INTRODUCTION: BLOCKCHAIN IN CARBON MARKET
The accelerating urgency of climate change has led to the expansion of carbon trading markets. The carbon credits serve as a mitigating factor to the rising global concern. These credits act as tradable environmental assets for governments and corporations to achieve their net-zero commitments and sustainability targets for ESG compliance. This mechanism permits the entities to offset greenhouse gas emissions by investing in certified emission reduction projects.[1]
In recent years, blockchain technology has emerged as a saviour to curb traditional carbon registry-based fraud by reducing reliance on intermediaries while enhancing transactional security. This transformative approach within the carbon trading system can provide transparency, traceability, and immutable transaction records for the climate finance system. However, instances of fraudulent carbon offsets, double-counting, and greenwashing continue to undermine the credibility of this technology. The risks of increasing fraud and manipulation highlight the regulatory vacuum and jurisdictional complications. The lack of a global-based treaty compromises the legal accountability of the decentralised carbon trading market.
UNDERSTANDING BLOCKCHAIN-BASED CARBON TRADING
Blockchain-based carbon trading markets operate through distributed ledger technology. The stored digital records of carbon credit transactions are verified in a decentralised, tamper-resistant manner. The carbon credits are frequently tokenised into digital assets. These are then traded across blockchain platforms through smart contracts. The system increases efficiency and reduces reliance on intermediaries. Blockchain technology is incorporated to improve transparency, minimise transactional costs and enable real-time tracking of carbon offset transfers. The immutable ledger records help prevent unauthorised alteration of transaction histories. This leads to enhanced trust among market participants. Nevertheless, while blockchain can authenticate transactional data, it cannot independently verify whether the underlying carbon offset projects genuinely reduce emissions in the physical environment. Consequently, technological transparency does not necessarily eliminate the possibility of environmental fraud or market manipulation.[2]
TYPES OF CARBON CREDIT FRAUD IN BLOCKCHAIN MARKETS
Despite the integration of blockchain technology into carbon trading systems, several forms of fraud continue to threaten the integrity of carbon credit markets. One of the most significant concerns is the issuance of phantom or non-additional carbon credits. In this, the emission reduction projects either fail to produce genuine environmental benefits or exaggerate their climate impact. Similarly, double counting remains an issue when the same carbon credit is sold or claimed by multiple entities across different trading platforms. Blockchain technology may secure digital transaction records, but it cannot independently validate the ecological authenticity of the underlying offset project. Furthermore, companies often engage in greenwashing by purchasing low-quality or misleading carbon credits to falsely portray themselves as environmentally responsible. The absence of standardised international verification mechanisms and effective regulatory supervision further enables market manipulation, fraudulent tokenisation, and deceptive sustainability claims within decentralised carbon trading ecosystems.[3]
LEGAL ACCOUNTABILITY AND REGULATORY CHALLENGES
The decentralised nature of blockchain-based carbon trading markets creates significant legal and regulatory challenges concerning accountability and enforcement. Since blockchain transactions frequently occur across multiple jurisdictions, determining the applicable legal framework and identifying the liable parties becomes increasingly complex. Questions often arise regarding whether liability should be imposed upon carbon project developers, blockchain platform operators, smart contract programmers, or token issuers when fraudulent carbon credits are circulated within the market. Additionally, the absence of harmonised international regulations governing blockchain-enabled carbon trading creates regulatory loopholes that can be exploited for financial and environmental misconduct. Existing environmental laws and financial compliance frameworks remain inadequately equipped to address issues such as decentralised governance, anonymous transactions, and automated smart contract execution. Consequently, enforcement agencies face considerable difficulties in investigating fraudulent activities and ensuring compliance within rapidly evolving digital carbon markets. These challenges highlight the urgent need for comprehensive regulatory mechanisms capable of balancing technological innovation with environmental accountability.
NEED FOR GLOBAL REGULATORY FRAMEWORKS
In order to preserve the credibility and effectiveness of carbon trading systems, the establishment of comprehensive international regulatory frameworks has become increasingly necessary. Merely relying on blockchain technology is insufficient unless supported by robust legal oversight, transparent verification standards, and independent auditing mechanisms. International organisations and regulatory authorities must develop uniform guidelines governing the issuance, tokenisation, and verification of carbon credits across digital trading platforms. Furthermore, mandatory ESG disclosure requirements and stronger due diligence obligations can help reduce greenwashing and fraudulent sustainability claims. The implementation of advanced monitoring systems integrating blockchain, artificial intelligence, and real-time emissions tracking may also strengthen market transparency and accountability. In this regard, Article 6 of the Paris Agreement provides an important foundation for international cooperation in carbon market governance and cross-border climate compliance mechanisms.[4]
CONCLUSION: THE PATHWAY AHEAD
Blockchain technology has undoubtedly transformed modern carbon trading markets by introducing greater transparency, traceability, and transactional efficiency. However, the persistence of fraudulent carbon credits, greenwashing practices, and regulatory loopholes demonstrates that technological innovation alone cannot guarantee environmental integrity or market accountability. The absence of harmonised international legal standards continues to weaken enforcement mechanisms within decentralised carbon trading ecosystems. Therefore, effective climate governance requires a balanced framework that combines blockchain-based innovation with stringent regulatory supervision, independent verification systems, and cross-border legal cooperation. Without robust legal accountability, blockchain-enabled carbon markets risk evolving into sophisticated instruments of environmental deception rather than genuine tools for climate mitigation.
Author(s) Name: Janhvi Pandey (National Law Institute University, Bhopal)
References:
[1] State and Trends of Carbon Pricing 2024 (World Bank 2024)
[2] Joy Guo, ‘How can blockchain open access to carbon markets?’ (World Economic Forum, 28 July 2022) <https://www.weforum.org/stories/2022/07/how-can-blockchain-open-access-to-carbon-markets/> accessed 27 May 2026
[3] Patrick Greenfield, ‘Revealed: more than 90% of rainforest carbon offsets by biggest certifier are worthless, analysis shows’ The Guardian (18 January 2023) <https://www.theguardian.com/environment/2023/jan/18/revealed-forest-carbon-offsets-biggest-provider-worthless-verra-aoe> accessed 27 May 2026
[4] Paris Agreement to the United Nations Framework Convention on Climate Change (adopted 12 December 2015, entered into force 04 November 2016) TIAS No 16-1104 art 6