Synopsis: In this article we will understand what carbon credits are, how companies that are into green energy acquire these carbon credits, and how these credits add additional revenue to the companies.
Carbon credits, also known as carbon allowances, work like permission slips for emissions. When a company buys a carbon credit, usually from the government, they gain permission to generate one tonne of CO₂ emissions. With carbon credits, carbon revenue flows vertically from companies to regulators, though companies that end up with excess credits can sell them to other companies.
How Do Green Energy Companies Generate Carbon Credits?
Carbon credits in India function through the Carbon Credit Trading Scheme (CCTS), which was established under the amended Energy Conservation Act of 2022. The government notifies obligated entities with a mandatory emissions intensity target (baseline), defined as tonnes of CO2 equivalent per unit of output, for each year of the specified compliance period
Green energy companies that operate solar farms, wind power plants, or other renewable energy projects reduce their greenhouse gas emissions below these government-set targets. Each carbon credit certificate represents one tonne of CO₂ equivalent reduction or removal from the atmosphere. When a renewable energy company produces cleaner energy than required, they earn these certificates as proof of their environmental contribution.
The trading system creates a market-based solution for emission reductions. Entities that overachieve their GHG emissions intensity target will be eligible for the issuance of carbon credit certificates, and entities that fall short of their target will be required to purchase and surrender an equivalent number of certificates to compensate for the shortfall.
The certificates will be exchanged via the national power exchanges, where companies with excess credits can sell them to companies that need them. This system turns environmental responsibility into a financial opportunity—green energy companies profit from their clean operations while polluting companies pay for their excess emissions, ultimately driving the entire economy toward lower carbon output.
How Do Companies Earn Revenue by Selling Carbon Credits?
Companies make money by polluting less than they’re allowed to and selling their leftover “pollution allowance” to other companies. A single carbon credit represents the removal or avoided emission of one tonne of carbon dioxide, or another greenhouse gas like methane of equivalent volume.
These credits can be sold at a cost to an entity that can then claim that credit as a reduction in its own carbon emissions. If a company emits less than the allowed limit, it can sell the remaining allowance as a carbon credit to other companies. The cleaner you operate, the more you can sell.
Companies also earn by running green projects like solar farms or planting forests. Companies that use renewable energy but do not need to claim carbon emission reductions can sell the corresponding carbon credits.
After getting their emission cuts verified, they sell these credits to businesses that need them. The price for a carbon credit is highly variable, ranging from a few rupees to a few thousand rupees, depending on how genuine and long-lasting the environmental benefit is.
Indian Example.
India’s carbon credit market is creating real money for businesses. Between April and July 2024, approximately 180,000 energy-saving certificates were traded, generating around ₹39 crore in revenue. This is just the beginning – the market is set to fully launch in 2026. What’s really interesting is that companies aren’t just earning from trading credits; they’re also protecting their export revenues.
In 2022, India exported about $8 billion worth of steel, aluminium, and other heavy industrial products to Europe, with 27% of aluminium and 38% of steel exports heading to European markets. Companies that reduce their carbon emissions can avoid Europe’s carbon border taxes starting in 2026, which means they get to keep selling at competitive prices while others might face hefty duties. It’s a smart move that turns environmental responsibility into actual profit.
This is how carbon credits have transformed the way companies conduct business, especially in the fields of energy, infrastructure, industry, and plenty of other sectors, to create a sustainable and efficient method of pollution control and create an easy path for companies towards a greener future.
Written by Leon Mendonca.
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