31st January 2025
Stewart is an investor, eager yet hesitant to buy carbon credits due to a combination of moral obligation and speculative opportunity, but such billowing desire is faces passionate delay and hesitation after the harassment from all angles of instances of mislabelling and fraud. This scenario isn’t far from reality, where uncertainty and regulatory gaps have created significant blocks and hurdles for the growth of the carbon markets while simultaneously jeopardising our planet’s health. As we explore the urgent need for standardisation, consider Stewart’s journey — a reflection of the broader market’s struggle to regain trust and clarity through effective regulation and uniform standards.
In the wake of the 29th meeting of the Conference of the Parties (COP29) to the UN Framework Convention on Climate Change (UNFCCC), the annual gathering of over 200 countries to address the climate crisis, the very first steps after the ratification of Article 6.4[i] under the Paris Agreement began. The Paris Agreement being the collective (almost binding) contract that now presents the biggest opportunity yet in the global endeavour to use markets to mitigate global warming. For the first time, 173 nations and the EU: a uniform framework that enables emissions reduction through carbon offset mechanisms to be globally tradeable, to properly mechanise the Paris Agreement and the gigatons of carbon capture and avoidance needed to rebalance our ecosystem.
Yet the Paris Agreement, is haunted by a spectre (and it isn’t the USA’s withdrawal): a lack of strong financial regulation and the absence of clear standards in carbon markets. Specifically, a lack of competency in the sellers and a lack of confidence in the buyers have synergised into a total slow-rolling of the market’s growth. Those with the experience needed are too scared to touch the market due to the lack of clear standards creating too high a risk. This lacuna impedes the necessary flow of information and investment to deal more effectively with the growing climate crisis.
There are no models that forecast the full level of devastation to come
The carbon market – especially for those inside – is a no man’s land: wide open and full of uncertainties. The global temperature check[ii] puts temperatures at a 3.1 ℃ increase over the pre-industrial level. A rise on that scale implies consequences so dire that there are no models that forecast the full level of devastation to come. Given this perspective, the need for effective, scalable and reliable carbon markets is unquestionable, as markets have been vital in attracting necessary capital since the ancient Egyptians and the shekel.
Let’s consider the journey of our market participant, Stewart. An investor, Stewart is ready to take part in carbon credits but is deterred by ambiguity. His challenges highlight the human side of this regulatory need and bring urgency to the call for standardisation.
The Dangers of Mislabelling in Carbon Financial Products
The fundamental issues with the market as a whole start with a simple inability to communicate. We are not using the right words. We say chair, and someone thinks table. We say shop, and someone thinks shot. The terminology is not in sync; the products are not labelled correctly. Unsurprisingly, this introduces ambiguity, which, in turn, introduces legal and financial risks that no sensible actor can afford to look at.
Legal Actions Addressing Mislabelling and Fraud
Incorrect categorisation of carbon-associated products has ALREADY lured companies into financial and securities regulation violations. In October 2024, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) accused C-Quest Capital LLC and its executives of committing fraud concerning voluntary carbon credits.[iii] The misrepresentation of financial products resulted in severe legal consequences, which, as reported by the media, risks harm to their reputation.
This enforcement, coupled with recent legal actions such as the class-action lawsuit against Delta Air Lines filed in May 2023 for alleged greenwashing[iv], highlights the consequences of not fully understanding the core of what is being bought: the ultimate issue with mislabelling. This lawsuit accused Delta of misrepresenting its carbon neutrality through questionable offset practices, leading to financial losses for consumers and damage to the airline’s reputation. These cases reveal how deceptive environmental claims not only harm investors but also undermine the integrity of the carbon market. They reinforce the necessity for clear, standardised definitions and robust regulatory oversight to prevent future misrepresentations and maintain market stability.
Thus, this case has now become a sad reminder of what happens when compliance is forgotten and how vital it is to be extremely careful with the classifications created through regulations.
CFTC Enforcement Actions
- CFTC v. Ikkurty: The US District Court for the Northern District of Illinois granted summary judgement against defendants who misappropriated funds through a carbon credit programme and crypto-related investment scheme. The court ordered over $83 million in restitution and nearly $37 million in disgorgement.
- CFTC Charges Against C-Quest Capital LLC: In October 2024, the CFTC charged C-Quest Capital LLC and its executives with fraud involving voluntary carbon credits. This case marked the CFTC’s first enforcement action for fraud in the voluntary carbon credit market.
