Carbon markets are global trading systems that tackle greenhouse gas (GHG) emissions through the purchase and sale of carbon credits or offsets – each representing one tonne of carbon dioxide (or equivalent GHG) reduced, avoided or sequestered. These markets come in two forms: compliance and voluntary.
Compliance vs voluntary markets
Compliance markets (or Emission Trading Systems (ETS)) were first created in response to the Kyoto Protocol in 1997, and later expanded by the Paris Agreement. These markets are regulated by specific frameworks, and companies in certain high-emitting sectors (such as energy or manufacturing) are legally required to participate. In compliance markets, carbon credits are traded. Companies are assigned an ‘emission cap’, which is a limit on the amount of GHG they can emit. If a company exceeds its cap, it must purchase additional credits to cover the excess. Conversely, if a company’s emissions fall below its cap, it can sell the surplus credits to others. This system encourages companies to stay within their designated emission limits while creating a market for trading excess allowances.
On the other hand, voluntary carbon markets enable companies to actively purchase carbon offsets on a voluntary basis – not because they are legally required to, but because they want to demonstrate environmental responsibility. Carbon offsets, unlike carbon credits, are not linked to regulatory caps or compliance requirements. Instead, offsets aim to mitigate emissions by funding projects that remove or reduce GHG from the atmosphere, such as forest restoration or renewable energy initiatives. This system allows entities to compensate for their emissions beyond their regulatory obligations. However, despite being praised for funding green initiatives, voluntary markets are often criticised for being lightly regulated – some even liken them to the ‘Wild-West’ – which raises concerns about the way they are used, their authenticity and the impacts of the projects they fund.
Do voluntary carbon offsets create a ‘licence to pollute’?
Voluntary carbon markets have faced criticism for enabling greenwashing, which occurs when a corporation actively tries to appear environmentally responsible without making significant changes to their activities. Corporations often purchase carbon offsets as ‘pollution permits’, enabling them to meet their climate targets more cost-effectively than by restructuring and decarbonising their polluting activities. This raises a significant concern that companies use claims such as ‘carbon neutral’ or ‘Net Zero’ in their marketing communications based on offsets rather than genuine in-house emission reductions. As a result, high-emitting companies can mislead the consumer by avoiding meaningful environmental action by choosing cheap voluntary carbon offsets.
In order to ensure greater accountability and responsible use of carbon markets, offsetting schemes should only be employed to mitigate residual emissions that cannot be eliminated by internal efforts. Companies should be required to prioritise reducing their emissions across their value chain by implementing all feasible changes before relying on the purchase of offsets. Not only would this approach prevent consumers from being misled by ‘net zero’ claims, it would ensure that carbon offsets are used as a last resort, alongside meaningful climate action, rather than as a substitute.
However, the path ahead seems promising, at least in the EU with the 2023 proposal for a Green Claims Directive receiving support from both the Parliament and the Council in 2024. The proposed Directive aims to regulate the responsible use of carbon offsets by overseeing marketing practices. It would require companies to separate claims based on voluntary offset schemes from information about their actual emissions. Additionally, the Directive would forbid companies from making claims that their products or services are carbon neutral or have a reduced or positive impact on the environment if they are based on emissions offsetting schemes. If this Directive enters into force and is implemented strictly, it could be effective in preventing greenwashing and the use of carbon offsets as a licence to pollute.
Can carbon offsets lead the path to a greener future?
Carbon Offsets are touted as having two main advantages: they fund global development and promote environmentally restorative efforts.
The voluntary carbon market has significant potential to involve resource-rich developing nations in emissions trading. Since 2018, the World Bank has supported the establishment of carbon crediting initiatives through pilot programs in 15 developing countries as part of its Forest Carbon Partnership Facility. In 2023, it announced plans to expand transparent and inclusive carbon markets, ensuring carbon offsets are genuine and beneficial to local communities, especially Indigenous peoples. By 2028, these developing countries could generate 126 million offsets potentially worth US $2.5 billion, providing substantial economic benefits, allegedly sourced through the sustainable use of their land via preservation and restoration efforts.
However, while intended to benefit communities, these carbon offset projects often impose restrictions on the livelihood of local communities, lack transparency and benefit sharing, create dependency, and cause significant harm, including land conflicts and human rights abuses. For instance, during the Southern Cardamom REDD+ project in Cambodia, Indigenous communities faced evictions and criminal charges for using ancestral lands. As the carbon industry expands, concerns are being raised about the sustainability and ethics of its practices.
Voluntary carbon markets can also drive environmental initiatives by ‘monetising’ nature. Since carbon-rich ecosystems have the potential to generate significant wealth, losing them carries an economic cost. Engaging private investors through this approach can provide a much-needed shift from historical reliance on philanthropic or public funding for environmental projects. By making nature an interesting investment opportunity that helps companies meet emission targets, carbon markets can attract greater funding, providing the financial support required to cover large-scale conservation efforts.
Yet, this approach is not without its own issues. Ecosystems are not commodities to be bought, sold, traded, or divided into units. They are holistic systems, where the interaction of every part is crucial to prevent its collapse. Nature’s value extends beyond carbon sequestration, including its importance for biodiversity, and the spiritual and ancestral ties of Indigenous communities. Furthermore, valuing nature solely in monetary terms will only function to preserve it if the financial benefit of conservation outweighs the cost-effectiveness of alternative land uses, such as logging. Therefore, monetising nature requires investors to adopt a holistic approach by valuing protection efforts not only economically but also ecologically, culturally, socially, and spiritually
Towards ethical and impactful carbon markets
Carbon offsets present an attractive opportunity to support global conservation and climate efforts, especially in developing nations where funding is scarce for large-scale projects. Yet, their potential is hindered by ethical concerns, a lack of transparency, and a focus on oversimplifying nature by transforming it into a financial asset.
For carbon markets to genuinely contribute to a greener future, stricter accountability is needed to ensure fair benefits for local communities and to recognise the broader social and ecological importance of ecosystems as holistic entities. While initiatives like the EU’s Green Claims Directive offer some hope in addressing misuse and greenwashing, carbon offsets will only be successful if they are integrated into a broader framework of real and genuine climate action. Indeed, they should not be seen as a standalone solution. Carbon offsets must be complemented by improved company practices and carbon projects that view nature’s value holistically, going beyond carbon sequestration. These projects should prioritise environmental protection and sustainable practices over economic gains.
