Josh Weiner
As global carbon markets expand, so do the opportunities for fraud. At COP29 in Baku, world leaders introduced new transparency measures under Article 6 of the Paris Agreement, aiming to prevent abuse in the carbon credit trade. Yet, despite these advances, carbon fraud remains a major concern, prompting regulatory bodies in the U.S., Germany, and beyond to take aggressive action against bad actors exploiting these markets.
New Rules, New Challenges
The latest regulatory measures require nations to publicly disclose carbon credit approvals and submit authorization requests through a unified accounting platform. Additionally, a UN-backed international carbon crediting system has been established under Article 6.4, implementing stricter monitoring, reporting, and oversight mechanisms.
These changes are a step forward in boosting the credibility of global carbon markets, ensuring that carbon credits are not just paper promises but real contributions to emission reduction. However, critics argue that gaps still exist, leaving room for manipulation and fraud. As companies increasingly rely on carbon credits to meet net-zero goals, the risk of deception looms large.
How Carbon Trading Works
Carbon trading treats greenhouse gas (GHG) reductions as commodities, with one credit typically representing the removal or prevention of one ton of CO2 emissions. These markets fall into two broad categories:
- Compliance Markets: Governed by national or international laws, these require high-emission industries like oil, steel, and aviation to purchase carbon credits to offset emissions. The EU Emissions Trading System (EU ETS) is one of the largest examples.
- Voluntary Markets: Companies or individuals seeking to reduce their carbon footprint outside regulatory mandates purchase credits from private carbon crediting programs, such as the Verified Carbon Standard and the Gold Standard.
While both systems aim to mitigate climate change, their rapid expansion has also created loopholes that fraudsters exploit.
The Many Faces of Carbon Fraud
With mounting pressure to achieve sustainability goals, some entities cut corners, engaging in deceptive practices such as:
- Ghost Credits: Fake carbon credits with no actual emissions reductions.
- Overstated Impact: Projects exaggerating their environmental benefits.
- Double Counting: Credits claimed multiple times by different entities.
- Questionable Permanence: Carbon credits tied to projects with uncertain long-term impact.
Regulatory loopholes, inadequate verification processes, and lack of market oversight exacerbate these risks.
Crackdowns in the U.S. and Germany
Fraud in Voluntary Carbon Markets
In the U.S., the Commodity Futures Trading Commission (CFTC) made history in October 2024 by launching its first enforcement actions against carbon fraud in the voluntary market. A project developer and its former executives faced charges for falsifying emissions reduction data to secure carbon credits beyond their actual contribution. These fraudulent credits were then sold, misleading buyers and undermining market integrity.
Adding to these concerns, a 2023 investigation by The Guardian revealed that over 90% of rainforest offset credits issued by Verra, one of the largest voluntary market certifiers, lacked corresponding real-world carbon reductions.
Fraud in Compliance Markets
Meanwhile, in Germany, authorities are probing allegations of fraudulent biodiesel imports and manipulated upstream emission reduction (UER) projects. The GHG reduction quota system, a key tool for cutting transportation emissions, has been rocked by claims that some companies misrepresented fuel origins, falsely labeling palm oil-derived biodiesel as sustainable alternatives. Additionally, reports suggest that some UER projects never actually took place or failed to meet verification standards.
The resulting uncertainty has sent carbon credit prices into a freefall, dropping from €450 per ton in late 2022 to just €80 per ton by early 2025. In response, German legislators are introducing new measures to restore market stability and tighten compliance frameworks.
How Companies Can Protect Themselves
For businesses relying on carbon credits, the risks extend beyond financial losses. Reputational damage, regulatory scrutiny, and potential legal battles pose significant threats.
Key steps to mitigate risk include:
- Due Diligence: Conduct thorough assessments of offset projects and credit providers.
- Regulatory Compliance: Stay informed about evolving rules, such as the EU’s Carbon Removal Certification Framework and California’s new Voluntary Carbon Market Disclosures law.
- Transparent Reporting: Ensure disclosures align with the Corporate Sustainability Reporting Directive (EU) and emerging U.S. climate disclosure rules.
- Fraud Prevention Measures: Follow guidelines like the Dutch Emissions Authority’s security protocols for carbon credit registries.
Looking Ahead
The battle against carbon fraud is intensifying. Governments and regulatory bodies worldwide are implementing stricter standards and penalties to enhance market integrity. Meanwhile, businesses must proactively navigate this evolving landscape, ensuring that their carbon credits are not just compliant but truly effective in fighting climate change.
As the carbon market grows, so will regulatory scrutiny. Companies that fail to adapt risk more than just financial penalties—they risk losing the trust of investors, customers, and the public at large.
