The Role of Carbon Credits in Climate Finance and Climate Investment
Addressing climate change requires more than shifting mindsets or adopting new economic models, such as the circular economy. It demands the massive deployment of capital to transform energy systems, industries, and communities toward low-carbon operations and net-zero commitments.
To meet global climate goals, trillions of dollars must flow into climate solutions by 2050. But where will this capital come from?
This is where climate finance and climate investment come into play. At first glance, these terms might seem interchangeable, but they represent distinct approaches to funding climate solutions, each with different risk profiles, return expectations, and strategic purposes.
Let’s break them down:
Climate Finance: Mobilizing Resources for Climate Action
Climate finance refers to the broad set of financial resources and instruments—such as grants, concessional loans, bonds, and equity—that support actions to combat climate change. These funds enable:
Mitigation: Reducing or avoiding greenhouse gas emissions
Adaptation: Enhancing resilience against climate impacts
Climate finance can come from public sources (governments, development banks, multilateral organizations), private actors (corporations, investors), and other channels. These resources flow across local, national, and international levels, often targeting projects or regions where commercial investment alone is insufficient.
Examples of Climate Finance
Green Climate Fund (GCF) Grants
Established by the UNFCCC, the GCF provides grants and concessional loans to developing countries for climate mitigation and adaptation.
Adaptation Fund
A UN-backed fund that finances climate adaptation projects in vulnerable countries.
Concessional Loans from Multilateral Development Banks (MDBs)
Low-interest or subsidized loans from institutions like the World Bank or the African Development Bank to support climate-related infrastructure and development.
Debt Forgiveness Linked to Climate Action (Debt-for-Climate Swaps)
Creditors forgive part of a country's debt in exchange for investments in environmental protection or climate resilience.
Carbon Credit-Generating Projects
Public and philanthropic funding to support carbon projects—such as reforestation, clean cookstoves, or methane capture —where carbon credits serve as a measurable and tradable unit of climate impact, like, for example, the Cordillera Azul National Park REDD+ Project in Peru.
Climate Investment: Financing Climate Solutions with Returns in Mind
Climate investment is a specific, more commercially focused subset of climate finance. It refers to the allocation of capital—primarily by private investors, though sometimes blended with public funds—into projects, technologies, companies, or financial instruments that deliver both climate impact and financial returns.
While both climate finance and climate investment support mitigation and adaptation, climate investment emphasizes profitability alongside climate outcomes.
Examples of Climate Investment
Renewable energy (solar farms, wind turbines)
Green infrastructure (low-carbon transport, energy storage)
Climate tech startups (carbon removal, advanced batteries, climate analytics)
Green bonds and climate-focused funds
Carbon project development (selling carbon credits for offsetting corporate emissions)
Key Differences Between Climate Finance and Climate Investment
In Simple Terms
Climate finance is mission-driven capital, often concessional, aimed at unlocking climate action where commercial viability is low or risks are too high.
Climate investment is profit-driven capital deployed into climate solutions that are economically viable or expected to generate financial returns.
Why the Distinction Matters
Understanding the difference is critical because:
Climate finance helps catalyze early-stage projects, emerging sectors, or vulnerable regions where private capital won’t flow on its own.
Climate investment scales up proven solutions by attracting private capital to accelerate the transition to a low-carbon economy.
How Carbon Markets Drive Climate Finance and Investment
From a functional perspective, carbon credits act as enablers of both climate finance and climate investment. By putting a price on greenhouse gas emissions, they create financial incentives to reduce them. One carbon credit typically represents the reduction or removal of one metric tonne of CO₂ or its equivalent. Carbon credits also help engage the private sector in mitigation efforts, encouraging innovation and unlocking new sources of finance for verified emissions reductions.
Voluntary carbon markets, in particular, go beyond regulatory compliance. They enable companies to offset their greenhouse gas emissions by financing carbon reduction or removal projects that align with their broader sustainability strategies and brand values. Companies purchase these credits as part of their net-zero or climate neutrality commitments, allowing them to compensate for emissions they cannot yet eliminate internally. These investments support high-impact projects such as forest conservation, clean cookstoves, or ocean alkalinity enhancement.
