Decarbonising Finance under Shariah: Understanding Carbon Credits and Offsets
1. Introduction to Carbon Credits and Offsets
Climate change has created a global demand for mechanisms that allow entities to control, limit, or compensate for their greenhouse gas emissions. Two of the most widely used instruments in this space are carbon credits and carbon offsets. Although the two are often treated as equivalent, they differ fundamentally in both purpose and structure, and this distinction is essential before any Shariah analysis can be attempted.
A carbon credit is a tradable permit that represents the right to emit one metric ton of carbon dioxide or an equivalent quantity of greenhouse gases. Carbon credits are created and issued by regulatory authorities within compliance markets such as the European Union Emissions Trading System or the California Carbon Market. Entities that are legally required to restrict emissions receive a certain number of credits that match their permitted allowance. Those that emit less than their limit may sell the surplus to others who exceed it. This framework is intended to reduce total emissions gradually by limiting the number of credits available over time.
A carbon offset, by contrast, represents the removal or avoidance of one metric ton of carbon dioxide from the atmosphere. Offsets are generated through projects that either prevent emissions, such as renewable energy installations or methane capture, or physically remove carbon, such as reforestation or direct air capture. Offsets are typically used in voluntary markets where corporations or individuals purchase them to compensate for unavoidable emissions, though some compliance systems also allow limited use of certified offsets.
The distinction between credits and offsets is crucial. The carbon credit is a permission to emit, while the offset is proof that a reduction has occurred. The first therefore concerns a right granted by law, while the second represents a right arising from a completed environmental service. In fiqh terms, both are forms of rights (huquq), though of different kinds: the credit is a regulatory right created by legal authority, whereas the offset is a right derived from verified benefit.
2. Islamic Legal Framework for Carbon Trading
The Shariah evaluation of carbon instruments must begin by identifying their legal and economic substance. A carbon credit represents a regulatory entitlement to emit a certain quantity of gas, while a carbon offset certifies an environmental service that has already been delivered. In neither case does the buyer perform the underlying activity. A company that purchases credits simply acquires a legal allowance to emit. A company that buys offsets does not plant trees itself but purchases verified evidence that such activity has been carried out by another party.
Both instruments enter the market through an initial issuance: regulators create and distribute carbon credits under cap-and-trade schemes, while offset projects generate certificates through accredited verification bodies. Once issued, these instruments may be traded on secondary markets where ownership is transferred between entities. This reality calls for a fiqh framework capable of addressing both rights (huquq) and services (manfaah), while safeguarding against the prohibitions of uncertainty (gharar), gambling (maysir), and sale of non-existent assets.
2.1 Legal Basis for the Exchange of Rights (Bayʿ al-Ḥuquq)
Mufti Usmani divides all rights into two main categories:
Shariah-based rights (ḥuquq sharʿiyyah)
Custom-based rights (huquq urfiyyah)
Shariah-based rights are those that exist solely through divine legislation, such as inheritance, retaliation, and pre-emption etc. These are personal entitlements whose purpose is moral and social protection rather than economic exchange. They cannot be transferred or sold, although they may be waived through reconciliation or compensation.
Custom-based rights, by contrast, are legitimate rights established for their holders through customary practice (ʿurf) and social dealings, not directly through divine scripture. They represent ongoing benefits derived from the use of tangible property, such as the right of passage (haqq al-murur), the right of water access (haqq al-shurb), or the right of drainage (haqq al-tasīl).
According to the Shafi‘i and Hanbali schools, and in some branches of the Maliki tradition, rights of enduring benefit that are attached to property, such as rights of passage or irrigation, may be sold outright. Early Hanafi jurists, however, did not treat such rights as property, viewing them as personal privileges rather than economic assets.
The later Hanafi scholars, influenced by evolving commercial realities, adopted a more flexible view. They held that when such rights are connected to fixed property, defined in law or custom, and yield genuine and continuous benefit, they acquire the status of property. Their sale or compensated transfer is therefore permissible, provided the transaction is free from gharar or ambiguity.
However, rights not linked to tangible property, such as the right to build above another’s structure (haqq al-ta‘li), cannot be sold, though they may be waived for compensation through a reconciliation agreement (sulh).
