A carbon credit or emissions allowance is a tradable ‘right to emit’, usually representing one tonne of CO2e. These credits are allocated by governments, and the allocations tend to fall over time to make it more expensive to emit GHGs. Businesses which emit less than their allocations can support their revenue by selling their excess credits to business which emit more than their allocations.
This concept is also referred to as ‘cap and trade’. It is the principle on which emissions trading systems – of which the EU Emissions Trading System (EU ETS) is the largest example – are based. In the EU ETS, these credits are called European Union Allowances (EUAs).
Carbon credits are an internationally recognised way for organisations to manage their carbon emissions  which can then be used tofinance projects which reduce the need to burn fossil fuels or can draw carbon out of the air.
3. Allocation and Trading
Every country or organisation, no matter how sustainable or energy efficient, creates carbon or other greenhouse gas emissions. Carbon credits can be used to compensate for such unavoidable emissions.
Another way to think of a carbon credit, is to see it as buying the right to emit a certain amount of greenhouse gas. A carbon credit certifies that the organisation that has bought them is doing something to balance out their emissions. 
In other words, businesses are buying and selling their right to pollute when they exchange carbon credits in the ‘cap-and-trade’ carbon market.
This gives us a definition, according to the Corporate Credit Institute: “a carbon credit is a tradable certificate that provides the holder of the credit the right to emit one ton of carbon dioxide or an equivalent of another greenhouse gas.” 
3. Allocation and Trading
Governments set a limit on how much GHG (expressed in terms of CO2) a business can release annually. If a business keeps its emissions below its allocated limit, it will be able to trade, sell or hold its carbon credits. However, if a business has used more than its limit, it will need to purchase carbon credits or face a fine.
The ultimate aim, of course, is to reduce the total amount of GHG in the atmosphere. Therefore, the number of carbon credits in the market is limited. Depending on the market, licenses to emit may be either be bought at auction or allocated for free. As time goes by, the number of available licenses diminishes which increases the value of the credits, putting pressure on the participating businesses to reduce their emissions.