- Class-Action Lawsuit Against Delta Air Lines: In May 2023, a class-action lawsuit was filed against Delta Air Lines, accusing the airline of misrepresenting itself as carbon neutral based on questionable carbon offset practices[v]. The lawsuit alleged that Delta’s claims amounted to ‘greenwashing’, i.e. deceptively promoting their environmental practices. This case underscores the financial and reputational risks associated with terminological confusion and highlights the necessity for clear, standardised definitions.
Financial and Operational Risks
Beyond legal ramifications, the mishandling of client funds – stemming from non-adherence to established money transmission rules – poses risks of insolvency and fraud. In May 2023, the CFTC undertook enforcement action against individuals who misappropriated funds through a carbon credit programme[vi]. The fallout from this incident was both financial and reputational. It is only the beginning of highlighting the perils that accompany a lack of transparency and accountability.
Furthermore, inconsistent product definitions disrupt effective risk management and create systemic and long-lasting market buyer hesitation, which deactivates the market and reduces climate change mitigation. It also makes firms susceptible to penalties and diminishes market credibility.
The voluntary carbon market, in particular, has grappled with challenges arising from a lack of standardisation, trust and other factors, leading to inefficiencies and increased operational costs for participants. A report by the International Emissions Trading Association[vii] (IETA) elucidates these issues, emphasising the need for clear guidelines to avert such complications.
The Impact on Operational Efficiency
The lack of standardisation is a significant obstacle to smooth functioning. The unclear definitions hinder efficient trading in carbon futures and forwards, which is evident from the fact that trading becomes inconsistent under different practices followed in unregulated markets. Fragmentation results in a lack of liquidity and higher transaction costs, scaring away potential investors and hindering market development.
The Case for Clear, Coordinated Standards
Success for any real financial system rests on the pillar of standardisation – an essential fact in the carbon market. Standardisation enables the following three pillars of a functioning market: investor clarity,regulatory compliance and market integrity, a process well-illustrated by the shekel.
Figure 1.A circular diagram illustrating the three key components of a successful liquid market: investor clarity, regulatory compliance, and market integrity. These pillars ensure transparency, trust, and efficiency, while labeling plays a crucial role in standardization and market function.
Figure 2. A timeline chart depicting global trade volume relative to time, spanning from 3000 BC to 1500 BC. The introduction of the Shekel around 2500 BC led to an exponential increase in trade, highlighting the transformative impact of standardized labeling on economic expansion and market efficiency.
The Imperative of Standardised Norms
The carbon market’s fragmentation, evident from the wide variation in regulation and standardisation across products listed in the comparison table, impedes project scaling and effectiveness. By standardising practice, we can simply trade by reducing friction in transactions, lowering costs, and increasing accessibility (a huge barrier in this market in general). Furthermore, we can drive for enhanced trust with clear definitions and adherence to regulations, building confidence amongst market players and encouraging further involvement. In addition, a standardised market is naturally far better suited to attract larger investments and scale operations effectively. Without unified standards, investors face fragmented markets that increase costs and hinder large-scale initiatives[viii].
Initiatives like the Core Carbon Principles (CCPs), developed by the Integrity Council for the Voluntary Carbon Market, are working to establish a uniform standard ensuring that each carbon credit genuinely represents one metric tonne of emissions reduction or removal[ix].
Clear financial regulatory frameworks are beginning to be introduced, such as the Financial Conduct Authority’s Sustainability Disclosure Requirements[x] (SDR) and investment labels regime introduced in 2024. These cohesive civil deliverables act as catalysts for growth, improving transparency and integrity and providing a blueprint for how similar regulations can bolster the carbon market. The SDR incorporates the following:
- Anti-Greenwashing Rule: Effective 31 May 2024, this rule requires all Financial Conduct Authorisation (FCA) -authorised firms to ensure that sustainability-related claims are accurate and not misleading.
- Sustainability Labels: Labels like ‘Sustainability Focus’, ‘Sustainability Improvers’ and ‘Sustainability Impact’ help consumers differentiate between investment products.
- Naming and Marketing Rules: These rules restrict the use of sustainability-related terms in product names and marketing materials unless specific criteria are met.
- Disclosure Requirements: Firms must provide clear and accessible information about the sustainability attributes of their products.
- Additionally, in April 2024, the FCA proposed extending the SDR and investment labels regime to include portfolio management services. This move aims to ensure that wealth managers and portfolio managers adhere to the same standards of transparency and accuracy in sustainability claims as asset managers.
