Addressing conflicts of interest in the voluntary carbon market

If a tree falls in the forest, it no longer absorbs carbon from the atmosphere.

In a nutshell, preserving that tree helps to explain the rationale behind carbon markets. In order to “cap” carbon emissions going into the atmosphere, those who engage in activities that increase carbon emissions, such as drilling new oil wells, can offset those emissions by paying for carbon emissions reductions, like saving the tree or, more aptly, an entire forest.

At their inception, under the 1997 Kyoto Protocol, these trading systems were touted as a promising market-based approach to address worsening climate change, especially by attracting financing for developing countries. Three decades later, ambition has not matched reality and, given the billions of dollars invested in the markets, we must ask why.

In a new report by Transparency International US, Offsetting Accountability: Conflicted Governance in the Voluntary Carbon Market, we looked at structural issues to determine if governance risks could play a role in undermining market impact. We found a market in which financial interdependence creates strong incentives to prioritize the volume of credits over their environmental integrity.  

Perverse incentives

Unlike clothing or food manufacturers that have tangible costs associated with every unit produced, issuers who estimate the number of carbon offset credits per project do not necessarily have additional costs for estimating, and then issuing, additional credits. And yet, the bulk of issuers’ revenue is based on the number of credits they issue. The combination of increased revenue and little or no additional cost is a powerful incentive to inflate the number of credits. 

Credit issuers often have policies to use conservative estimates when valuing how much carbon a project will save, but overestimates remain common. Consider also that the client (i.e., the carbon offset project developer) is happy to have its project assessed as having a larger climate impact. Without changing their project or raising the costs to implement it, the developers can purchase additional credits from the issuer that are then resold at a markup to carbon producers. 

Estimating the amount of carbon a project offsets is difficult in the best of circumstances and subjective judgments must be made. To provide checks in the system, projects must be reviewed by outside auditors who determine if the project is in compliance with the rules which seek to reduce carbon in, or emitted into, the atmosphere. But the auditors are hired and paid by those who seek higher estimates for their projects. Lowballing the creditworthiness of projects is not likely to be good for one’s audit business. Financial dependencies between standard setters, project developers and auditors have created a systemic race to the bottom. 

Natural consequences

Given the inherent conflicts of interest in payment structures, it should not be surprising that the voluntary carbon markets have been rocked by scandals, most notably revelations that most offset credits issued by major registries are not reducing carbon emissions. 

One notorious example is the Kariba Carbon Project, a forest conservation project in Zimbabwe and one of the largest carbon offset projects in the world. Investigations in 2023 uncovered serious flaws, including that it had vastly overstated the carbon credits it would generate for preventing deforestation. The project developer, South Pole, initially estimated Kariba would generate approximately 52 million credits. After going through the credit issuer’s assessment process, that estimate somehow jumped to nearly 200 million credits (i.e., equal to the removal of 200 million metric tons of carbon dioxide or other greenhouse gases). In the end, more than half of the credits proved to be fictitious. Only recently has the credit issuer tried to address this problem.

To better understand how these types of overestimates happen, consider the conflicted interests setting the standards. At Verra, the world’s largest credit issuer, the CEO of one company, C-Quest Capital, sat on the Board of Directors overseeing the development of standards and issuing process for more than a decade while also benefiting when submitting projects for assessment based on those standards. It’s as if students were grading their own homework based on whatever grading scale they chose.

Addressing the conflicts

One unspoken concern among champions of carbon markets is that truly independent assessments of the impact of climate mitigation projects and accurate allotment of carbon credits for those projects could undermine the financial viability of the markets. That alone should be enough of a red flag to question the efficacy of the entire approach. But to the extent there is a pathway forward for a positive role for carbon markets, the conflicted payment and governance structures identified in the Offsetting Accountability: Conflicted Governance in the Voluntary Carbon Market report must be addressed. 

Some of the top-line recommendations raised in the report include calls for all standard setters to establish and publicly disclose robust conflict of interest policies that clearly define what constitutes a conflict and mandate recusal or mitigation measures to ensure impartiality in decision-making. The policy should prohibit financial relationships between project developers, credit buyers and standard setters that reward credit volume over quality, and certifiers must rely on revenue streams not tied to per-credit issuance fees.

To ensure projects have local legitimacy, standard setters must ensure meaningful participation of affected communities and enable public oversight of the process.

To minimize further damage, at a minimum, credit issuers should sunset credits issued under flawed or discredited methodologies that are still on the market. 

The voluntary carbon market, in its current form, is not working. It is failing the climate, failing frontline communities and failing to uphold public trust. The path forward must be built on systemic reform, not incremental improvement. This means breaking the financial and governance dependencies that compromise integrity, reducing corporate influence over the standard-setting bodies and oversight, shifting from offsetting to contribution, and placing scientific evidence and accountability at the center of market design. Without serious reform, these markets will continue to fall short of their climate promises.

Gary Kalman is the Executive Director of Transparency International U.S.

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