All You Need to Know About Carbon Credits

Carbon, carbon trading, carbon credits, carbon markets—it can all feel overwhelming. Let’s cut through the noise by focusing on a simple idea: there’s too much greenhouse gas (GHG) in the atmosphere, and anyone who helps remove or prevent more of it has the potential to generate an additional revenue stream. It boils down to this:

• The Problem:
  • Too many greenhouse gases (GHGs), like carbon dioxide (CO2) and methane, are accumulating in our atmosphere.
• The Opportunity:
  • If we remove or prevent additional GHGs from entering the air, we can be rewarded for it.

In this article, we’ll break down what carbon credits are, how they work, and why they matter, while also exploring the challenges, solutions, and their growing importance in agriculture—both now and in the future.

What is a carbon credit?

A carbon credit is a recognised unit that offsets one tonne of CO₂ (or its equivalent) that an organisation or individual cannot otherwise reduce through direct measures. To create a credit, an equivalent amount of emissions must be removed or avoided from entering the atmosphere. These credits are then traded in carbon markets, allowing participants to compensate for the emissions they cannot eliminate by other means.

How do carbon credits work?

Carbon credits facilitate a market-based approach to controlling GHG emissions by assigning a monetary value to emission reductions. Carbon credits function in a market where companies and individuals essentially buy and sell the right to emit GHGs.

Picture a concrete company under pressure from the government to reduce its carbon footprint. If it decides not to curb its own emissions directly (e.g. via cleaner tech), it can offset them by purchasing carbon credits from projects that remove or avoid that same amount of CO₂.

This offsetting balances out the carbon cycle—the natural movement of carbon among the atmosphere, land and oceans—by making sure every tonne of CO₂ released is matched by a tonne removed or never emitted. Consequently, carbon credits are a cornerstone of many environmental policies targeting climate change. By putting a price on pollution, they encourage businesses to invest in sustainability and green innovation.

Where do Australian Carbon Credit Units (ACCUs) fit in?

Australian Carbon Credit Units (ACCUs) are tradable certificates that represent one tonne of carbon dioxide equivalent (tCO₂-e) either stored or avoided in Australia. ACCUs primarily belong in the compliance category under Australian government policies. However, companies that do not face mandatory caps can still voluntarily purchase and retire ACCUs to lower their carbon footprint. In this way, ACCUs can serve both compliance and voluntary buyers—bridging the gap between the two market types.

Example: An Australian mining company might need ACCUs to meet government emissions targets (compliance), while a small agribusiness might voluntarily buy ACCUs to market itself as carbon-neutral. Both parties tap into the same mechanism, but their motivations differ.

How are carbon credits generated?

To earn a carbon credit, a project must prove it has removed or avoided one tonne of CO₂ (or its equivalent) from being emitted. Common examples include:

• Avoided 
  • Renewable energy: Using wind or solar instead of fossil fuels.

• Removed
  • Forest conservation: Protecting existing forests so they continue absorbing CO₂.
  • Plantation projects: Planting new forests or restoring degraded land to sequester more carbon.

• Improved agricultural practices: Techniques like reduced tillage and cover cropping to store extra carbon in the soil.

Australian Carbon Credit Units (ACCUs)

What are ACCUs?

Australian Carbon Credit Units (ACCUs) are tradable certificates that represent one tonne of carbon dioxide equivalents (tCO₂-e) either stored or avoided in Australia. They act as the official currency for carbon reduction under the Australian government policies, allowing businesses to offset emissions or meet regulatory targets.

Source: Clean Energy Regulator 28 November 2024

Who regulates them?

ACCUs are generated under the ACCU Scheme, which falls under the authority of the Clean Energy Regulator (CER), an independent body responsible for verifying emissions reductions. Projects that meet stringent measurement, reporting, and permanence requirements earn ACCUs.

A brief history

The foundation for ACCUs emerged from the Carbon Farming Initiative (CFI) in 2011, designed to reward landholders for adopting emission-lowering practices. Over time, it expanded to encompass energy efficiency, landfill gas capture, savanna burning, and more. Each approved method details how to quantify and verify climate benefits.

Types of ACCU scheme projects

The ACCU scheme covers a wide range of methods—reforestation, waste management, avoided deforestation, and more. However, soil carbon stands out as especially promising. Farmers can boost soil carbon by using regenerative practices like reduced tillage, cover cropping, and improved grazing management. By sequestering carbon, this can also improve soil health, increase drought resilience and enhance productivity.

Why are soil carbon projects exciting?

1. Dual benefits: Climate change mitigation + healthier, more productive soils.
2. Growing interest: Soil carbon initiatives are increasingly recognised for their role in sustainable agriculture.
3. ACCUs: Farmers who verify these gains can sell ACCUs to companies looking to offset or comply with emissions rules.

Case Study: Queensland soil carbon projects

• In June 2023, two projects in Queensland issued 150,312 ACCUs which had a value over A$5.2 million dollars.
• Enhanced grazing practices: These projects improved soil carbon levels by adjusting how livestock grazed.
• Verification: Involved randomised soil sampling and independent lab analysis, ensuring accuracy and credibility.
• Impact: Demonstrated the feasibility of soil carbon projects as a revenue stream for landholders while benefitting the environment.