Don’t Reinvent the Wheel
I was recently on a client call, being sold futures (they were, in fact, selling forwards). As I read through the details and the data, I realised – they were inadvertently redesigning the futures contract and margin requirements. They weren’t trained on complex financial products, but were developing the nuances nonetheless. Apparently, this is what happens when you combine carbon marketers with credit selling…
Consequences of Terminological Confusion
Such debacles, amongst other more widespread market debates[xi] debates, have highlighted the harmful impact of confusion over terms like ‘offsets’ and ‘reductions.’ Again, misunderstandings here run enormous risk, especially if one person thinks they’re getting an offset and the other thinks they’re performing reductions. Do you know the difference?
Offsets vs. Reductions
Offsets: Compensating for emissions by funding projects that reduce or remove carbon dioxide elsewhere.
Reductions: Direct actions to decrease one’s own emissions.
Table 1 illustrates the unevenness of the present market structure.
The Role of Technology?
Integrating Technology Within Regulatory Frameworks
For technology to be truly effective in carbon markets, it must be integrated within a solid regulatory framework. So, despite the following statements made by the World Bank and the European Commission[xii]. It is not necessarily the case that we can rely on innovation to solve first-principle problems.
The voluntary markets need robust regulation; they were excluded from the second Markets in Financial Instruments Directive (MiFID II), the primary European financial regulation, while compliance markets were included. One is a thriving liquid market; one isn’t.
The problem that the technology can solve is as follows:
1. It can provide the most robust audit trail if the provenance is properly implemented using on-chain technologies.
2. It can drive up liquidity significantly, provided the provenance and tradeability of the underlying asset is satisfactory.
3. Modern sensing technology can significantly reduce the cost and increase the fidelity of monitoring, recording and validating project performance.
But all of the above are simply processes. The process doesn’t know what a carbon credit is, nor does it understand the intrinsic value of a credit. The process may provide an infrastructure for trading but doesn’t make the credits or make them valuable. This is achieved by consensus on carbon credits.
The Need for Proactive Buyer Engagement
This consensus needs to be enough to spur our investor, Stewart, into active participation. He must be one of many bringing liquidity, the lifeblood of any market. Without robust engagement, the market’s potential remains untapped. Companies must commit to investing in carbon credits and consider strategic actions, such as mergers and acquisitions, to consolidate efforts toward emission reductions.
Blockchain for Transparency and Standardisation Initiatives
Blockchain technology is being explored to enhance transparency and traceability in carbon credit transactions, as seen in emerging platforms launched in 2024[xiii]. However, without standardised protocols and regulatory oversight, these solutions often fail to fully address issues of credibility and trust. Several blockchain-based carbon credit platforms have struggled due to regulatory uncertainties and the absence of standardisation, highlighting the limitations of relying solely on technology without addressing governance challenges.
By coupling technological innovation with standardisation efforts such as those from the FCA and the CCPs, [xiv]the industry can leverage blockchain and other technologies effectively while maintaining the necessary regulatory rigour.
The Limitations of Smart Contracts
It is worth noting again that smart contracts deployed disregarding regulatory requirements or a market lacking in trust don’t suddenly make everything ‘zero trust’ or ‘blockchain trustworthy’ and certainly do not avoid legal risk. If foundational understanding and legal agreements are unsound or, worse, simply undefined, their automation does not cure intrinsic weaknesses. For example, take a country with a dire need for cars, a fantastic distribution of petrol stations across its key road infrastructure and the money to invest in a major car production. If this country were to invest in producing electric cars, however good, innovative and effective the cars were, this would be a disaster because there aren’t any charging points. If my government did this, I wouldn’t be amused. For this ultimate reason, lawmakers and regulatory bodies take actions such as those brought by the CFTC, as they underpin how regulatory regimes remain preeminent in the face of technological innovation despite how well-intentioned it may be.
A Unified Path Forward: Collective Action for a Sustainable Market
Regulatory Developments in Carbon Markets
As the market grows its credibility, the establishment of entities such as the Environmental Fraud Task Force illustrates how a commitment to rooting out malfeasance ensures that technological advances cannot displace the need for good governance. Furthermore, recent regulatory efforts signal a strong move towards standardisation. For example, California’s Voluntary Carbon Market Disclosures Act, enacted in October 2023, mandates transparency in voluntary carbon markets. This legislation requires businesses to disclose their carbon credit purchases and associated environmental claims, with a compliance deadline set for 1 January 2024[xv]. Such measures aim to increase accountability and accuracy in reporting, thereby reducing greenwashing and fostering investor confidence. Milestones such as these, as well as the ratification of COP, underscore the action and urgent need for global regulatory alignment to ensure that carbon markets can effectively contribute to mitigating climate change. [xvi]
International Collaboration: The Path Forward
Cross-border collaboration is essential for setting global standards. By aligning national policies with frameworks such as Article 6.4 of the Paris Agreement, countries can ensure consistency and reliability in carbon credit trading, fostering investor confidence. A great example is the International Carbon Action Partnership (ICAP), which unites nations with cap-and-trade systems, sharing best practices and exploring ways to link diverse carbon markets. By participating in multilateral dialogues and agreements, stakeholders can share best practices and work towards common standards that enhance market efficiency and credibility. Such international collaboration not only strengthens the regulatory foundation but also ensures that standardisation efforts are comprehensive and effective, ultimately bolstering the global carbon market’s ability to drive meaningful climate action.
