Escaping the market for lemons - Ensuring quality carbon credits that incentivize climate action

Carbon crediting continues to be a popular policy instrument in the international community’s response to global warming. Public and private actors alike count on carbon credits to incentivize accelerated climate action as well as for complying with voluntary and mandatory climate targets. At the same time, a series of scientific reports have questioned the environmental integrity of many of the carbon credits traded on voluntary carbon markets, leading to an erosion of confidence in the instrument’s ability to deliver real impacts on atmospheric greenhouse gas emission levels. In discussions about carbon credit quality, an argument that is often brought forward is that high standards would be an impediment to market growth. But the economic theory of lemon markets strongly suggests otherwise.