Carbon credit: the lifecycle of carbon credits and the associated retirement process

What is a carbon credit?

A carbon credit is a certificate that proves the avoidance or capture of one tonne of CO2e, i.e. through the implementation of an action. One carbon credit represents one tonne of CO2e avoided or removed from the atmosphere. Get our free guide to carbon credits.  

Voluntary carbon credits

Credits from the Voluntary Carbon Market (VCM) are valuable for sustainability but cannot replace direct efforts to reduce emissions. Credits should mitigate only unavoidable emissions after a company has actively reduced its carbon footprint. Relying too heavily on carbon credits risks being perceived as a “license to pollute” may weaken a company’s sustainability claims. Best practice calls for companies to prioritise reducing Scope 1 (direct) and Scope 2 (indirect) emissions, using carbon credits only as a final step for emissions that cannot realistically be eliminated. This approach ensures that credits complement rather than replace substantial and direct actions to reduce greenhouse gas emissions.

The lifecycle of a carbon credit 

Carbon credits from the VCM are a bit like consumable products. They’re bought, used, and can’t be reused. Their main purpose is to help mitigate greenhouse gas emissions (GHGs) by allowing a company or individual to claim that they’ve neutralised a specific amount of CO2 or equivalent emissions. This offset is theoretical as it doesn’t reduce emissions directly but supports projects that do. Users of carbon credits typically make a public statement about their carbon offsets, such as in a report or other formal announcement, and thus, need to consume and, therefore, retire them. 

Ex-ante vs ex-post carbon credits

In practice, carbon credits take two forms: ex-ante (before the CO2 is captured) and ex-post (after the CO2 is captured).

Credits are usually issued ex-ante and later converted into ex-post credits as the forest grows. They can be used/retired anytime, either ex-ante or ex-post, but only once in any case. This avoids any possibility of manipulation or double counting.

Get our free guide, "10 Questions to Ask Before Committing to a Carbon Contribution Strategy."

Why carbon retirement is important

The consumption and withdrawal of voluntary carbon credits are essential to ensure each credit is used transparently and only once. This process maintains the integrity of the VCM by avoiding the risk of double accounting. Emissions mitigation through carbon credits must be publicly declared to validate the offsetting effect, followed by a formal withdrawal from the accounting register. This approach is governed by strict regulations, such as the CSRD directive, to ensure traceability, the good faith of the owners, and the credibility of the mechanisms for offsetting carbon emissions.

When to retire carbon credits 

A carbon credit is retired when its owner publicly declares that it has been used to mitigate emissions. At this point, the carbon credit produces its compensatory effect, which consists of offsetting a quantity of CO2 emissions generated by the owner's activity (professional or otherwise). Once this declaration has been made, the carbon credit is deemed to have been used up. From that point onwards, it is removed from the public accounting register, making it non-transferable and non-tradable.

This consumption-by-communication procedure is particularly applied by companies subject to the Non-Financial Performance Declaration or the European CSRD Directive (EU Directive 2022/2464). As corporate ESG practices come under increased scrutiny, regulations like the CSRD enforce transparency in carbon reporting.

The CSRD requires companies to disclose their environmental impact, including using carbon credits to mitigate emissions. This mandate ensures that companies report the credits they purchase and verify that they are officially retired, preventing double-counting or resale. The CSRD aims to standardise sustainability reporting across sectors, reducing the risk of “greenwashing” and bolstering the credibility of corporate climate commitments. Compliance with the CSRD strengthens carbon market integrity and builds public trust in sustainable business practices.

How to 'retire' carbon credits

Once a carbon credit has been used up, i.e., it has produced its offsetting effect, it must be withdrawn. This involves freezing the credit in the registry, where it is then marked as ‘retired’ or 'consumed'. At this stage, the carbon credit becomes non-transferable and non-tradable, preventing any form of double counting. 

The carbon credit owner must notify the registrar, usually a third-party certifier or project developer, of the credit's use and request its withdrawal. This procedure guarantees the traceability of credits and prevents any attempt at resale or fraudulent re-use. 

3-step-guide to 'retire' carbon credits with EcoTree: 

1. The owner of the credit informs EcoTree of their intention to 'retire' or use the credit. 
2. EcoTree officially withdraws the credit from the register, marking it as 'retired' or 'used'. 
3. The credit then becomes non-transferable and non-tradable. 

This process is governed by strict standards and relies on the transparency and good faith of the owner. 

Be aware! Any public communication on using your carbon credits to mitigate emissions, including their inclusion in a non-financial report, is considered consumption of these credits. Once your credits have been used up, they must be officially withdrawn from the register to guarantee their uniqueness and avoid any double counting. It is, therefore, essential that you inform us of any use so that we can update the register accordingly.

Carbon Glossary 

The carbon credit market can be complex, with technical terms that may not be familiar to all readers. Here is a quick overview of key terms:

• Additionality:  This ensures that the emissions reduction or removal would not have happened without the carbon credit project. In other words, the project must create a new, measurable environmental benefit.
• Permanence: To be valid, a carbon credit must be associated with a «permanent» and theoretically irreversible reduction in emissions.
• Measurability/Verifiability: It must be possible to measure and verify emissions reductions to ensure that each credit corresponds to 1 tCO2 eq. avoided or captured.
• Double Counting: This term describes a risk where a single carbon credit is counted more than once, misleadingly inflating the amount of emissions offset. Retiring credits in a public registry prevents double counting.

Keep on reading! 

• How to choose a carbon project and credits that suit your company's strategy. 
• Read our carbon methodology. 
• How companies can integrate biodiversity into their sustainability strategy. 
• Take climate action with credible nature-based solutions.