The global carbon market is at a pivotal point. Realising its potential requires a unified effort from all stakeholders, including governments, financial institutions, project developers and buyers.
Actionable Steps Toward a Unified Carbon Market
Regulatory Leadership and Enforceable Guidelines
Governments and regulatory bodies must establish and apply clear, binding rules that harmonise global carbon market practices. For example, the European Union Emissions Trading System (EU ETS) stands as the world’s first and largest carbon market, setting a cap on total emissions across covered entities. Companies receive or buy allowances that they can trade as needed, ensuring overall emissions steadily decrease. These enforceable schemes were the first and continue to be the most significant stomps (think giant step) and are pivotal to reducing fragmentation and creating a level playing field for all participants, especially once we begin to see the voluntary and compliance markets merging.
Market Education
A lack of understanding is rife. I ask almost everyone I know if they know what carbon credits are and what they think of them. Almost everyone is immediately sketchy and scathing. Once I actually explain how they work, end to end, and the rigour that goes into monitoring, recording and verification (MRV), their attitude changes. This takes me about three to four minutes for your average Jo(Anne) and around sixty minutes for a sceptical businessman. I need twenty-four hours with a climate change denier.
Essential to the growth of the market, therefore, are Transparency Initiatives involving the development of open-access platforms for sharing verified information on carbon credit quality, project methodologies and credibility. This clarity reduces confusion and investor risk while enhancing market integrity. The previously mentioned CCPs are an excellent example of this.
Combining this with stakeholder engagement means purposeful participation by investors, companies, NGOs and civil society to help refine market standards and forge consensus on fair, effective policies. The UK’s principles for voluntary carbon and nature market integrity are a great example and were developed through broad consultations to ensure carbon credits contribute genuinely to climate and nature goals. The California Voluntary Carbon Market Disclosures Act mandates public reporting of carbon credit purchases, which also acts to boost transparency and accountability for participating businesses.
Technology Integration
As mentioned, technologies such as blockchain can improve traceability and verification but must operate within a solid legal framework. Sound monitoring, reporting and verification (MRV) systems ensure these solutions strengthen overall market credibility. But only when built and implemented properly. Beyond blockchain, digital platforms that automate credit tracking or use artificial intelligence (AI) for emissions monitoring can cut transaction costs and boost accuracy. However, enforceable standards and strict oversight remain essential for these innovations to succeed. Much more is coming soon on innovations in future pieces – watch this space.
Further Steps to Strengthen Carbon Markets
Utopia: Truly Shared Responsibility Grounded in Scientific Precision
Standardising carbon markets transcends administrative efficiency; it directly reflects the precision demanded by climate science. With global warming cataclysmically breaking to 3.2 ℃ and our being so perilously far above the Paris Agreement’s upper limit of 2 °C, the meticulous definition, measurement and classification of carbon credits are non-negotiable.
This Intersection of Science and Policy Requires the following:
· Accurate Emissions Measurement
Uniform protocols ensure carbon credits represent real, additional reductions.
· Verification and Validation
Rigorous third-party reviews confirm that claimed cuts or removals actually occur.
· Data Transparency
Open data cultivates investor confidence and public trust – critical to scaling carbon markets.
The path forward demands collective effort grounded in solid policy and scientific rigour. How can professionals in finance, regulation and sustainability forge a well-regulated, high-integrity market that truly curbs emissions? By aligning expertise, embracing uniform standards and prioritising global collaboration, we can transform carbon markets into a powerful instrument for mitigating climate change. Let’s move forward together, shaping the future of carbon markets – and our planet – through concrete, collaborative action.
End Notes
[i][i]In 2024, negotiators at COP29 ratified a new framework under Article 6.4 of the Paris Agreement. This ratification established standardized methodologies for international carbon credit trading, enhancing transparency and credibility across borders.
