models. By preventing deforestation and forest degradation, for instance, greenhouse gas emissions can be avoided.

Reduced emissions: Initiatives such as improving fuel efficiency to reduce fossil fuel use, as well as implementing programmes that mitigate methane emissions from farms, peatlands (see below), or municipal waste processing can generate carbon reduction credits. Reduction credits are determined by comparing the greenhouse gas emissions of a project scenario to the emissions of a baseline scenario. They represent the emissions that would have occurred if the project had not been implemented.

Removal and storage of CO2: Carbon can be removed by direct air capture, the process of chemically scrubbing carbon dioxide from the ambient air or by restoring forests, for example. 

UK carbon offset programmes include:

  • Removal: A willow planting scheme in the Lake District that will sequester over 10,000 tonnes of carbon dioxide equivalent (CO2e).
  • Reduction: Woodland and peatland restoration.
  • Avoidance: Solar panels for schools and biodiversity and conservation schemes.

However, there are numerous other projects worldwide providing organisations in the UK and elsewhere with the opportunity to offset carbon, from replanting mangroves in Madagascar to reversing deforestation in Peru. Meanwhile, COP29 has agreed a deal to kick-start global carbon credit trading.

The differences between the UK’s regulated and voluntary carbon markets

There are two types of carbon markets in the UK — voluntary and regulated. The UK Emissions Trading Scheme (UK ETS), which replaced the UK’s participation in the European Union Emissions Trading Scheme (EU ETS) on 1 January 2021, is a regulated scheme. The UK ETS works on “cap and trade” principles, where caps are set on the amount of greenhouse gases emitted by certain sectors, while operators in these sectors with low emissions can sell extra allowances to larger emitters.

For example, a factory or airline will have specific limits on the amount of carbon emissions they are allowed to produce per year. If this limit is exceeded, they are required to purchase carbon credits to offset their excess emissions to comply with regulations. Conversely, if they emit less than their allocated limit, they can document these lower emissions and sell surplus carbon credits. This system provides an economic motivation for organisations to work towards reducing their carbon emissions and contribute to environmental sustainability.

Operating alongside the ETS, the UK’s voluntary carbon market provides the opportunity for individuals and organisations to take responsibility for their carbon emissions beyond regulatory requirements. At COP29, the UK launched its principles for voluntary and nature market integrity. The principles aim to qualify key elements of good practice when engaging with carbon and nature markets, with the objective of maximising finance mobilisation from all possible sources.

Various organisations and schemes already facilitate the trading and certification of voluntary carbon credits in the UK's voluntary market.

For example, the Peatland Code provides a framework for peatland restoration projects and assurances for investors. Peatlands store substantial amounts of carbon that is released when they are damaged. Therefore, their restoration is widely recognised as a cost-effective way to tackle climate change. Additionally, the Woodland Carbon Code is a certification scheme in the UK that provides a framework for woodland creation projects to generate carbon credits.

For more information from Marsh on voluntary carbon credits, please click here.

Principal advantages of becoming a carbon neutral business

UK organisations can gain numerous benefits from becoming carbon neutral. Given the small proportion of FTSE 100 companies that have achieved carbon neutrality, organisations can differentiate themselves and attract consumers who prioritise environmentally conscious brands by becoming carbon neutral, according to Carbon Neutral Britain. Carbon neutral organisations may be better able to attract talent, especially among younger workers, who are seeking socially-conscious employers. Also, environmental considerations, including carbon reduction, are expected to play an increasing role in the execution of contracts, including UK government contracts.

Questions over the integrity of carbon credits

The UK carbon credit market has undergone rapid expansion as organisations buy carbon credits to achieve their sustainability targets, and as investors back projects. However, the integrity of carbon credits has become a critical area of concern. In 2023, a high-profile media investigation alleged many offsets were worthless and could make global heating worse.

There have been subsequent assessments as to why the credits may not have had a positive impact on the climate. Simultaneously, we have seen a marked shift away from the purchase of avoidance credits, which were the main subject of the investigation, towards the purchase of removal credits, which are simpler to verify. The controversy has resulted in increased scrutiny of the carbon credit certification process, which is a positive development. Additionally, the insurance market can contribute to ensuring certainty in this area, as the underwriting process serves as a secondary vetting of carbon credits on behalf of investors.

Future of the UK carbon credits market

Despite concerns over market integrity, the UK appetite for carbon credits is expected to grow, especially if tougher climate policies make polluting more expensive. Furthermore, many organisations view the purchase of carbon credits not only as “the right thing to do,” but also as a sound financial investment.

In the next article, we outline the risks associated with carbon credits and insurances available to mitigate these risks. 

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Robert Cooper

Growth Leader, Credit Specialties

  • United Kingdom