Don't Just Dismiss The Voluntary Carbon Market Because Of Its Imperfections


The market for carbon offsets is growing exponentially but remains filled with dodgy projects that do little for the environment. Sceptics say it’s time to do away with the voluntary carbon markets altogether and take real action through carbon taxes and emissions caps. But by focusing on the imperfections of carbon offsets, they are dismissing a viable approach to climate action that should be used alongside a broader transition towards lower carbon emissions. Read more to find out why carbon credits shouldn’t be dismissed just yet and how technology is improving the integrity of the carbon market.

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"A healthy, thick mangrove forest surrounded and protected by currency notes, in the style of graphic art", as imagined by DALL-E.

People that don’t trust the market are prone to distrusting the carbon market, mused one carbon investment strategist last year at the sidelines of a conference in downtown Singapore attended by representatives from family offices, carbon brokers, carbon exchanges, and climate-focused investment funds.

She continues: After all, if free market principles were responsible for environmental destruction in the first place, how can they be part of the solution?

Nonetheless, the mood was buoyant. The conference organiser - climate-focused venture capital firm Carbon Growth Partners (CGP) -  announced that they had raised US$10 million from a Singapore-based family office and has hit US$32 million for its second carbon fund. 

CGP manages roughly US$165 million of assets today, a drop in the bucket compared to the US$1-2 billion worth of carbon credits that trade on the voluntary carbon market every year. The sector is likely to surpass US$500 billion in 2050 based on its current pace of growth.

Two types of carbon credits

  Emissions units Carbon offsets
How it works Emissions units are traded in emissions trading schemes (ETS), also known as “cap and trade” systems. Collectively, they make up the compliance carbon market. Carbon credits become offsets when claimed by companies to offset emissions. They are created by projects that claim to reduce or avoid further carbon emissions.
Nature of carbon market Mandated by law with specified emission caps Participation is voluntary. However, companies are facing increasing pressure from their shareholders, employees, and customers to become more climate conscious, effectively forcing them to participate.
Oversight body Governments and the European Union (EU) None
Stakeholders Governments and the EU, private companies Carbon project developers, carbon standards bodies, private investors, carbon exchanges, carbon brokers, and individual or corporate consumers
Applicable scope There are 30 ETS globally covering 38 countries, where integrated laws and trading systems are in place. Worldwide. However, the market is very fragmented.


Like all nascent industries, the voluntary carbon market has its problems. 

A recent article published by The Guardian, citing three scientific studies, stated that 94% of the rainforest offsets (known as REDD+ offsets) issued by leading carbon credit registry Verra, are worthless as they do not represent genuine carbon reductions. One study even concluded that the threat to the forests had been overstated by about 400%. 

The industry also remains rife with dodgy projects despite efforts by regulators to shore up the quality of carbon credits. These range from projects that are outright fraudulent to “junk offsets” that exaggerate their environmental benefits. The proliferation of sketchy credits has even spawned a nascent business – insurance against fraud and negligence in the voluntary carbon markets.

Some sceptics go further. They say that carbon offsets are based on a counterfactual and do not mitigate any additional pollution at all. Carbon offsets therefore serve to perpetuate the status quo while giving a false impression that climate action has been taken. Furthermore, by allowing companies to “pay to pollute”, offsets diminish the incentive for polluters to do the harder work of reducing their emissions. 

But before dismissing offsets altogether, consider this. 

None of the alternatives to offsets, if deployed in isolation, are feasible. They are also unlikely to scale at the pace that is required to stop the planet from being inhabitable. 

Why do we even need the voluntary carbon market?

Detractors of carbon offsets point to one fundamental flaw in the scheme - the “baseline”. As the reference point to gauge the environmental benefits of a carbon project, the baseline has been criticised for being subjective and a poor foundation for measuring the effectiveness of climate action via offsets.

