Broekhoff advises Calyx Global and the ICVCM under paid contracts with his employer, the Stockholm Environment Institute. These organizations did not review this work prior to publication. The analysis and conclusions presented here are solely those of the authors.
This paper is part of a workstream made possible by support from Bloomberg Philanthropies. The views expressed in this report are those of its authors and do not represent the views of Bloomberg Philanthropies, their officers, or employees.
Executive summary
In the past three decades, carbon credit markets have emerged as a prominent mechanism for channeling finance into climate change mitigation projects around the world. Carbon credits are generated by a diverse array of activities that avoid or remove greenhouse gas emissions from the atmosphere, including renewable energy, nature-based projects such as reforestation or avoided deforestation, and engineered removals like direct air capture. Nearly 6,000 companies globally use carbon credits to meet voluntary climate commitments, and dozens of governments recognize them for meeting compliance obligations under regulatory carbon pricing programs. While carbon credit markets remain small compared to global needs for climate finance, they hold considerable potential for mobilizing private investment to achieve global climate and energy transition goals.
Despite their potential, carbon credit markets have suffered from persistent challenges. Multiple studies have found that many credits fail to correspond to additional, accurately quantified, and permanent mitigation. This points to broader structural issues in these markets that have yet to be fully addressed. Lack of transparency and informational asymmetry subdue demand and amplify public distrust, while weak crediting standards open the door to adverse selection. Carbon credit markets also face perennial concerns about whether they detract from higher-priority mitigation objectives or discourage implementation of more effective policy measures. These concerns have existed for years, and experience suggests they are unlikely to go away entirely. Carbon credit markets have been designed to serve multiple objectives—including supporting specific constituencies and delivering regulatory cost containment—which typically entail tradeoffs with respect to environmental performance.
However, ongoing quality issues do not mean these markets are not useful. Rather, they need to be developed and regulated with their challenges in mind and with an eye to whether they can advance climate policy objectives. To deliver on their potential, carbon credit markets require institutions capable of safeguarding environmental performance, providing transparency, and managing the tradeoffs inherent in aligning markets with broader policy goals. New oversight bodies, such as the Integrity Council for the Voluntary Carbon Market (ICVCM), and new rating agencies are attempting to restore market confidence through stricter “high-integrity” labeling exercises, while parallel initiatives are policing responsible use of carbon credits. Other initiatives, like the expansion of buyers’ coalitions aimed at driving sectoral transitions (like the LEAF Coalition) and organizations aimed at improving data-transparency (like the Climate Action Data Trust) are laying further groundwork for effective markets.
Continued government support for initiatives to enhance integrity and build market infrastructure will be crucial for ensuring markets work to deliver on mitigation goals. Governments are uniquely positioned to enforce integrity guardrails and deter abuse, clarify acceptable claims, and align voluntary and compliance markets with broader policy objectives. Governments can also help drive greater alignment under Article 6 of the Paris Agreement, enabling further global cooperation. If supported with a focus on integrity, transparency, and clear objectives in mind, project-based carbon credit markets can continue to play an important role in driving decarbonization and channeling climate finance to communities in need.
This paper explains and evaluates project-based carbon credit markets—assessing their economic logic, empirical performance, and the emerging and potential reforms to ensure they contribute meaningfully to achieving climate goals. We discuss the history of carbon credit markets, their current challenges, and key areas for future development.
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Acknowledgements and disclosures
The authors acknowledge the following support for this article:
- Research: Aidan Kane and Mike Wiley
- Editorial: Nellie Liang, Chris Miller, and David Wessel
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