In recent weeks, a review of more than 25 years of carbon-offset projects delivered a sobering conclusion: the vast majority of these projects have failed to produce meaningful reductions in greenhouse-gas emissions. Forests that were never in danger of being cut down were suddenly “saved.” Emissions reductions were counted multiple times. Promised climate benefits proved temporary, while the emissions they were meant to offset were permanent.
The findings highlight a paradox in modern climate strategies. Across the world, governments, companies and institutions are increasingly eager to “do the right thing.” Net-zero pledges proliferate, ESG strategies are drafted, climate targets are announced. However, the systems designed to turn these ambitions into reality are often lacking. Sustainability is often decided not by individual virtue, but by the design of the system.
The bureaucratisation of good intentions
The ambition to do less harm and move faster toward a low-carbon economy is widely shared. But as these ambitions expand, they gradually translate into layers of rules, procedures and oversight. Reporting obligations multiply, and third-party audits, compliance frameworks and verification protocols increasingly dominate the sustainability landscape. Climate action becomes something that must be documented and ticked off, while no institution or organisation feels the benefit of their good intentions.
The consequence is that organisations begin to optimise their behaviour not around what most effectively reduces emissions, but around what is easiest to measure, verify and report. What can be counted receives priority; and what matters but resists quantification often is left behind. Companies learn how to look green within regulatory frameworks without fundamentally changing their operations. Governments reward activities that satisfy formal criteria, even when real-world emissions barely move. Over time, a gap opens up between what the system claims to achieve and what it actually delivers.
When doing good fails to do good
This leads to an uncomfortable question in climate policy: Does complying with climate regulations always produce sustainable outcomes? In theory, the answer seems easy. Closing a coal plant, abandoning a high-emission process, tightening internal standards; these should all lead to positive environmental change. In practice, such decisions often trigger a chain of second-order effects.
Economists refer to this phenomenon as “leakage.” When pollution does not disappear; but moves. A factory closure in one country may result in increased imports from regions with weaker environmental standards. A company withdrawing from a controversial activity may simply be replaced by a competitor with fewer constraints and less transparency. The moral action remains intact, but the environmental benefit evaporates.
This shows the friction between individual responsibility and system logic. Firms and consumers can make better choices in isolation, but aggregated outcomes are governed by market structures, price signals and policy design. When regulation focuses primarily on deterrence without ensuring that cleaner alternatives become the default, it creates a vacuum. And vacuums in markets are usually filled by actors who are less regulated, less accountable and less sustainable.
The illusion of carbon neutrality
Few mechanisms illustrate this better than carbon markets. There are basically two types of carbon markets, and they work quite differently. The first is offset systems, where companies or countries buy emission reductions that have already happened somewhere else.
A company or country pays for emissions reductions that have already taken place somewhere else, like a new forest that absorbs CO₂ or a wind farm that replaces fossil energy. The idea is that you can “compensate” your own emissions by supporting reductions elsewhere. Originally conceived as a pragmatic market-based tool, offsets were meant to channel capital toward the cheapest and fastest emissions reductions worldwide. A company unable to eliminate all emissions could compensate by financing equivalent reductions elsewhere. This doesn’t automatically lower total emissions in the system; it’s more about saying, “we’re doing something good, even if emissions still exist somewhere else.”
Investigations have repeatedly shown that many offset projects fail the basic test of “additionality”: they would have happened anyway. Others suffer from permanence problems, especially forestry projects where stored carbon can be released again through fires, disease or logging. Verification remains complex and uncertain, and the same reductions are sometimes sold and counted multiple times.
Even when projects are technically real, the trade in offsets is ambiguous. The emissions being offset are effectively permanent. The storage meant to compensate them often is not. Offsetting is frequently cheaper and more convenient than genuine operational decarbonisation. Instead of transforming production processes, companies invest in paperwork-heavy accounting systems that sustain the appearance of climate neutrality. The result is a bureaucratic apparatus of certification and carbon accounting that produces reassuring numbers, while global emissions continue to rise.