There is some truth to that. Baselines could vary widely depending on when the forest was measured, or the veracity of the information pertaining to the likelihood of it being chopped down. Furthermore, as a commodity, offsets are more intangible compared to, say, soybeans, sugar, or oil. One cannot simply head to a forest to locate a tonne of would-have-been-there CO2. 

But that’s not to say that baselines and the offsets based upon them are a complete fabrication. 

The following paragraphs describe how baselines work. 

Imagine a mangrove forest. There are two possible futures for this forest in 30 years. One involves carbon financing and the other doesn’t.

  • Baseline: There is no carbon financing and the forest is eventually cleared for farmland. Less CO2 is absorbed as trees have been chopped and more CO2 is emitted by the resulting economic activity.
  • Alternative future: A project developer intervenes and the forest is conserved for carbon offsets. The trees do not get chopped and the same amount of CO2 continues to be absorbed as compared to the start of the project. 

While most reasonable people today would agree that large swathes of forest are indeed in danger of being cleared, it is the reliance of forest protection on climate financing that has introduced a shroud of scepticism on the motivations of carbon project developers and the voluntary carbon market altogether. 

Namely: Was the threat of deforestation overstated so some greedy developer could make a quick buck?

The positions of offset sceptics vs. offset proponents regarding the subject of baselines was most clearly demonstrated in the responses to the aforementioned article on The Guardian. Verra (the issuer of the disputed carbon credits), Sylvera (a carbon credits rating agency) and Everland (an investment firm focusing on REDD+ projects) have published replies stating that the methodology used to assess project baselines was fundamentally flawed and therefore, led to a drastically inaccurate conclusion that 94% of Verra’s carbon credits were worthless.

In essence, the studies relied on a method called “synthetic controls”, which compared a given project to a “control scenario” based on a set of variables that impact deforestation. The use of synthetic controls for REDD+ projects was problematic as the variables used to define the baseline were selected based only on physical characteristics such as proximity to roads, rivers, settlements, slopes and so forth.

Verra noted that while synthetic controls are effective for certain types of projects, it was unsuitable for REDD+ projects, which are selected based on local factors such as the acute risk of deforestation in a particular area.

And this, according to Verra, is why the studies calculated emissions reductions that were drastically different from the number of credits that Verra issued.

Beyond issues with baselines, sceptics also argue that as a zero sum game - one tonne of CO2 mitigated by the offset equals one tonne of CO2 emitted by the polluter - offsets do not mitigate any additional CO2 and are therefore moot. 

The counter-argument against that is simple. Without carbon financing, as in the case of the baseline, CO2 in the atmosphere would more than double as the planet would be devoid of the carbon sink to mitigate an equal amount of CO2 emissions from the polluter, and would have to bear additional emissions from the resulting economic activity on the cleared forest. 

The all-or-nothing approach must stop

Offset sceptics point out that beyond not providing any environmental benefits at all, that there is a cost to the very existence of the scheme. Namely, that offsets allow for “greenwashing" - providing a false impression that climate action has been taken - and gives decision-makers an excuse not to embark on more difficult, but effective measures. 

Examples include politicians not embarking on unpopular but more effective compliance-driven policies such as carbon taxes or emissions caps, or corporate leaders choosing not to do the harder work of reducing emissions and instead, purchasing offsets to maintain the status quo. 

This absolutist argument pushes a false dichotomy: that we must either buy into the voluntary market completely to the exclusion of all else, or get rid of it completely. It also relies on an outdated caricature of companies as greedy, monolithic entities that will do nothing to fix their carbon footprint unless legally compelled to do so. 

The aforementioned rhetoric can be seen clearly in the aviation sector which has been criticised for relying too much on offsets and not doing enough to reduce their emissions 

Last October, 193 member countries in the International Civil Aviation Organisation (ICAO), an agency under the United Nations formed to coordinate inter-governmental air transport norms and standards, agreed to hit an aspirational “net zero” goal by 2050

To do so, the ICAO recommended that aviation companies reduce their CO2 emissions by adopting new aircraft technologies, streamlining flight operations, and transitioning to sustainable aviation fuels (SAF). Meanwhile, the companies should offset emissions above the agreed baseline; ICAO has set the baseline at 85% of CO2 emissions in 2019.

