The Shadow Inflation of Climate Tech: How Carbon Accounting Markets Inflate Green Investment Returns

By Jack Thompson Jul. 29, 2025

When investors speak of “green growth,” they often refer to the booming world of climate technology—an umbrella term encompassing carbon capture, renewable energy, and carbon credit trading. By 2024, global climate tech investment surpassed US$490 billion, according to BloombergNEF, nearly doubling from 2020 levels. Yet, as capital floods into the climate transition, a quiet distortion is spreading through its balance sheets: shadow inflation in carbon accounting. Across private and public markets alike, overstated emission reductions and speculative carbon credits are artificially inflating the perceived return on climate investments. This is not the moral fraud of greenwashing—it is a systemic market failure born of measurement opacity, over-leveraged optimism, and political convenience.

The Mirage of Measured Carbon

At the center of the climate finance boom lies the assumption that carbon can be precisely measured, priced, and offset. But the tools used to calculate avoided or reduced emissions remain fundamentally uncertain. According to the International Emissions Trading Association (IETA), the margin of error for many voluntary carbon credit methodologies exceeds 30%, and in land-based offset projects such as reforestation, up to 70% of claimed reductions may not materialize over a 10-year period due to fires, drought, or land-use change.

Despite these uncertainties, carbon credits are traded as if they were fungible commodities. Companies report them as tangible environmental assets on their ESG disclosures, while investors use them to boost portfolio “green intensity.” The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) estimates that over 41% of credits issued since 2016 have been double-counted—claimed both by the project originator and the credit purchaser. This has created a fictitious multiplier effect, where the same unit of avoided CO₂ generates multiple streams of financial value. The climate ledger thus grows richer, even as the atmosphere does not grow cleaner.

Subsidized Speculation

Carbon markets were originally intended to internalize externalities—forcing polluters to pay for their emissions. Instead, they now mirror the speculative dynamics of early cryptocurrency markets. Between 2021 and 2023, the price of voluntary carbon credits rose from US$3.80 to US$13.90 per ton, a 266% increase, before collapsing back to under US$7 in mid-2024. Much of this volatility is driven not by shifts in climate performance, but by financialization. Hedge funds, commodity traders, and ESG-linked exchange-traded funds have entered the carbon market en masse, treating carbon credits as assets for yield arbitrage.

Governments have unintentionally fueled this dynamic through subsidy design. In the United States, the Inflation Reduction Act (IRA) offers tax credits of up to US$85 per ton of CO₂ captured, creating a lucrative environment for over-reporting. Carbon capture and storage (CCS) firms have since multiplied; yet, according to the International Energy Agency (IEA), of the 45 million tons of annual capture capacity claimed globally, only 31 million tons are verifiably stored. The rest exists as “accounted carbon”—emissions theoretically prevented but never physically sequestered. Subsidized speculation has turned carbon into an accounting fiction whose market value now exceeds its environmental one.

The Inflation of ESG Valuation

This shadow inflation extends into the corporate realm. Firms that announce “net zero by 2040” targets often report declining emissions while their actual footprint grows. The CDP Global Disclosure Report (2024) found that 58% of companies claiming year-on-year emission reductions did so primarily through the purchase of offsets rather than operational cuts. Yet, these firms consistently outperform non-disclosing peers in ESG-linked equity valuations.

In capital markets, such signals translate directly into inflated asset pricing. A Harvard Business School study in 2024 calculated that climate tech firms listed on major exchanges trade at an average 32% price-to-earnings premium compared to non-green peers, despite equivalent profitability and higher input volatility. Much of this premium is attributed to “anticipated carbon dividends”—expected profits from future carbon credit sales or avoided-emission subsidies. As the real productivity of these assets remains unverifiable, this valuation boom represents the climate economy’s version of monetary inflation without output growth.

The Accounting Blind Spot

Why does shadow inflation persist despite regulatory scrutiny? The answer lies in the fragmented architecture of carbon accounting. There are currently over 60 carbon standards and registries worldwide—each with distinct baselines, verification methods, and offset eligibility criteria. The United Nations Framework Convention on Climate Change (UNFCCC) provides only partial oversight of national carbon markets, leaving voluntary markets largely unregulated.

This fragmentation allows for “standard arbitrage”: developers shop for registries that provide the most favorable carbon accounting outcomes. A wind project in Kenya, for instance, can yield 40% more credits under the Verra Verified Carbon Standard than under the Gold Standard, simply because the former uses broader baseline assumptions. As these credits enter the same global trading pool, they distort both price signals and emission totals. The market thus rewards creative accounting over carbon efficiency.