Ibn ‘Abidin later affirmed this adaptive reasoning, observing that the notion of property value in Islamic law is established through people’s recognition and customary use. What society accepts as beneficial and tradable gains legal and financial standing.
Mufti Usmani extends this reasoning to modern intangible rights like trade names, trademarks, commercial licences, and intellectual property. Although these rights have no physical form, they are created through human effort, formal registration, and legal recognition. Once registered, they acquire an independent existence that can be verified and transferred. In the view of traders and the law, they function as tangible property. He therefore concludes that these rights may be exchanged through sale, since custom has a legitimate role in defining property. As the Hanafi jurist Ibn Abidin observed, financial value is established by people’s recognition of worth. Just as electricity and gas, once intangible forces, became valuable tradable assets through benefit and social acceptance, modern rights can likewise acquire legal and financial standing when their benefit and recognition are established.
Dr Ali al-Qaradaghi approaches the same subject through the concept of tasarrufat, meaning human legal dealings that generate benefit. He distinguishes between two main types:
Rights established directly by Shariah, such as inheritance, bequest, and retaliation, which cannot be transferred because they arise from divine command and serve moral rather than commercial purposes.
The second category covers rights emerging from human dealings, particularly those relating to benefits derived either from people or from property. Benefits from people include contracts such as mudarabah, and wakalah which generate profit through cooperation. Benefits from property include usufructs such as ijarah (lease), where the benefit arises from tangible assets.
Through this division, Qaradaghi explains that many modern rights fall into the second category because they arise from lawful dealings recognised by society. When such rights produce measurable and legitimate benefit, are recognised by law or custom, and do not cause harm or deception, they acquire the legal status of property (mal mutaqawwam) and may be exchanged. The permissibility of their sale therefore depends on social recognition, clear definition, and lawful benefit.
Qaradaghi further grounds this recognition in the higher objectives of Shariah (maqasid al-shariah), arguing that assigning financial value to such rights reflects Islam’s commitment to contractual freedom and fair trade, the realisation of public welfare (tahqiq al-maslahah), and the prevention of harm (dar al-mafsadah). On this basis, Shariah principles such as public policy in law (siyasah shariah), consideration of welfare (maslahah), and blocking the means to harm (sadd al-dhara’i) together affirm the legitimacy of recognising and protecting these emerging rights within modern transactions.
Both jurists thus affirm that ownership in Shariah can be founded upon recognised benefit rather than physical form. When a right is clearly defined, produces genuine utility, and does not contradict public interest or justice, it becomes legally valuable and eligible for exchange.
2.2 Trading Carbon Credits under Islamic Law
A carbon credit is a quantified right to emit a fixed amount of greenhouse gases, usually one metric ton of carbon dioxide equivalent. It is a regulatory entitlement created under a compliance scheme and issued by an authorised body. The holder may use it to meet emission obligations or transfer it to another participant. It therefore functions as a tradable permit rather than a physical commodity.
From a Shariah perspective, such a permit can be analysed through the juristic frameworks developed by contemporary scholars like Mufti Muhammad Taqi Usmani and Dr Ali al-Qaradaghi. Within Mufti Usmani’s classification, it corresponds to the category of custom-based rights (huquq urfiyyah), which are rights established through law and recognised by social and commercial practice. In Qaradaghi’s analysis, it would likewise fall under lawful entitlements arising from human dealings that generate measurable benefit.
On the basis of these frameworks, the exchange of a carbon credit is permissible when it fulfils the two key conditions that Mufti Usmani outlined for the transfer of modern rights such as trade names and licences: legal recognition and the absence of deception or harm.
The first condition requires that the right be formally recognised and registered. Mufti Usmani explained that a trade name attains the status of property only after official registration, which gives it commercial standing and legal identity. A carbon credit functions in a similar manner. It exists solely through its entry in an authorised registry, and its transfer is valid only within that legal framework. Trading unregistered or invalid credits would therefore constitute deception and the sale of a non-existent asset.
