Scoping Corruption in Voluntary Carbon Markets

Allegations of weak oversight, fraud and corruption in voluntary carbon markets (VCMs) have caused substantial market uncertainty. VCMs involve the generation and trading of carbon offsets, derived from activities that reduce or remove greenhouse gas emissions. These markets are expected to play an important role in helping countries to meet net zero targets while also channelling finance to environmental preservation.

In the early 2020s, VCMs experienced considerable growth as demand grew from companies seeking to offset their carbon footprint. However, some offsetting claims were overstated, and the media and NGOs reported on high-profile cases of corruption and fraud. Together, these have damaged the market’s reputation and contributed to a perception of widespread corruption in VCMs. Demand has subsequently tumbled, causing carbon credit prices to collapse.

Despite public perceptions that corruption is prevalent, there has, to date, been no systematic analysis of corruption risks in VCMs, and empirical evidence remains scarce. There is limited understanding of the full extent of corruption in VCMs – and whether the risk is greater than in other markets – as well as how corruption manifests in practice and which market deficiencies facilitate it. This lack of insight threatens to derail efforts to effectively scale the market.

This paper starts to address this knowledge gap by providing an initial scoping review of the structural and operational features of VCMs that expose them to corruption risk. It finds that market volatility creates the conditions for corruption. During boom periods, characteristics such as the intangibility of carbon credits, difficulties of measuring real emission reductions and the monetisation of emerging sectors attract opportunistic actors. Conversely, busts can depress prices, weakening due diligence checks and incentivising project developers to behave fraudulently.

Deficiencies in the validation and verification processes – such as limited know your client and anti-money laundering controls – along with potential conflicts of interest limit the ability of VCMs to prevent corruption amid these market fluctuations, particularly in high-risk environments. Regulatory ambiguity further compounds these vulnerabilities, creating uncertainty over who is responsible for conducting these checks.

This paper outlines the current state of the market and its preparedness to meet corruption risk, while also identifying evidence gaps to be explored in more depth in two subsequent research papers. The ultimate aim is to inform practical solutions to enhance market integrity and restore confidence in VCMs.