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Carbon credits, offsetting and carbon markets
Learn what carbon credits are, how carbon markets work, and why they matter in the UK. This page explains the UK ETS, the voluntary carbon market, project standards, pricing, and the role of nature-based solutions.
A carbon credit represents one tonne of carbon dioxide equivalent (CO₂e) permanently removed from the atmosphere, or avoided, through changes in land use or energy generation.
CO₂e is a standardised unit of measurement that describes the impact of greenhouse gases on global warming in comparison to carbon dioxide.
Tree planting is a key nature-based method for removing carbon, as growing trees lock carbon into their trunks and roots. Credits can also come from avoidance projects, such as peatland restoration in the UK, which prevents large greenhouse gas releases from degraded peat.
Nature-based carbon credits also deliver valuable co-benefits beyond carbon, including flood mitigation, access to green spaces, and biodiversity gains through habitat creation and protection.
For many pollutants, society has long relied on laws that set strict limits. Think of the bans on lead in petrol or paint, for example. Greenhouse gases (GHGs), however, went largely unregulated until 2008, when the UK passed its pioneering Climate Change Act.
That Act, and others like it around the world, didn’t appear overnight. They were built on decades of work by campaigners, scientists, and policymakers calling for action against GHG pollution. A pivotal moment came with the Kyoto Protocol negotiations, where industrialised nations first committed to binding targets for reducing emissions.
One of Kyoto’s legacies was the introduction of systems designed to put a price on emissions and allow reductions to be traded. This idea evolved into what we now call "carbon markets" — frameworks that turn emissions reductions into tradable carbon credits.
In the UK, two distinct carbon markets have developed. You can explore both of them below.
The UK has two main carbon markets. The first is the regulated UK Emissions Trading Scheme (UK ETS), in which certain high-emitting industries are legally required to take part.
The second is the voluntary carbon market (VCM), which organisations and individuals choose to engage with. In the UK, the integrity of this voluntary market is underpinned by government-backed standards such as the Woodland Carbon Code and the Peatland Code.
The UK ETS exists to incentivise decarbonisation among the country’s largest emitters. It is a cap-and-trade scheme, which sets a limit on the total emissions a sector can produce and attaches a financial value to each unit of emissions.
Each year, organisations receive a certain number of free allowances. If their emissions are lower than their allocation, they can sell or carry over the surplus. If they emit more, they must buy extra allowances. The system does not dictate where reductions happen or what the price should be — that is left to the market. However, it does have measures to avoid extreme price swings: the Auction Reserve Price sets a minimum sale price for allowances, and the Cost Containment Mechanism allows intervention when prices remain high for an extended period.
The overall cap is lowered every year. In theory, this pushes allowance prices up over time, strengthening the financial case for cutting emissions.
In July 2025, the UK government announced its intention to allow greenhouse gas removal (GGR) credits into the UK ETS from 2029. These will let operators buy GGR credits instead of allowances, on a one-for-one basis. Initially, only UK-based projects with ex-post credits and 200-year permanence will qualify, meaning woodland carbon may be eligible, although this is still under consultation.
The principle of the VCM is simple: organisations/individuals can compensate for their emissions by purchasing carbon credits, with one credit representing one tonne of CO₂e reduced or removed. This is often referred to as “offsetting.” Over time, however, best practice has evolved. The mitigation hierarchy now guides companies to prioritise cutting their own emissions first, with offsetting reserved for residual or unavoidable emissions. Today, initiatives such as the Science Based Targets initiative (SBTi) also recommend companies support Beyond Value Chain Mitigation (BVCM), which involves investing in climate action beyond the scope of their own operations.
The early vision for carbon markets was that finance would flow from developed nations (historically the biggest emitters) to projects in developing countries. That remains an important and active part of the global VCM. But after the 2015 Paris Agreement, which recognised the need for action everywhere and saw almost every country commit to climate targets, carbon markets began to emerge all around the world.
In the UK, Forest Carbon helped pioneer a home-grown market. In the early 2000s, our founders, Steve and James, saw tree planting rates declining and asked a simple question: could carbon finance revitalise woodland creation here? The answer was a resounding yes. Today, the Woodland Carbon Code has seen over 42,000 hectares of new woodland created, while the Peatland Code covers 53,000+ hectares of restored peatland. Alongside carbon, these projects deliver biodiversity gains, cleaner water, flood mitigation, and other benefits to people and nature.
You can read more about Forest Carbon’s role in shaping the UK VCM on our Our story page.
Article 6 of the Paris Agreement outlines the rules for international cooperation on climate action, including carbon markets. These rules were agreed upon at COP26, but continue to be fine-tuned. You can find the most up-to-date documents and decisions by the UNFCCC here.
The Voluntary Carbon Markets Integrity (VCMI) Initiative, the Integrity Council for the Voluntary Carbon Market (ICVCM), and the International Carbon Reduction and Offset Alliance (ICROA) were developed from/align with the Paris Agreement and set clear standards for carbon buyers and sellers, helping to provide a high-integrity voluntary carbon market.
The quality assurance standard for UK woodland carbon projects is the Woodland Carbon Code, and the standard for UK peatland restoration projects is the Peatland Code. Both are endorsed by ICROA and are investing in ICVCM approval in the future.
Unlike the compliance market, prices in the voluntary carbon market are not fixed; they’re shaped by a mix of factors, including:
- Links to compliance market prices
- Project type and location (e.g. land and establishment costs)
- Certification costs
- Integrity and quality ratings
- Monitoring, reporting and verification (MRV) practices
- Project co-benefits (e.g. biodiversity, health, flood mitigation)
- Supply and demand dynamics
When demand is high and supply is tight, prices rise. When demand drops or credits flood the market, prices fall.
Maintaining a healthy market is essential. When prices are too low, projects struggle to get off the ground. When prices are too high, buyers can be priced out, stalling market growth and climate action.
That’s why it pays to work with experienced, trusted partners. At Forest Carbon, we’ve spent nearly 20 years developing projects and supporting transparent, high-integrity transactions that give both buyers and sellers confidence.
Climate, communities, and ecosystems are inseparable: tackling one in isolation often misses the bigger picture. That’s why experts are now looking for solutions that deliver across all three. Carbon markets already play a role here; a woodland might capture carbon while also restoring wildlife habitat, improving water quality, and creating healthier places for people.
But carbon is only part of the story. New nature markets are emerging to recognise and reward these wider benefits, from biodiversity uplift to cleaner rivers to healthier soils. This is an exciting time, and we at Forest Carbon are engaged in helping bring some of these new markets to life, but in the meantime, the carbon market remains the most established way of channelling private finance into UK nature.