Opportunity for grain farmers

While many soil carbon projects so far have focused on grazing, grain farmers could soon benefit as well. Loam Bio is pioneering a microbial technology that builds stable carbon in cropping systems—an area often seen as more challenging for soil carbon sequestration. Many SecondCrop soil carbon projects are registered in Australia, and are expected to qualify for ACCU issuance in the coming years.

Are carbon credits good or bad?

Carbon credits are neither inherently “good” nor “bad.” They can be a useful tool for driving investment into climate-friendly projects and incentivising lower emissions, but they also carry risks. Critics point out that some carbon credit programs may fail to deliver genuine climate benefits, leading to concerns like greenwashing or poor verification.

Difference Between Low- and High-Quality Carbon Credits

• Low-Quality Credits: Often suffer from poor quality control, meaning they can fail to deliver the emissions reductions they promise and undermine the market’s credibility. They are prone to over-crediting, lack true additionality (the offset project would have happened anyway), and may not ensure long-term carbon storage. These features contribute to a moral hazard where companies purchase inexpensive credits instead of committing to meaningful emissions cuts within their own operations or supply chains.
• High-Quality Credits: Are rigorously verified, genuinely additional, and designed to provide lasting climate benefits. Such credits are usually more expensive. Their higher cost incentivises companies to prioritise real emissions reductions, thus avoiding the pitfalls of moral hazard and truly benefiting the climate.

What are the benefits of carbon credits?

• Encourages investment in climate-friendly projects, from renewable energy to reforestation.
• Funds conservation: Revenue from credits can help protect forests or restore degraded lands.
• Incentivises lower emissions: By attaching a price to carbon pollution, businesses are nudged to develop greener solutions.

What are the risks of carbon credits?

• Poor verification: If credits aren’t thoroughly verified, emissions aren’t truly offset.
• Greenwashing: Companies may use credits as a marketing tool without tackling their own carbon footprint.

Innovative solutions 

• Buffer pools

• • The ACCU scheme employs a risk of reversal buffer.
  • A percentage of credits from each project is set aside in a pool.
  • This buffer acts as insurance against unexpected carbon losses across all projects.

• Insurance in carbon credits 

• • Insurance products are emerging to protect against project failure.
  • Parametric insurance: Payouts are triggered by predefined events (e.g., drought) rather than assessed losses.
  • Carbon credit delivery guarantee: Insures against a project’s failure to deliver the expected number of credits.

• Technological advances

• • Improved measurement and verification
  • Remote sensing: Satellites and drones provide frequent, large-scale monitoring of land use changes and biomass.
  • Machine learning: AI algorithms can process vast amounts of data to detect patterns and anomalies in carbon sequestration.

• Loam Bio’s CarbonBuilder technology 

• • Loam Bio’s innovative approach addresses several key challenges:
    • Stability: Develops microbial treatments that build more stable forms of soil carbon, reducing the risk of carbon loss due to environmental factors.
    • Measurement: Incorporates advanced soil testing and data analytics to provide deeper insights into how to optimise build rates across the project area.
    • Scalability: Designed to work across cropping systems, expanding the potential for carbon farming beyond just grazing operations.

The future of carbon credits: Trends and outlook

The carbon credit market is poised for significant growth and evolution in the coming years, driven by increasing climate urgency and technological advancements. Here’s an overview of the key trends and outlook:

Market expansion

• Specifically for Australia, the carbon credit market is expected to grow from USD 4.11 billion in 2024 to USD 9.126 billion by 2030, with a CAGR of 13.18%.

Technological advancements

Innovations in measurement, reporting, and verification (MRV) technologies are improving credit reliability and transparency:

• Digital measurement, reporting and verification (dMRV) systems utilising AI, machine learning, remote sensing, and IoT devices are enhancing accuracy and efficiency.
• Satellite imagery and advanced data analytics are improving monitoring capabilities, particularly for forestry and agricultural projects.

Focus on quality

There’s an increasing emphasis on high-quality credits:

• The Integrity Council for the Voluntary Carbon Market (ICVCM) is implementing Core Carbon Principles (CCPs) to set standards for high-quality carbon credits.
• Ratings agencies are emerging to provide independent assessments of carbon credit quality.
• Regulatory bodies are implementing stricter transparency and reporting requirements.

Integration with financial markets

The carbon credit market will continue to become more sophisticated:

• Carbon-linked financial products like Futures and Options are being developed.
• The Australian Securities Exchange (ASX) launched ACCU Futures contracts in July 2024.
• There’s growing interest in carbon credits as a new asset class amongst investors.

Conclusion

Carbon credits are a powerful mechanism for both environmental stewardship and economic opportunity, particularly in the Australian market, where ACCUs provide a government-backed pathway to monetise emissions reductions. Forward-thinking technologies, such as Loam Bio’s microbial CarbonBuilder approach, are expanding the horizons of soil carbon projects, making it easier for farmers to earn ACCUs while improving soil health and resilience.

As robust measurement and oversight continue to evolve, carbon credits have the potential to become a trusted tool for climate action and a valuable addition to farmers’ revenue streams. Ultimately, ensuring high-quality verification, preventing greenwashing, and scaling technologies like Loam’s will be crucial for the carbon credit market to fulfill its promise in combating climate change.