The Carbon Credit Market Is Failing — and the Cascade Is Starting

In January 2023, The Guardian and Zeit Online published an investigation finding that more than 90% of Verra's REDD+ rainforest offset credits — among the most widely purchased voluntary carbon offsets in the world — were "phantom credits" that did not represent real carbon reductions. The investigation used independent satellite data to compare actual deforestation rates in offset project areas against the rates those projects claimed to be preventing. The gap was not marginal. It was categorical.

Verra disputed the findings. The response from major corporate purchasers of its credits — Delta Air Lines, Shell, Disney, Gucci — ranged from silence to careful hedging. The response from the voluntary carbon market itself was, initially, minimal. Carbon credit prices dipped briefly and recovered. The market priced in the investigation as a reputational event and moved on.

Two years later, it is clear that the investigation was not a reputational event. It was the beginning of a credibility cascade that has not yet reached its inflection point but is now visibly accelerating.

The Signal

The Voluntary Carbon Markets Integrity Initiative (VCMI) published its 2025 audit of major voluntary carbon registries and found that 34% of currently active credits across all registries failed at least one of its additionality, permanence, or quantification criteria. Verra, the largest registry, had a failure rate of 41%. Gold Standard, considered higher-quality, had a failure rate of 22%. The audit methodology was conservative — it did not attempt to replicate the Guardian/Zeit satellite analysis but used the registries' own documentation against standard verification criteria.

The 34% failure rate is a market-wide signal that the quality problem is systemic, not isolated to specific projects or registries. Buyers who constructed net-zero pathways by purchasing voluntary credits cannot rely on a majority of those credits representing the carbon reductions they were purchased to represent.

The Historical Context

The voluntary carbon market was designed as a private-sector mechanism to fund emissions reductions that government policy had not yet mandated. The theory was that buyers with reputational incentives to make genuine claims would create demand for high-quality offsets, and that competitive pressure would improve verification standards over time.

This theory has a structural flaw that the market's first decade revealed: the buyers of carbon credits have an incentive to make genuine claims about emissions reductions, but they do not have an incentive to verify that the credits they purchase represent genuine reductions. The verification cost is borne by the buyer; the reputational benefit of the claim is realized regardless of whether verification is rigorous. The market therefore systematically underinvests in verification relative to what genuine carbon accounting would require.

This is a classic principal-agent problem with an added layer of complexity: the agents responsible for verification (the registries) are paid by the project developers who want their projects approved, not by the buyers who would benefit from rigorous rejection of inadequate projects. The incentive structure of the voluntary carbon market was optimized for transaction volume, not for carbon accounting accuracy.

The Mechanism

The credibility cascade is being driven by three converging forces.

Independent verification technology has made the gap between claimed and actual reductions visible in ways that were not previously possible. Satellite monitoring of forest cover, atmospheric carbon concentration measurement at project sites, and machine learning analysis of land use change have created an independent verification capability that did not exist when the major offset methodologies were written. This technology is being applied systematically by academic researchers, investigative journalists, and now by institutional investors performing due diligence on net-zero claims.

Institutional investor attention is increasing the financial stakes of inadequate verification. ESG-focused investment mandates have made corporate net-zero claims financially material — investors are pricing them into valuations and using them to screen portfolios. As those investors begin to receive analyses questioning the quality of the credits underlying net-zero claims, the financial exposure of companies making inadequate claims is becoming quantifiable. Several securities fraud attorneys have filed preliminary inquiries with the SEC regarding corporate disclosures of net-zero progress relying on offset credits.

Regulatory scrutiny is closing the enforcement gap that the voluntary market exploited. The SEC's climate disclosure rules, the EU's Corporate Sustainability Reporting Directive, and the UK's Competition and Markets Authority investigation into greenwashing are collectively creating a regulatory environment in which unsubstantiated carbon credit claims carry compliance risk.

Second-Order Effects

The most significant second-order effect is the potential collapse of demand for voluntary carbon credits as institutional purchasers withdraw from the market to avoid regulatory and reputational exposure. The projects funded by those credits — which include genuine forest conservation efforts, renewable energy development in low-income countries, and early-stage carbon removal technology — would lose funding if the market collapses.

The irony is structural: the voluntary carbon market has done genuine environmental good in specific projects even as its aggregate accounting has been fraudulent. A credibility collapse that eliminates the market entirely would damage the good along with the bad. The policy challenge is designing a regulated replacement that captures the genuine projects while eliminating the phantom credits.

The corporate net-zero commitment landscape will require significant adjustment. Companies that have publicly committed to net-zero by 2030, 2035, or 2040 through offset-heavy strategies will need to either revise their commitments or shift to strategies based on genuine emissions reductions. The financial cost of the shift is substantial — direct emissions reduction is more expensive than offset purchase — and the timeline pressure is significant.

What to Watch

SEC enforcement actions: The first securities enforcement action against a company for material misrepresentation of net-zero progress relying on inadequate carbon credits will be the signal that financial liability has arrived. Watch SEC enforcement releases.

Institutional credit purchaser withdrawal: Watch whether major corporate net-zero commitments begin excluding voluntary offset credits from their accounting. A significant announcement from a Fortune 100 company would accelerate market-wide withdrawal.

Registry reform proposals: The quality of reform proposals from the major registries — and the pace of their adoption — will determine whether the market can salvage credibility through internal reform or whether regulatory intervention becomes necessary.

Carbon removal technology investment: If the voluntary carbon market contracts, watch whether capital flows toward direct carbon removal technologies (direct air capture, enhanced weathering) that provide more verifiable carbon accounting than biological offsets.