[ii]https://www.reuters.com/business/environment/climate-set-warm-by-31-c-without-greater-action-un-report-warns-2024-10-24
[iii] In October 2024, the Commodity Futures Trading Commission (CFTC) filed charges against Kenneth Newcombe, former CEO of CQC Impact Investors LLC (C-Quest), alleging fraud and the submission of false reports related to voluntary carbon credits. The CFTC also settled charges with C-Quest and its former COO, Jason Steele, marking the agency’s first enforcement action involving fraud in the voluntary carbon markets. https://www.cftc.gov/PressRoom/PressReleases/8994-24
[iv] In May 2023, a class-action lawsuit was filed against Delta Air Lines in the U.S. District Court for the Central District of California. The lawsuit alleges that Delta misrepresented itself as a carbon-neutral airline, accusing the company of greenwashing by relying on carbon offsets deemed unreliable. https://natlawreview.com/article/carbon-neutrality-suit-against-delta-airlines-signals-arrival-time-greenwashing
[v]https://www.theguardian.com/environment/2023/may/30/delta-air-lines-lawsuit-carbon-neutrality-aoe#:~:text=bunch%20of%20ways.%E2%80%9D-,The%20case%20argues%20that%20there%20is%20a%20market%20premium%20for,purchased%20for%20its%20environmental%20claims.
[vi] https://www.wsj.com/articles/former-executives-of-carbon-credit-project-developer-cqc-charged-with-fraud-5641b9d9
[viii] Market Analysis Report on Fragmentation, 2024: The International Emissions Trading Association (IETA) has published reports addressing key issues in carbon markets, including market fragmentation and the need for unified standards. You can access their reports here: https://www.ieta.org/resources/reports/
[ix] Integrity Council for the Voluntary Carbon Market, Core Carbon Principles Release, 2024: The Integrity Council for the Voluntary Carbon Market (ICVCM) has developed the Core Carbon Principles (CCPs) to establish high-integrity standards for carbon credits. More information can be found on their official website: https://icvcm.org/core-carbon-principles/
[x] Financial Conduct Authority’s Sustainability Disclosure Requirements (SDR) and Investment Labels Regime, 2024: The FCA has introduced the Sustainability Disclosure Requirements and investment labels regime to enhance transparency and integrity in the market. Details can be found here: https://www.fca.org.uk/firms/climate-change-and-sustainable-finance/sustainability-disclosure-and-labelling-regime
[xii] World Bank
The adoption of Blockchain, Big Data, the Internet of Things (IoT), and other disruptive technologies presents a significant opportunity to enhance the efficiency and integrity of next-generation climate markets. These technologies facilitate the development, management, and harmonization of information related to GHG mitigation efforts, ensuring greater accuracy and reliability.
European Commission
Blockchain is a transformative tool that can vastly improve the transparency, accountability, and traceability of greenhouse gas emissions. The European Commission is committed to leveraging blockchain innovations to strengthen global climate initiatives and accelerate the fight against climate change.
[xiii] Overview of 2024 Blockchain Carbon Platforms, Industry Report: While a specific industry report titled “Overview of 2024 Blockchain Carbon Platforms” is not directly available, the International Carbon Action Partnership (ICAP) provides status reports on emissions trading systems worldwide, which may include information on technological integrations in carbon markets. Access their reports here: https://icapcarbonaction.com/en/status-report
[xiv]https://www.fca.org.uk/firms/climate-change-and-sustainable-finance/sustainability-disclosure-and-labelling-regime AND https://icvcm.org/core-carbon-principles/
[xv] In October 2023, California enacted Assembly Bill 1305, known as the Voluntary Carbon Market Disclosures Act (VCMDA). Effective January 1, 2024, this legislation mandates that entities operating in California that market or sell carbon offsets, purchase or use carbon offsets or make specific environmental claims, disclose pertinent information on their websites. Required disclosures include details about the offset registry or program, project type, protocols used and documentation verifying the accuracy of any carbon neutrality or net-zero claims. This initiative aims to combat greenwashing by ensuring transparency and accuracy in environmental claims, thereby bolstering market integrity: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240AB1305
[xvi] During COP29, held in Baku, Azerbaijan, in November 2024, negotiators reached a pivotal agreement on Article 6.4 of the Paris Agreement. This consensus established standardized methodologies for international carbon credit trading, facilitating the creation, purchase and sale of carbon credits under a UN-governed global market. The adoption of these standards is expected to enhance transparency, credibility and environmental integrity across borders, marking a significant advancement in the operationalization of global carbon markets.
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