The second condition concerns honesty and market integrity. Mufti Usmani noted that the sale of a trademark becomes impermissible if it misleads consumers. Likewise, transactions in carbon credits that involve false representation, double counting, or market manipulation would amount to deception and excessive uncertainty. Trading must remain transparent, traceable, and aligned with genuine emission obligations to preserve both Shariah compliance and market credibility.
Once these two conditions are met, the carbon credit can, by analogy, be treated as property (mal mutaqawwam) and exchanged as a recognised entitlement within its lawful system of regulation.
2.3 Shariah Treatment of Carbon Offsets
A carbon offset certificate records a verified environmental benefit, such as the removal or avoidance of one metric ton of carbon dioxide. It documents a completed act of reduction or removal confirmed by an accredited body. The question is whether such a certificate represents a saleable right or merely an ethical attribution without the qualities of property.
It may be viewed as a custom-based right that has gained economic recognition through law and market practice. The developer has produced a measurable benefit that is verified and recorded. Once certified, that outcome becomes a distinct and transferable unit. By analogy with modern rights recognised in Shariah, such as emission licences or digital access rights, the offset can be treated as legally valuable property provided that the environmental reduction is genuine, unique, and verifiable, the certificate’s transfer is legally recognised, and the trade is transparent and free from deception.
However, several objections arise. The offset represents a benefit already completed; no new service or usufruct remains to be delivered. This raises the concern that its trade may resemble the sale of a non-existent thing or involve excessive uncertainty if the certificate merely symbolises attribution. Moreover, the voluntary carbon market has suffered from issues such as double counting, exaggerated claims, and non-permanent projects, which introduce uncertainty and undermine reliability. These deficiencies render many offset trades non-compliant with Shariah principles.
From a broader Islamic finance perspective, it is preferable to channel capital directly into genuine carbon-removal or reduction projects through Shariah-compliant investment structures such as waqf bi al istithmar, musharakah, or sukuk al ijarah. This approach links financial participation to real environmental outcomes and upholds the ethical aims of stewardship while avoiding speculative or symbolic trading.
3. Conclusion
The Shariah assessment of carbon instruments rests on how each instrument aligns with the juristic framework of rights (huquq) and benefits (manafiʿ). Both Mufti Muhammad Taqi Usmani and Dr Ali al-Qaradaghi provide structured methodologies that allow modern intangible entitlements to be evaluated within classical legal principles. Their shared conclusion is that ownership and exchange in Shariah are not limited to physical objects but extend to any legally recognised, beneficial, and transferable right that serves a legitimate purpose and avoids harm or deception.
Under this framework, a carbon credit represents a regulatory right created by lawful authority and established through formal registration. It is therefore comparable to other legally recognised commercial rights such as trade names, import licences, or broadcasting permits. When traded transparently within a recognised compliance system, it satisfies the essential conditions for valid exchange: legal recognition, clear definition, and the absence of deceit or uncertainty. Accordingly, its sale is permissible as a transfer of a recognised entitlement, provided that trading remains within its lawful framework and does not become speculative or manipulative.
A carbon offset, on the other hand, represents the result of a completed service rather than a continuing right. Although it can function as a tradable proof of benefit, its legitimacy depends on the authenticity and permanence of the underlying environmental reduction. Where the reduction is real, verified, and uniquely attributable, the offset may be treated as a valuable right and its sale permitted. However, where the claim is uncertain, duplicated, or unverifiable, trading such offsets would constitute gharar (excessive uncertainty) and violate the principles of fairness and transparency.
Overall, the permissibility of carbon trading in Shariah depends less on the form of the instrument and more on the substance of the transaction. Rights that are lawfully recognised, economically beneficial, and transparently exchanged fall within the permissible domain of bayʿ al-huquq (sale of rights). Yet, if such trading turns into speculative profit-seeking divorced from real environmental outcomes, it would contradict the higher objectives of Shariah, which are grounded in justice, honesty, and the preservation of the environment.
In conclusion, carbon credits may be traded as legitimate rights within regulated systems, while carbon offsets require cautious verification of substance before being treated as saleable property. A genuinely ethical Shariah framework for climate finance should therefore move beyond symbolic trading toward direct participation in measurable carbon-reduction and removal projects, ensuring that financial activity remains a means of real environmental stewardship rather than an exercise in paper compliance.
