An Autopsy of the Voluntary Carbon Market

The Voluntary Carbon Market (VCM) rests on the premise that one carbon credit compensates for one tonne of emissions. While a growing body of evidence questions the integrity of many credits, much less is known about whether the ability to offset affects firms' incentives to reduce their own emissions. Using a buyer-linked dataset covering the near-universe of offset retirements, we exploit the 2023 carbon-market scandals as a quasi-natural experiment. Firms that stop offsetting after the shock reduce their operational (Scope 1) emissions substantially more than firms that continue to purchase offsets. This finding is consistent with moral licensing: access to offsets weakens firms' incentives to undertake internal abatement. We also document persistent oversupply, opaque intermediation, and sharp price and volume responses to the scandals. Our results identify a demand-side problem in the VCM that is distinct from concerns about credit quality: even when credits represent genuine emissions reductions, the option to offset may slow decarbonization within purchasing firms.