The trade in carbon credits
The second type of carbon market is what we can call a cap-and-trade system, or Emissions Trading System (ETS). In an ETS, companies buy and sell pollution permits, each one giving the right to emit one tonne of CO₂. Unlike voluntary offsets, the ETS imposes a legal cap on total emissions. If a company emits one tonne, it has to give a permit back to the government. Since the total number of permits is capped, there’s a hard limit on overall emissions in the system. At first, this seems far more robust. And in many respects, it is. The total emissions ceiling is real. But here too, system design matters.
When a company covered by the ETS reduces emissions, by closing a coal plant or improving efficiency, it uses fewer allowances. That looks like progress. However, since the total number of allowances is fixed, those unused permits do not disappear. Instead, most firms sell them or bank them for future use rather than cancel them, which increases supply on the market, pushes down prices, and enables other firms to emit more. Also, national coal phase-outs have sometimes led to increased electricity imports from neighbouring countries under the same ETS. Emissions shift across borders rather than declining overall. Economists describe this as the “waterbed effect" : press down in one place, and emissions rise somewhere else. The total remains unchanged unless allowances are permanently removed or the cap is lowered. This undermines countries that have higher ambitions than the system.
The same mechanism becomes visible during economic downturns. When emissions fall for reasons unrelated to climate policy — as they did during the financial crisis of 2008 or the Covid-19 pandemic — demand for allowances collapses. Permit prices drop, pressure on industry eases, and the incentive to invest in long-term decarbonisation weakens.
In a cap-and-trade system, such temporary shocks do not automatically translate into lasting reductions. Unless surplus allowances are permanently removed or the cap is tightened, lower emissions in one period simply make it easier to emit more in the next. Unless, for example, having surplus allowances would be rewarded. But now, the system absorbs the shock rather than locking in the gain. The EU has attempted to address this dynamic through the Market Stability Reserve, which automatically withholds surplus allowances when supply becomes excessive. Introduced in 2019, the mechanism has helped prevent a repeat of the post-2008 collapse in carbon prices, and has strengthened the long-term investment signal.
Yet the rebound in emissions after the Covid-19 pandemic also reveals the limits of such corrective tools. The Market Stability Reserve can absorb shocks, but it does not eliminate them. When economic activity recovers, emissions rise again unless the cap itself tightens fast enough or demand for carbon-intensive production falls. The return to pre-pandemic emission levels is therefore not evidence of policy failure, but of a system designed to stabilise markets rather than guarantee structural decline on its own.
Designing systems that actually work
If climate policy is to succeed, it must move beyond obliging compliance with ambiguous regulations and start redesigning incentives. That means shifting the focus from compliance to outcomes, cutting through unnecessary bureaucracy, and freeing resources for genuine innovation and transformation. Most importantly, sustainable choices must become the default rather than the exception. Unsustainable alternatives should either disappear or become prohibitively costly, whether through effective carbon pricing, minimum standards, border adjustments, or outright bans. Policymakers also need to anticipate behavioural effects. Demand does not decrease simply because supply changes; unless both sides of the equation are addressed, emissions will continue to shift rather than fall.
One option is a straightforward carbon tax: instead of relying solely on tradable allowances, emissions would be taxed directly, and the revenues could be earmarked for nature conservation, ecosystem restoration, or climate adaptation. This would ensure that every tonne of CO₂ emitted carries a real and unavoidable cost, independent of market dynamics or surplus allowances.
At the same time, the system could reward genuine over-performance. Firms that reduce emissions beyond regulatory requirements and create surplus emission rights should not merely sell them back into a market that enables others to pollute, but could be rewarded through permanent cancellation of those allowances, tax rebates, or direct financial incentives. This would align private incentives with collective climate goals, ensuring that emission reductions translate into real, system-wide progress rather than simply reshuffling emissions across actors.
Effective climate policy is not about encouraging people and companies to “do good”, but about avoiding the trap of symbolic compliance that satisfies regulations without delivering real impact. The challenge is not only ethical but structural: we must redesign the rules of the game so that sustainability becomes the most logical choice in everyday decisions. Shall we?
This article is part of The Outside World, ftrprf’s very own research center.
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