Carbon Credit Fraud, Market Integrity, and the Limits of Technology

Client Legal Alert
By Paul B. Turner

Voluntary carbon markets have expanded faster than the legal, contractual, and verification frameworks meant to support them. That mismatch creates predictable stress points: questions around provenance, double counting, baseline integrity, delivery risk, and—at the far end of the spectrum—outright fraud. For traders, compliance teams, and risk managers, these risks are not theoretical. They translate directly into credit exposure, enforcement risk, and reputational harm.

Against that backdrop, blockchain and other distributed-ledger technologies are often proposed as solutions. The appeal is easy to understand: immutable records, enhanced traceability, and greater transparency across fragmented project and registry ecosystems. But technology does not operate in a vacuum. Whether these tools meaningfully reduce fraud risk depends on how they are embedded within contractual frameworks, verification regimes, market incentives, and enforcement expectations.

At the same time, the market is also attempting to address these issues through private ordering, most notably through the International Swaps and Derivatives Association’s work on the Voluntary Carbon Credit (VCC) Definitions. ISDA’s effort reflects a recognition that standardization around credit characteristics, delivery mechanics, and representations can mitigate certain categories of fraud and operational risk—particularly in derivatives and financially settled transactions. But standardized definitions, like technology, are not a panacea; they reduce some risks while leaving others firmly in place.

I recently addressed these themes in a separate EnergyEvolutionLaw alert focused specifically on the evolving VCC market and the practical implications of ISDA’s definitional framework. Read together, that alert and the analysis below highlight a consistent point: durable solutions in voluntary carbon markets will not come from any single tool. They emerge from the interaction of documentation, verification, market structure, and disciplined risk management.

This Insight builds on an article I originally published in August 2023 examining carbon-credit fraud risks and the potential—and limits—of blockchain as a control mechanism.

The original article, published by Corporate Compliance Insights, is available here:
https://www.corporatecomplianceinsights.com/carbon-credit-fraud-blockchain/