The deal was panned by environmental campaigners as weak, not legally binding, and essentially, without teeth. The baseline was also condemned for being too low as it failed to address the bulk of aviation emissions, enabling only 22% of total aviation emissions to be offset by 2030.

European campaign group Transport & Environment (T&E) added that at the current price of offsets, airlines would have to add only €1.7 to the price of a ticket on a flight from Europe to the US to offset emissions, which disincentivizes the decarbonising of the industry.

T&E argued that a better approach would be mandating more use of SAF, setting a higher baseline, and - reading in between the lines - not depending on offsets if possible.

Not depending on offsets - *if possible* - is key to understanding the role of the voluntary carbon market in climate action. Decarbonization of any organisation, particularly one as complex as an aviation company, is a process that takes time. Until then, there will be a role for offsets to mitigate ongoing emissions. 

One of the world’s largest buyers of carbon credits, Delta Airlines, for example, has declared that it would aim to reach net zero carbon emissions by 2050. It is now winding down its reliance on offsets, while it replaces its older planes and transits to sustainable aviation fuel.

“Long term, ultimately, the technical “unlock” for long-haul flying has yet to be identified... Everything is in play, from propulsion to actual airframe design and other critical systems. There isn’t an exact line of sight today.” said Delta’s chief sustainability officer Pam Fletcher in an interview with Quartz.

She continued: “There are still a lot of unknowns in how you decarbonize aviation. If you’ve got an equation and it needs to balance, at some point the offsets are the lever that you have.”

Integrity of the carbon offsets isn’t the problem. It’s the shortage of high quality projects.

Carbon credits may be imperfect, but with tighter regulatory scrutiny and greater investor interest in high quality units, the market is improving by leaps and bounds. Certainly, the quality of carbon credits issued today are much better than those issued a decade ago, when standards used to measure carbon claims were less stringent.

A recent government review of Australian Carbon Credit Units (ACCU) found that despite whistleblower allegations that up to 80% carbon projects in Australia did not add to emissions abatement, the program was largely sound, but required updating after 11 years of operation.

Furthermore, carbon investors say that the problem with the voluntary carbon market isn’t that the market is filled with fraudsters selling junk offsets. Rather, the supply of carbon offsets is already under strain from exponentially increasing demand and what the market needs is more supply of high quality carbon credits that cater to companies willing to buy them at a premium.

One such project is Pakistan’s Delta Blue Carbon project, the largest mangrove restoration project in the world. In November, 250,000 carbon credits from the project were auctioned for S$27.80 (€26) per tonne by Singapore-based carbon exchange Climate Impact X (CIX) and carbon finance business Respira. 

According to CIX, a third of the bidders were willing to pay a 27% premium above the auction reserve price, indicating that some buyers were willing to pay more for high quality and unique credit types.

Delta Blue Carbon is far from the only high quality project around. Carbon ratings agency Sylvera assessed more than 397 million carbon credits from Reducing Emissions from Deforestation and forest Degradation (REDD+) projects and found that 31% of those credits are high quality and low risk investments. 

Furthermore, with most of REDD+ projects located in the developing world, carbon credits are also an opportunity for the developed world to channel climate financing to the countries that need it the most.

 Regional credit issuance breakdown of REDD+ projects

Percentage of credits
No. of projects Total credits issued Average issuance per project
South America 39% 44 155,981,367 3,466,253
Asia-Pacific (APAC) 29% 9 117,800,424 13,088,936
Sub Saharan Africa 29% 19 115,306,225 6,068,749
Central America 2% 6 9,360,788 1,337,255

(Source: Sylvera)

What role will technology play in the future of carbon offsets?

