What are carbon credits and how do they relate to finance?

Carbon credits are permits that allow entities to emit a certain amount of carbon dioxide or other greenhouse gases. Each credit typically equals one metric ton of CO₂. If a company emits less than its allowance, it can sell surplus credits; if it emits more, it must buy extra credits. This creates a market-based mechanism to reduce global emissions. In finance, carbon credits have become tradeable assets, attracting institutional investors and fueling carbon markets. Their pricing influences corporate strategies, investment decisions, and compliance costs. As demand for climate accountability rises, carbon credit trading has become a financial tool for risk management, regulatory compliance, and environmental impact reduction—linking sustainability with profitability.