The market for carbon offsets: insights from US stock exchanges

Carbon offsets are a critical factor in addressing the harmful effects of climate change. The recent growth in voluntary carbon offsets is a welcome development in a setting dominated by compliance-oriented carbon markets driven by government emissions targets. However, fragmentation, volatile pricing, and low quality offsets have been problematic indications of inefficiency in this market. We argue that the underlying economic theory for compliance-oriented markets is different from that of voluntary offsets. Coase’s (1960) Problem of Social Cost lays the groundwork for the former while Akerlof’s (1970) Market for Lemons underpins the latter. We propose a literature on successful responses to the lemons problem, which employ a two-sided market structure (or multi-sided platform, MSP). We suggest that the value chain in the voluntary offset market could be reconfigured using this structure, as one possible response to the lemons problem. This structure has the added advantage of driving innovation and adoption in accounting and other market standards that would be tailored to support the carbon offset market.