The Problem with Carbon Markets

Jan. 31, 2023, 10:30 a.m. • By Adam Forster

The current state of the carbon market is untenable. Read Dr. Adam Forster's thoughts on the problems with the carbon market and potential solutions.

Cover Image

In light of the latest blow to the Carbon Markets, I thought I would write this blog post to contribute my thoughts to the discussion. Although I am not completely impartial, having purchased and sold carbon credits before, C Free’s business model is centred around carbon calculations and we only offer carbon credits as a subsidiary benefit. Therefore, I believe I can give some insight into the market, without being tainted with professional interest in the debate.

Although not the ultimate solution, I believe that the carbon market is a critical component in our fight against climate change. The ability to efficiently fund carbon reducing projects is of great benefit in an increasingly globalised world. Having said this, it most certianly is not a silver bullet and all sectors must look beyond carbon offsets when assessing their sustainability strategy. Indeed, in our experience, all clients who engage with the carbon markets also make great efforts to address their own activities and reduce emissions where possible.

The Follow The Money article, exposing some of the potential over reaches of South Pole, the first carbon project developer to gain unicorn status, was released last week. It revealed some serious malpractices within the carbon markets first Unicorn company. Lowlights include:

  • 27 million tonnes of "worthless" credits sold (for more details see the Follow the Money article). I would estimate that this is about $270 million in revenue.
  • Lying to customers about the amount of revenue that flows back to the project developer, in some cases buying credits for half a euro and selling them for 20 euros.
  • Even after red-flags emerged in South Pole’s own due diligence process regarding promises made about investments reaching the local community, South Pole continued with the project and advertised a promise that funding reaches local populations.

Although I cannot speak to the validity of any claims, and I invite readers to draw their own conclusions, I do think that this article (and others) have highlighted some structural issues with the carbon industry that I believe need addressing. Ultimately, I believe the question comes down to this:

Should the carbon market be a market?

The multitude of challenges faced by carbon markets stem from a lack of clear classification as either a conventional market, like the stock market, or a philanthropic sector. This nebulous pseudo-capitalist status is the root cause of much of the public’s confusion and mistrust.

I am going to make the case that we should either move the voluntary sector towards one state or the other; but leaving it as is is untenable.

There are many positive features of markets. First and foremost, financing for projects can be rapidly attained, and in our struggle against climate change, speed is of the essence. Markets also incentive self interested actors to create value. In this case, that involves radically reducing the global carbon footprint. Surely incentivising people to do that is a good thing.

However, at present, the carbon market does not function as a market. Primarily, the demand side views their carbon credit purchases as a charitable purchase. Therefore, they are not truly price sensitive. Instead, they often view higher prices as a good thing, indicating quality.

Furthermore, a frequently asked question in the space is “what proportion of the money goes to the project?” But we never ask this question in other markets. You simply ask “is this price worth it for me?”.

In fact, a common funding strategy in many markets often sees a vast upfront payment from a financier to a project developer where subsequently the financier will see all of the returns of the credit issuances. This is a good situation for both parties; the project developer gets the money and reduces their risk exposure, while the financier takes on the risk (which they are better suited to handle) whilst getting the potential upside. But of course, 0% of the end consumer's carbon credit purchase ends up going to the project.

When searching for pension funds etc. we dogmatically search for the lowest management fees to try to get the best price. So how are South Pole et al. able to charge such significant markups? I believe this is fundamentally attached to the lack of demand. Although, naively, you would expect low demand to drive down prices, in order to convince clients to invest in carbon credits, many highly trained sustainability experts are hired to reassure them and give them everything they need. But this massively increases the cost of doing business for South Pole and ultimately feeds through into their prices.

Instead, the market needs higher demand with price sensitive customers. Imagine a world in which it would be unthinkable to bring a product to market without neutralising its carbon first. In this world, everyone would need credits, would seek out low prices, and would drive a revolution in sustainable project development. This is the environment the carbon market needs. In the current paradigm, neutralising products seems only to expose you to public scandal and defamation.

Finally, if the carbon market thrived as it should, I have no doubt that, very quickly, governments would move to regulate it and prevent the scandalous behaviour reported recently. Society needs to set a minimum standard that we can all agree on that all carbon credits must abide by.

The alternative is to move to a model of charitable giving thus solving perceived issues of integrity and the corrosive qualities of financial incentives. However, I do believe that without these financial incentives that markets offer, efforts to combat climate change would be ponderous.


The current state of the voluntary carbon market is untenable and I believe there are two feasible options: either more market or less market. However, given the urgency of climate change, a quick and nimble carbon sector is absolutely imperative. Therefore, I believe that the charitable direction, although tenable, is not suitable for the situation we find ourselves in. Instead, we must drive carbon reductions through a thriving and functional carbon market.

Meet with one of our experts