Carbon Markets, Compliance and Credibility: Why Business Verification Matters

As the requirements to meet some climate goals become urgent, carbon markets become one of the most significant weapons against greenhouse gas emissions around the world. They allow commercial firms to trade carbon credits – each producing a ton of CO2 emissions reduced or removed – as a way to comply with regulatory obligations or as a demonstration of voluntary environmental responsibility.

And yet there’s a fundamental challenge hidden under this potentially perfect system: credibility. The carbon market setup is open to fraud, greenwashing, and manipulation without proper checks. The heart of this challenge includes the one most critical and usually ignored question: Who are the people or entities issuing these credits and trading them, and can we trust them?

The Carbon Market’s Promise & the Risk Lurking Beneath

The premise of carbon markets is that a good company can fund emission-reducing projects elsewhere to offset its own carbon footprint. Such credits can be generated for afforestation, renewable energy, carbon capture, and other similar initiatives.

However, this is only possible if the credits are real, verifiable, and managed in a transparent way. Unfortunately, there are growing concerns that carbon markets, particularly voluntary ones, have become a complex web of dubious projects, shell entities, and unverifiable claims.

The issue lies with the multi-party nature of the entire process: project developers, validation agencies, brokers, and marketplaces. If any one of these players in the chain can be compromised, the integrity of the credit is in doubt.

Why Identifying Entities Is Challenging?

Another huge challenge facing businesses is the identification of who they are actually doing business with. Unlike financial markets, which operate under strict licensing and disclosure requirements, carbon markets, mainly voluntary ones, remain immature. This has engendered a lot of ambiguity. Companies seeking to buy or finance carbon credits may have to confront undisclosed ownership structures, casually documented entities, and missing standardized disclosures. While making an environmentally conscious purchase, the last thing you need to do is to validate the existence of the seller.

The Risk of Market Manipulation

The risks here aren’t hypothetical. The carbon market has already seen manipulation in different forms, such as credits sold for projects that never materialized, the same credit sold to multiple buyers, or credits linked to entities under investigation for financial crime or fraud. In many cases, buyers assumed that if a credit appeared on a registry, it was legitimate. But registries don’t always verify ownership or the legal standing of the issuer. As a result, businesses risk buying into initiatives that are unverifiable, inflated, or completely fabricated.

Why Business Verification and UBO Screening Matter

Adding to the risk here are the nonexistent due diligence and business verification, including UBO checks. Since carbon projects are often layered on top of multiple entities, sometimes across several jurisdictions, unless proper checks are made into the legal business behind the credits and those that control it, companies will never be able to truly understand the real nature of the counterparty.

A project that is claiming to plant trees in Southeast Asia might be going through a tax haven, which is owned by a parent company with unknown stakeholders and run by a bunch with no environmental track record. The damage is already done: once issues are raised, they drag not only the company’s compliance profile down but also its brand and climate commitments.

The Stakes of Not Verifying: What Could Happen

Not conducting comprehensive due diligence can have far-reaching implications. Companies might otherwise enter agreements with sanctioned entities or those involved in environmental and financial wrongdoing. In the case of regulated carbon markets, this would lead to penalties for non-compliance or fines.

In voluntary markets, the backlash could come directly from customers, investors, or watchdogs who demand more than perfunctory compliance efforts. No company wants to be on a newshole story about fraudulent offsets or greenwash. In a market where credibility is currency, reputation damage may prove more costly than any regulatory consequences.

Such risks are not mere theories; they are being manifested in real-life scenarios. The Commodity Futures Trading Commission (CFTC) in the United States has brought fraud charges against a carbon credit project developer who fabricated data into the voluntary market to get and sell carbon credits. Notably, the developer misrepresented the emission reductions from 2019 to 2023 and, as a consequence of these bogus entries, fake carbon credits were issued and sold to buyers who thought these credits were real. Its fine now has the affected buyers pursuing legal action. The fraud could have been prevented had proper business verification and due diligence been done.

The Evolution of Carbon Markets: Trust as a Growth Engine

Carbon markets are fast-growing as a result of regulatory initiatives, investor pressure, and international climate accords. The industry is following the evolution:

• International carbon registries: Networks are forming to allow for this, but uptake is very slow.
• Due diligence mandates: Regulators within the EU and beyond are enacting laws related to supply chain and sustainability reporting that make verification mandatory, taking it out of the realm of best practice and into actual law.

With the ongoing evolution, one thing is sure: trust is the engine of scale. If those would-be users and regulators can’t trust the players involved, the whole market might tap out under its own weight of skepticism.

How The KYB Is Simplifying Trust in Carbon Markets

Carbon markets can actually have a big impact in reality, but you really need to know who you are dealing with. This is a field of entities that can hide in a complex ownership structure and unverifiable claims. And the real risk is that you get it wrong. You should not have to act like a detective every time you do a transaction.

That’s where The KYB comes in. Our platform will allow you to engage confidently in carbon markets: 

• Real-time business verification to confirm that the entity issuing or selling carbon credits is actually legally registered and active
• UBO identification that exposes the true owners behind companies and even identifies hidden links with high-risk individuals or sanctioned entities
• Cross-border registry access to validate outside entities under several jurisdictions with up-to-date data from official sources
• Automated risk screening to flag possible compliance issues before they become expensive mistakes

Carbon markets are a good and fair way to save the environment. The KYB ensures you are doing it with the right partners verified, transparent, and trustworthy. Contact us today to learn more.