Carbon credit markets – integrity challenges and emergent responses

Key messages

• Voluntary carbon markets have expanded rapidly, but concerns about credit quality and credibility persist.
• Evidence shows that in many cases, emissions “avoidance” projects lack additionality and nature-based removal projects overestimate carbon sequestration.
• Most corporate buyers have relied on low-quality, low-cost avoidance credits, raising concerns about a “delay effect” by which offsetting results in the weakening or postponement of direct decarbonisation efforts.
• Carbon credit markets face systemic flaws, but progress in establishing quality benchmarks, rating systems, and regulations – as well as a shift in using credits as additional contributions to mitigation efforts, rather than as offsets – aims to strengthen integrity.

Markets for carbon credits allow a variety of actors to generate revenue through climate change mitigation activities, such as forest management or renewable energy deployment. Credits are traded in different settings: voluntary markets in which credits are purchased to “offset” emissions; regulated markets that legally require companies to reduce emissions; and international mechanisms with country-to-country emission-reduction transfers under UNFCCC rules. A vast 76% of the nearly 250 million credits retired in 2024 were through voluntary markets. Credit issuances grew from approximately 200 million in 2020 to 350 million in 2021 as a result of governmental and company decarbonisation policies but have since dropped to 290 million in 2024. This drop reflects concerns about the quality of carbon credits and growing uncertainty about their role in voluntary climate action. Systemic flaws in how credits have been generated, verified, and sold demonstrate that carbon credits are not a reliable substitute for fossil fuel cuts. Still, attempts are being made to strengthen verification standards and enhance transparency, as well as to establish new governance mechanisms to improve the integrity and credibility of credits.

Quality on the supply side of carbon credit markets is a challenge. Standards and methodologies consistently fail to guarantee the effectiveness of carbon credits in mitigating climate change: an analysis of nearly one billion tons of carbon credits – around one-fifth of all issued – found that less than 16% represented actual emissions reductions (Figure 9). Project developers select favourable data or make unrealistic assumptions, while adverse selection, outdated data, and inappropriate methodologies compromise the climate benefit of carbon credits. Many project types, including wind power in China and improved forest management in the USA, show no statistically significant climate benefits, while cookstove and deforestation avoidance projects achieve lower emission reductions than claimed (Figure 9).

Evidence of low-quality credits has mostly concerned “avoidance” projects such as forest conservation and renewable energy. However, evidence now shows that nature-based removal approaches, including afforestation and soil management, also overestimate carbon sequestration and lack additionality, meaning they often fail to generate carbon removals beyond what would have occurred in the absence of carbon credit incentives. Furthermore, upscaling natural sinks to counterbalance fossil fuel emissions is limited by slow absorption rates, increased reversal risks from wildfires and the scarcity of suitable land. Despite optimistic assumptions in IPCC models and national plans, actual capacity for terrestrial emissions removal is much lower than expected. Collectively, these recent findings suggest that nature-based carbon removals cannot reliably substitute for cuts in fossil fuel emissions or resolve the fundamental quality issues associated with avoidance credits.

Demand-side dynamics can also influence quality. A recent study analysed carbon credits purchased by the 20 largest corporate buyers for voluntary purposes between 2020 and 2023 and found that most companies have consistently relied on low-quality, low-cost avoidance credits with a high risk of overstating emission reductions. With most credits originating from older projects that started issuing credits a decade or more earlier, corporate offset spending has largely failed to support new investments in climate mitigation.

While carbon credits are often linked to claims about net-zero or carbon neutrality, most companies do not detail how they use offsets in greenhouse gas accounting. Reliance on offsetting could delay or weaken decarbonisation if companies prioritise credit purchases and divert funds away from internal decarbonisation and fossil fuel phase-out initiatives. An analysis of net-zero strategies by oil majors supports concerns about a “delay effect”, revealing the use of carbon credits to legitimise the continued production and consumption of conventional fossil fuels. While carbon credits will not replace internal decarbonisation efforts for most companies, they could divert considerable funds away from direct emissions-reduction efforts among large polluters like airlines.

Carbon credit projects have been consistently criticised for a singular focus on emissions neutralisation. As such, many projects fail to realise or systematically quantify socio-economic and environmental non-carbon benefits. Some studies suggest that adequate project design can help reduce carbon emissions while improving social welfare, yet other studies underscore inherent trade-offs between project success and equity in forest-carbon initiatives. Many emissions-reduction efforts disproportionately benefit more affluent or environmentally destructive communities, and upfront and transaction costs can be entry barriers for small-scale projects. Although more funding is needed to address deforestation, especially in tropical regions, and to support critical non-carbon benefits like biodiversity, these challenges highlight the limitations of using carbon credits as the primary funding vehicle.

Carbon market actors are responding in multiple ways. Initiatives like the Integrity Council for Voluntary Carbon Markets (ICVCM) have established governance and quality benchmarks. Several carbon credit rating services provide customers with detailed project-specific insights about relative credit quality, including co-benefits. Research suggests there is growing voluntary demand for higher-quality credits, though impacts remain uncertain. To address demand-side concerns, standard-setters such as Science-Based Targets initiative and the Voluntary Carbon Markets Integrity initiative stress that carbon credits should not substitute direct decarbonisation. This bolsters ongoing calls for a paradigm shift, under which carbon credits would be used to provide additional “contributions” to global mitigation efforts, rather than offset emissions. Nominally, this could alleviate concerns about delay effects.

Some governments have begun to respond with regulations and guidance. Under the now delayed EU Corporate Sustainability Reporting Directive (Toms et al. 2025), for example, large companies would be required to elucidate the quality of carbon credits they use and explain their role in decarbonisation efforts. In 2024, the US government issued a statement endorsing similar principles, though the administration has since changed. Similar efforts are underway elsewhere. The biggest test lies ahead: under Article 6 of the Paris Agreement, policymakers are establishing international standards that could set a quality benchmark for all carbon credit markets. Paying close attention to the unresolved quality challenges of existing standards could help ensure the same pitfalls are avoided in the future so that carbon credit markets accelerate climate action rather than undermine it.