Carbon offsets clearly have much to improve upon before being accepted by critics. The good news is that technological solutions are underway to solve many of the issues that are preventing offsets from being effective and scaling at the pace required to stop global warming.

Many of these climate technology solutions have not been proven yet. But a combination of industry demand and institutional backing is likely to bring them to fruition soon.

The National University of Singapore launched the Carbon Prospecting Dashboard in September last year, which features an interactive map to identify locations for high-quality carbon credits. Designed for carbon project developers, the platform quantifies the environmental benefits of forests while helping to calculate the estimated yield of carbon credits and even returns-on-investment. The aim is to lower the complexity and cost of carbon prospecting which in turn, will alleviate the supply-side crunch for high quality carbon offsets. 

Scientists have already quantified the potential benefits of carbon projects in Southeast Asia. One study found that as much as 58% of the forests under threat of clearing in the region could be protected as financially viable carbon projects. If converted, they would prevent 835 megatonnes of carbon emissions a year from being released, equivalent to half of the region’s total emissions in 2020

Another promising solution lies in the application of blockchain technology. The International Finance Corporation (IFC), a sister organisation of the World Bank, launched the Climate Action Data Trust (CAD Trust) late last year together with two other founding members - the Singapore government, and the International Emissions Trading Association (IETA).

CAD Trust is a global meta registry for carbon credits built on a public blockchain, the Chia Network. Unlike other registries, CAD Trust is a decentralized database and not domiciled in any specific jurisdiction, which serves to foster trust and intergovernmental cooperation. 

The aim of CAD Trust is to unify the fragmented carbon markets that are currently divided by categories (offsets vs. emissions units), countries, and issuing registries, and hopefully pave the way for a highly liquid, global market for carbon credits.

The results are promising. Four carbon credit registries have come on board, including Verra and Gold Standard, the two largest issuers of carbon credits in the VCM in the world. Six governments, including Singapore, have signed up.

CAD Trust also aims to eliminate double counting - when two parties claim the same carbon credit. Once tokenized on the blockchain network, each carbon credit is assigned a unique identifier and cannot be consumed twice. Every transaction involving the carbon credit will also be recorded in the network - a feature known as “immutability" - making the entire inventory and the use of it completely transparent.

CAD Trust isn’t the only solution around. Other companies are also experimenting with blockchain technology for climate action in an emerging sector known as “regenerative finance”, or ReFi.

One promising company is the Open Forest Protocol which raised USD 4.1m in pre-seed funding this year. It calls itself an open data platform for nature-based solutions which allows for forest projects to measure, report, and verify their data by logging it on a blockchain network. 

Like CAD Trust, data on the Open Forest Protocol is immutable. This is likely to increase trust in the data, particularly data related to the project’s baseline. 

Don’t dismiss carbon offsets just yet

Ultimately, offset sceptics will continue to point to the possibility of fraud and abuse, particularly when setting up the baseline. 

Solutions like the Carbon Prospecting Dashboard may make it easier for project developers to quantify the environmental benefits of a forest and therefore obtain assurance from buyers that the resulting credits are of high quality. 

However, rogue projects based on a completely fictitious baseline will continue to exist - such as carbon credits based on a forest that was never in danger of being cleared. Junk carbon credits that were issued a decade ago with almost zero trading volume, will also continue to exist in the market, fooling unsuspecting buyers. 

Nonetheless, regulators have wisened up over the years and have begun to put carbon credits under greater scrutiny. Companies have also become more discerning. Pressured by climate-aware shareholders, employees, and investors, they can no longer afford to purchase low quality offsets as a checkbox measure and are on the lookout for high quality carbon credits. But there simply isn’t enough supply. 

Offset sceptics would do well to focus on the bigger picture, rather than dismissing carbon offsets altogether because of imperfections in the market.