Emerging Economies and the Credit Trap

The burden of this distortion often falls on emerging economies, which supply most nature-based credits. Forest-rich nations like Brazil, Indonesia, and the Democratic Republic of Congo account for over 60% of issued offsets under the voluntary carbon market. However, less than 14% of total carbon revenue flows back to these host countries after intermediaries and certification fees. Moreover, as prices collapse or projects are invalidated, local communities bear the reputational cost without compensation.

This has led to a phenomenon climate economists call the “credit trap”—where developing nations lock themselves into low-value offset projects rather than investing in domestic mitigation technologies. According to Oxford Energy Studies (2023), for every dollar invested in renewable generation, nature-based carbon projects in Sub-Saharan Africa receive four dollars of speculative funding. The short-term inflow of green capital thus substitutes, rather than supplements, long-term sustainable investment.

Policy Capture and Political Optics

Governments have also found political shelter in shadow inflation. Carbon markets enable policymakers to announce large emission reductions without restructuring their energy systems. The European Union’s Emissions Trading System (ETS), for example, reports an annual reduction of over 200 million tons of CO₂ since 2013. Yet Sandbag Climate Analysis (2024) estimates that nearly half of those reductions result from accounting adjustments—particularly from declining cap allocations during economic downturns, rather than actual cuts.

Meanwhile, in the Global South, climate credit programs have become a diplomatic currency. Wealthy nations pledge “offset partnerships” in lieu of direct climate finance. The African Carbon Markets Initiative (ACMI), launched in 2022, aims to generate US$6 billion annually in carbon trading by 2030, but less than 5% of credits issued so far have verified co-benefits for local development. As long as paper reductions are easier to trade than real decarbonization, shadow inflation will remain politically expedient.

Deflating the Green Bubble

Fixing the carbon market requires deflating both its statistical and financial bubbles. Three reforms stand out. First, harmonized global baselines—anchored to direct measurement rather than modeled counterfactuals—must replace the fragmented registry system. Second, dynamic disclosure laws should require firms to distinguish between physical and virtual emission reductions. The EU’s proposed Corporate Sustainability Reporting Directive (CSRD) is a step forward but must include verification of third-party offsets. Third, governments must cap public subsidies tied to unverifiable carbon metrics and redirect funds toward direct mitigation infrastructure such as grid modernization and industrial electrification.

Some jurisdictions are moving in this direction. Singapore’s Climate Impact X exchange ties credit value to verified satellite data, while California’s Air Resources Board applies a conservative buffer deduction to all offset projects to prevent over-issuance. Still, without systemic alignment, these reforms remain isolated. Until global carbon markets trade on verified reality rather than modeled virtue, the climate economy will continue to inflate on borrowed trust.

Conclusion

The green transition cannot rest on numbers that only exist in spreadsheets. The carbon market’s shadow inflation reflects the growing distance between the measurement of virtue and the production of value. Investors, regulators, and governments alike face a reckoning: climate credibility cannot be collateralized. The next decade of green growth will not depend on how high the price of carbon rises—but on how much of it is real.

Works Cited

“Voluntary Carbon Market Outlook 2024.” Taskforce on Scaling Voluntary Carbon Markets (TSVCM), 2024. https://www.iif.com/tsvcm

 “IETA State of the Market Report 2023.” International Emissions Trading Association (IETA), 2023. https://ieta.org/reports

 “Global Climate Tech Investment Trends.” BloombergNEF, 2024. https://about.bnef.com/reports/climate-investment

 “Carbon Capture Status Report 2024.” International Energy Agency (IEA), 2024. https://www.iea.org/reports/carbon-capture-status-2024

 “Corporate Climate Disclosure Report.” CDP Global, 2024. https://www.cdp.net/en/reports

 “Carbon Markets and Development Finance.” Oxford Institute for Energy Studies, 2023. https://www.oxfordenergy.org/publications

 “EU Emissions Trading System Annual Review.” Sandbag Climate Analysis, 2024. https://sandbag.be/reports/ets

 “Environmental Market Efficiency Report.” Harvard Business School Working Paper Series, 2024. https://hbs.edu/research/climate-finance

 “UNFCCC Carbon Market Oversight Summary.” United Nations Framework Convention on Climate Change, 2024. https://unfccc.int

 “Climate Impact X Operational Review.” Government of Singapore and Temasek Holdings, 2024. https://climateimpactx.com