Check our article “Carbon Offsetting Done Right: A Guide for Businesses Taking Climate Action Seriously” to learn more about how to use offsets strategically and transparently, alongside serious efforts to reduce emissions at the source.
Beyond emissions reduction, voluntary carbon markets serve as a strategic tool to demonstrate climate leadership, enhance brand credibility, and engage stakeholders—including customers, investors, and employees—in meaningful climate action. When well-aligned with corporate values and communicated transparently, voluntary offsets can act as a bridge between ambition and action on the path to decarbonization.
Our Buyers’ Guide to Selecting Carbon Credits is designed to empower businesses and investors with the knowledge and tools needed to navigate the complexities of carbon markets, evaluate the quality of carbon credits, and build impactful offset portfolios. The guide addresses compliance requirements, voluntary commitments, and long-term sustainability objectives—ensuring alignment with both global climate action efforts and business goals.
If we look closely at the role of carbon credits within the frameworks of climate finance and climate investment, we can see that they play distinct yet complementary roles.
In Climate Finance
Carbon credits help mobilize finance toward emission reductions, especially in developing countries where climate finance supports mitigation efforts.
Key Functions:
Project Funding: Carbon credits act as a market-based mechanism to channel financial resources into climate action projects that reduce or remove greenhouse gases. This helps mobilize both public and private finance for mitigation and adaptation.
Results-Based Financing: By linking payments to verified emissions reductions, carbon credits enable a results-based approach that attracts funding—especially in developing countries with significant climate finance gaps.
Unlocking Additional Funding: As traditional aid or public funding becomes scarce, carbon credits provide an alternative financing stream that supports both climate goals and sustainable development objectives.
Purpose:
To ensure that financed projects deliver verified emissions reductions and to leverage market mechanisms to scale up climate solutions.
In Climate Investment
Carbon credits are a market-based asset class that investors can buy, sell, or finance the generation of—offering potential financial returns alongside climate impact.
Key Functions:
Attracting Private Investment: The sale of carbon credits provides a financial incentive for businesses and investors to fund projects that deliver measurable climate benefits, such as renewable energy, forest conservation, or clean technology innovation.
Supporting Project Viability: In many emerging markets, climate projects may not be financially feasible without the additional revenue from carbon credits. This income can make otherwise marginal projects investable.
Driving Innovation: By rewarding verified emissions reductions, carbon credits encourage the development and scaling of novel climate solutions, such as direct air capture, biochar, and regenerative agriculture.
Purpose:
To generate returns while meeting growing corporate and governmental demand for emissions offsets—and to fund climate-positive, scalable solutions.
In Summary
Carbon credits play a pivotal role in both climate finance and climate investment by:
Mobilizing capital for climate action projects
Providing results-based financing and new revenue streams
Attracting private investment and scaling innovation
Supporting the achievement of global climate goals
When integrated with robust standards and aligned with a broader decarbonization strategy, carbon credits can unlock transformative opportunities for sustainable development and accelerate the transition to a low-carbon economy.
Turn Climate Strategy into Action with Carbonmark
At Carbonmark, we believe that credible climate action should be both accessible and scalable. Whether you're a company taking its first step toward carbon neutrality or a seasoned sustainability leader seeking deeper integration, Carbonmark offers two powerful ways to accelerate your progress toward climate goals:
Carbonmark Marketplace: Discover and purchase verified carbon credits from a wide range of climate projects around the world. Filter by project type, geography, co-benefits (SDGs), or registry to find credits that align with your company’s market positioning, sustainability strategy, and brand values.
Carbonmark API: For businesses looking to integrate offsetting directly into their platforms, services, or operations, our API enables seamless, programmatic access to carbon credits. Scale your climate strategy effortlessly—whether you're offsetting per transaction, per product, or across your entire value chain.
Ready to Make an Impact?
Go to our Marketplace to select carbon credits that align with your company’s mission and market presence—or integrate our API for scalable, automated offsetting at the heart of your business.
