The world’s largest companies are turning to carbon credits. And the

As governments pressure the private sector to limit greenhouse gas emissions, the world’s largest companies have turned to a financial product to offset their environmental footprints — carbon credits.

It’s a hot market, hitting all-time highs in volume and on track to be worth $1 billion in 2021, according to Ecosystem Marketplace, a market publication run by the environmental finance research nonprofit Forest Trends. And just ahead of the United Nations Climate Change Conference starting Sunday, the U.N. Environment Programme issued a report that said carbon markets could “help slash emissions” with clearly defined rules and transparency.

But why are carbon credits important? And why does it matter whether they’re used or not?

What is a carbon credit?

A carbon credit is a kind of permit that represents 1 ton of carbon dioxide removed from the atmosphere. They can be purchased by an individual or, more commonly, a company to make up for carbon dioxide emissions that come from industrial production, delivery vehicles or travel.

Carbon credits are most often created through agricultural or forestry practices, although a credit can be made by nearly any project that reduces, avoids, destroys or captures emissions. Individuals or companies looking to offset their own greenhouse gas emissions can buy those credits through a middleman or those directly capturing the carbon. In the case of a farmer that plants trees, the landowner gets money; the corporation pays to offset their emissions; and the middleman, if there is one, can earn a profit along the way.

But this only goes for what is called the “voluntary market.” There is also something called the involuntary or “compliance market.”

What is the “compliance market” for carbon credits?

In the compliance market, or involuntary market, governments set a cap on how many tons of emissions certain sectors — oil, transportation, energy or waste management — can release.

If an oil company, for example, goes over the prescribed emissions limit, it must buy or use saved credits to stay under the emissions cap. If a company stays under that cap, it can save or sell those credits. This is known as a cap-and-trade market. The cap is the amount of greenhouse gases a government will allow to be released into the atmosphere and emitters must trade to stay within that limit.

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Article 6 of the 2015 Paris Agreement tasks national leaders with figuring this out on a global scale. So far, about 64 carbon compliance markets are now in operation around the world, the World Bank reported in May. The largest carbon compliance markets are in the European Union, China, Australia and Canada.

While politicians and business executives have discussed putting a price on carbon, the U.S. does not have a federal, wide-ranging cap-and-trade market for greenhouse gases.

Regulators, businesses and environmentalists have debated globalizing a cap-and-trade market for carbon. But it is challenging to…