Carbon credits are an essential part of the global legal framework for combating climate change. The main idea behind carbon credits is to create a market in which the rights to emit carbon dioxide into the atmosphere can be bought and sold. In this way, companies that reduce their emissions below their assigned level can sell the surplus to other companies that need additional rights to pollute above their assigned level. Carbon Credits provide an incentive for companies to reduce their carbon emissions by monetizing unused emission allowances.

The idea behind carbon credits is that they are allocated to countries, states, cities, or other entities, with each being assigned a certain quota. Companies can buy, sell, or trade their carbon credits with other entities to meet their own emissions goals. It is based on the principle of cap-and-trade in which an overall upper limit (cap) is set on the total amount of a certain pollutant that can be emitted, and companies or individuals receive emission permits that allow them to lawfully discharge a certain amount of the pollutant.

The multinational companies involved in the trade are in need of carbon credits because they are legally required to reduce their emissions either through the imposition of a law or through their own corporate policies. Carbon credits provide them with the impetus to reduce their emissions by monetizing the emissions that have already been reduced. This creates a financial sense of obligation to reduce emissions because those ecological investments now have tangible returns on investment.

The creation of a global carbon credit trading market through COP26 in Glasgow signals an increase in global cooperation and collaboration in the fight against climate change. Carbon credits will create a new set of market incentives and provide more opportunities for private capital to be invested in lower-carbon projects and technologies. These investments could play an important role in helping the world reach its climate goals.