How to Choose Carbon Credits That Actually Cut Emissions Carbon credits are an important way to reduce your carbon footprint, but they can be confusing. Here's what you need to know.

Across industries, businesses are taking drastic action to minimize their environmental impact — from slashing carbon emissions to utilizing recycled materials to minimizing corporate travel. Carbon offsets have become a major tactic for forward-thinking companies looking to meaningfully reduce their climate impact.

The voluntary carbon market is expected to grow from $2 billion in 2020 to roughly $250 billion by 2050, indicating its immense viability to deliver meaningful climate solutions.

However, for the industry to achieve its full potential, companies need clarity and transparency in the process of selecting carbon credits. For companies looking to meaningfully reduce their carbon footprint, there can be concern and confusion over picking the "right" credits — those that actually deliver the impact being paid for. The voluntary carbon markets lack clear standards, which can make it challenging for businesses that want to do the right thing to navigate.

Related: The Carbon Credit Market Could Grow 50X Bigger: How One Pioneering Platform Is Meeting the Demand

What are carbon credits?

It's crucial that companies make major strides in reducing the carbon that they produce. However, there will inevitably come a point when organizations have reduced their total emissions as much as possible. In order to bridge that carbon gap, companies rely on carbon credits — which represent the removal or protection of carbon by others.

Companies purchase carbon credits from projects that draw down legacy carbon trapped in the atmosphere and protect existing stores of carbon from being released – both of which are needed to reverse the climate crisis.

For instance, the crops of the globe's two billion smallholder farmers naturally pull down carbon from the atmosphere, storing it back in the soil. Using sensors, satellite imagery, AI and regular monitoring, this stored carbon can be tracked and quantified then sold as a carbon credit.

Most companies purchase carbon credits via the voluntary carbon markets, which are fast-emerging as a vital tool to help companies achieve their climate targets. While these carbon credits are a proven tool for offsetting emissions, there are a multitude of options that vary in quality and impact.

Why carbon credits?

Risk is the biggest driver in business and — with trillions of dollars in annual climate-related costs and damage – the climate crisis is fast becoming a business crisis. Corporations must act now to minimize losses, illustrate meaningful climate action to shareholders and comply with fast-approaching climate regulations.

Carbon credits are an important approach to scaling climate action globally and are a fast-growing strategy for delivering on corporate ESG goals. While these offsets are part of nearly every scenario that keeps global warming to 1.5 degrees Celsius, legacy carbon markets lack broad public trust: Impactful carbon solutions require clear guidelines and proven, verifiable data.

Delivering transparency via data

In selecting carbon credits, consider the data:

• What kind of data is provided — Is it clear who is responsible for carbon sequestration (i.e., smallholder farmers), and how they're doing it (i.e., through the crops of their regenerative farms?
• How is carbon removal calculated?
• Who is verifying the data — Is it a third-party entity?
• Is the carbon data auditable (this is especially important for public companies in light of fast-approaching SEC climate disclosure rules)?

Businesses need auditable, transparent climate and social impact data to convey their actions to key shareholders.

Without transparency about where carbon comes from, the positive and negative impacts of how it's being captured and stored, and how it's being calculated, there is a tremendous corporate risk for faulty carbon credits.

Investors should turn to carbon credits that allow them to track the sourcing of their credits back to the specific farm and community they came from, and that robustly quantify how those communities are benefiting from the carbon markets.

Climate justice: Merging social and environmental impact

While legacy carbon markets rarely have focused on socio-economic impacts, the burgeoning generation of carbon markets will prioritize both social and environmental impact in their models. In action, these carbon credits will benefit the environment while equitably compensating those responsible for the carbon sequestration. Often, these carbon stewards are among the most vulnerable populations – including smallholder farmers, women and indigenous communities.

When buying carbon credits, ensure that carbon stewards are equitably compensated by asking some basic questions of those selling carbon credits:

• What language do they use to discuss the partnership with carbon stewards?
• Is their data auditable?
• Is the financial model of carbon credits disclosed? Are carbon stewards paid equitably and in a timely manner?
• Is socioeconomic improvement data shared with investors according to accepted third-party standards?

Incorporating social and environmental impacts into the next generation of carbon markets can further enhance their value, potentially benefiting vulnerable communities that play a key role in carbon sequestration. A well-designed carbon credit protocol can financially incentivize carbon stewards to bolster their future work – which increases the positive socio-economic and environmental impacts for generations to come.

Other tactics for carbon removal

Mechanical carbon capture comes in the form of big machines that effectively suck carbon dioxide out of the air to store, either by putting it underground or repurposing it in other ways. While mechanical carbon capture is promising, this technology is largely still in its infancy, enormously expensive, and still proving its ability to scale.

Related: Blockchain Could Help Us Combat Climate Change — Here's How.

The time is now

Forecasts now show that the planet will hit a threshold of 1.5C in global temperature change by 2027, which is far sooner than ever expected and carries the potential for massive damage, loss of human life and trillions of dollars in incurred damages for the global economy.

This is an all-hands-on-deck moment. We must engage proven, reliable, and equitable methods to meet what may be the greatest threat to the future of humanity and the planet we inhabit. Carbon credits, when implemented responsibly and at scale, can be a very effective tool for humanity to use in the fight to limit the damages from climate change. However, the industry's growth hinges on increasing transparency and standardization to ensure that carbon credits truly deliver the promised impact.