The voluntary carbon market is broken. Meet the companies trying to fix it.

Few elements of the energy transition are as hotly contested as the voluntary carbon market. For its critics, the VCM vacillates between snake oil and greenwashing, a form of subterfuge used by heavy polluters to cover up for their emissions without actually decarbonizing. A string of high-profile controversies about the integrity of offsets, particularly those involving reforestation programs, have led many major companies to cease buying them entirely.

But a growing number of firms now argue that the fallout risks doing more harm than good, dissuading potential customers from developing what many policymakers regard as a necessary market, and stifling investments in technologies that could help the world curb temperature increases.

Startups across the VCM space are dealing with a legacy of mistrust in varying ways. A few are touting changed business models: Isometric charges buyers, rather than sellers of carbon credits; BeZero users pay a fee to access its ratings platform, rather than the issuers of credits paying to be rated. Both, in theory, remove a potential conflict of interest incentivizing credulity over the integrity of credits being sold.

Some companies are upping transparency by more clearly showcasing how they reach their calculations. Others are debuting new technologies that, if successful, will more durably remove more-precise amounts of carbon from the atmosphere.

Yet the market is still hamstrung by several issues, some of which have to do with its relative youth, and others to do with this legacy of mistrust.

For one, companies disagree on what a fully formed carbon market should look like. One startup executive told me VCM assets should eventually resemble corporate bonds — policed by an overarching regulator, rated by third-party agencies that mimic Moody’s or Standard & Poor’s, and each acting as a slightly different financial instrument. Another argued that the very existence of ratings agencies was a sign of the market’s failure to police itself, insisting that VCM products should ultimately be viewed as commodities: In effect, a tonne of carbon removed or offset is equivalent to any other of a similar type, regardless of its provenance or process.

Investors are also hesitant to dive wholeheartedly into a market mired in past controversy, suffering either from what one executive labeled FOBCO — a fear of being called out — or from greenhushing, where companies make investments but do not publicize them. In many ways, the end result is the same, proponents argue: Fewer buyers in the market, leading to reduced demand for new supply of carbon credits, curtailing investment into the startups exploring frontier technologies that could cut emissions. The counter argument, of course, is that allowing companies to use offsets in particular reduces incentives for investment and innovation in ways for them to cut emissions from their operations and supply chain.

For differing reasons, both offsets and removals also require huge amounts of due diligence on the part of buyers — the former because of the reputational risk associated with investing in the wrong type of offset, potentially making headlines for the wrong reasons; the latter due to the fact that many of the underlying technologies that power removals are so new, meaning buyers have to hire their own scientists to verify their credibility. That means that, for now, many such assets are uncertain or unaffordable for smaller companies.

The VCMs can be separated into two broad categories: Carbon offsets, where investors buy into projects that avoid new emissions, say by preserving forested land; and carbon removal, where emissions are withdrawn from the atmosphere. Both can be achieved with technology, or through nature.

Offsets are the more controversial of the two. Many suffer from a lack of “additionality”: Would a project getting funding have been undertaken regardless of whether it was allotted a carbon credit? Others, as The Guardian and other outlets revealed this year, are insufficiently vetted and are effectively “phantom” projects. And because of their typically low cost, buyers are often accused of using them as marketing ploys to buttress claims of carbon neutrality, rather than using them — as is recommended — only to avoid emissions in hard-to-abate sectors and processes.

Carbon removal, by contrast, was labeled by the U.N.’s Intergovernmental Panel on Climate Change as “unavoidable if net zero … emissions are to be achieved.” These credits are still in their infancy and are more expensive, involving new technologies such as direct air capture and enhanced rock weathering, but have the backing of major corporations such as Microsoft, JPMorgan Chase, and Alphabet.

When it comes to the voluntary carbon market, the operative word is voluntary: Companies in most parts of the world are not legally obliged to cut their emissions; they do so for a variety of reasons — altruism, investor pressure, marketing. Mexico is among a small group of countries showcasing how that may change. Under its emissions trading system, in which firms are issued a declining emissions allowance over time, companies will be allowed to meet up to a tenth of their emissions-cutting obligations through the purchase of domestic carbon offsets. Colombia’s ETS contains similar provisions, while Singapore’s would allow for credits purchased from Vietnam to be set against a company’s carbon tax liabilities.

Even proponents of the VCM I spoke to admitted it suffered from major design flaws, had expanded too quickly and with too little oversight, and contained products and assets that had a limited — to put it mildly — relationship between supply and demand. Finalizing rules on allowing the trading of carbon credits across borders has been, as The Wall Street Journal put it, “fiendishly complicated.” With such a wide array of hard-to-resolve problems, it’s no wonder critics are skeptical the VCM has long-term staying power.

“It’s the hardest business I’ve ever built. … You’re building a science product, you’re building a technology platform to manage that, and then you’ve got all of your other normal business functions, with all of this mess around that market. But it’s the most important thing I’ve ever done. And that, to me, is the driving force.”

— Jim Mann, founder and chief executive of UNDO, an enhanced-rock-weathering carbon-removal startup whose customers include Microsoft and Stripe.

• It isn’t just startups trying to build the credibility of the VCM: Green stalwarts such as the Rocky Mountain Institute are getting in on the act, announcing efforts to increase the supply and credibility of carbon credits, while The Rockefeller Foundation sees offsets as a potential solution, albeit an imperfect one, to accelerate the closure of coal-power plants in poorer nations.
• Among the proponents of a bond-like future for carbon credits is the ratings agency BeZero, which recently published research showing buyers of credits are increasingly discriminating on price, based on the ratings — between AAA and D — that an offset or removal project receives.