Carbon credits, offsets and removals in reporting

What are carbon credits?

A carbon credit is a tradable certificate representing one tonne of CO2 equivalent that a project has avoided, reduced or removed, measured against a baseline and verified. Avoidance and reduction credits come from projects such as protecting forests, capturing landfill methane or distributing efficient cookstoves; removal credits from projects that take carbon out of the atmosphere, through forests and soils or technologies such as biochar and direct air capture with storage. Credits are issued by programmes such as Verra, Gold Standard and ACR, held in registries and retired, or cancelled, when a buyer uses them, so they cannot be sold again. Quality depends on additionality, a robust baseline, permanence, no double counting and safeguards for communities. See setting and reporting net zero targets.

Can carbon credits reduce reported emissions?

No. Under the GHG Protocol, a company reports its gross scope 1, 2 and 3 emissions and shows any credits separately. A net figure can be presented only alongside the gross one, with the credits described. The same principle applies under IFRS S2 and the ESRS, whose emissions disclosures are gross, and under the SBTi, which does not count credits towards emission reduction targets. See the GHG Protocol explained.

What do IFRS S2 and the ESRS require on carbon credits?

For each climate target, IFRS S2 requires a company to say how far it plans to rely on carbon credits to meet any net emissions target, which third-party scheme will verify or certify the credits, whether they are nature-based or based on technological removals, whether they come from emission reductions or removals, and any other factors needed to judge their credibility and integrity, such as assumed permanence. ESRS E1 asks for the credits from projects outside the value chain that were cancelled in the period and those planned to be cancelled, the share from removals, the quality standards they meet, and the basis for any public claim of climate neutrality. See IFRS S2 and ESRS E1.

Carbon credits in practice: a company's first purchase

A company with 50,000 tonnes of scope 1 and 2 emissions in 2027 buys and retires 10,000 forest protection credits carrying the Core Carbon Principles label at US$ 12 each and 2,000 biochar removal credits at US$ 150: US$ 420,000 in total.

Its emissions stay at 50,000 tonnes. In its sustainability disclosures it reports the 12,000 credits separately, by type, programme and label, and explains that they support its climate strategy beyond its value chain but do not count towards its reduction targets. It does not label any product carbon neutral in the EU. In its IFRS accounts, it records the credits as intangible assets at cost until retired, then expenses them; once it adopts ASU 2026-02 under US GAAP, its US subsidiary will expense credits bought for retirement immediately. See greenwashing risk.

How is credit quality judged?

The Integrity Council for the Voluntary Carbon Market sets the Core Carbon Principles and approves programmes and methodologies that meet them; by late 2025 it had approved seven programmes and 36 methodologies, with about 51 million unretired credits eligible for the label, around 4% of 2024 market volume, and it decided in 2024 that grid-connected renewable energy methodologies did not qualify. For removals, the EU's Carbon Removals and Carbon Farming Certification Regulation, published in December 2024, sets a voluntary certification system, with its first methodologies, for direct air capture, bioenergy with carbon capture and biochar, entering into force in May 2026. Ratings agencies and the airline scheme CORSIA's eligibility rules also inform buyers.

What claims can a company make?

In the EU, Directive 2024/825 has banned claims that a product has a neutral, reduced or positive climate impact based on offsetting since 27 September 2026. Company-level claims remain possible but must be accurate and substantiated, and in California AB 1305 requires companies making carbon neutral or net zero claims to publish details of the credits behind them. Guidance such as the Voluntary Carbon Markets Integrity Initiative's Claims Code of Practice ties credible claims to progress on the company's own targets. See greenwashing.

How are carbon credits accounted for?

IFRS has no standard on voluntary credits; the IASB deferred its project on pollutant pricing mechanisms in January 2025. In practice, credits held for the company's own retirement are often recognised as intangible assets at cost and expensed on retirement, while credits held for sale in the ordinary course of business are inventory. A commitment to retire credits for emissions already made can create a provision. Under US GAAP, ASU 2026-02, issued in May 2026 and effective for public companies for years beginning after 15 December 2027, recognises a credit as an asset only if it is probable it will be sold, transferred or used to settle a compliance obligation, so credits bought for voluntary retirement are expensed. See climate commitments and provisions and emissions allowances.

This guide is general information. It is not tax or legal advice for your situation.