In January 2023, a joint investigation by The Guardian, Die Zeit and the journalism nonprofit SourceMaterial concluded that more than 90% of the rainforest offset credits certified by Verra — the world’s largest carbon credit certifier — were effectively worthless. The credits, purchased by major corporations like Shell, Gucci, Salesforce and easyJet to support their net-zero claims, did not represent genuine emissions reductions. baselines had been inflated, and threats to forests had been overstated by an average of 400%. Verra’s CEO resigned; the voluntary carbon market lost a significant share of its already fragile credibility.
The Verra scandal illustrates exactly what is — and is not — broken about environmental markets. The wave of optimism now washing over those markets, centered on blockchain-based tokenization, will not fix the problem unless the technology is deployed in the right sequence.
Environmental markets are entering a critical phase. The EU’s Emissions Trading System (EU ETS) has demonstrated that regulatory-grade carbon pricing can scale. Yet voluntary carbon markets remain fragmented and constrained by trust issues. Biodiversity credit systems are still nascent, struggling with inconsistent methodologies, limited liquidity and questions around environmental integrity.
‘Tokenization does not solve the core problems of environmental markets. What it does, perhaps more valuably, is expose them.’
Into this landscape, tokenization has arrived with fanfare. Its proponents argue it can unlock liquidity, enforce transparency and democratize access to environmental assets across geographies. There is something to these claims, but they obscure a more fundamental question: Can financial infrastructure innovation compensate for unresolved problems in market design?
The answer is no, but the attempt is instructive. Tokenization does not solve the core problems of environmental markets. What it does, perhaps more valuably, is expose them.
The infrastructure is not the asset
Tokenization is a settlement and distribution layer, governing how an asset moves, gets recorded and changes hands. It says nothing about whether the underlying asset is real.
The issue at Verra was not that credits were issued on the wrong registry, or that the settlement infrastructure was inefficient. The problem was that the measurement of the underlying ecological reality was wrong: baselines were inflated, leakage was undercounted. Permanence was assumed rather than demonstrated. None of these failures had anything to do with registry infrastructure. Putting those credits on a blockchain would not have changed the outcome. In fact, it would have made them more liquid — a different thing entirely, and in this case potentially a more dangerous one.
The EU ETS is a useful counterpoint. The system works, even if imperfectly, not because of its technical infrastructure but because it rests on regulatory obligation and a measurement framework backed by law. Cap-and-trade as a policy instrument was first proven at scale in the United States under the Clean Air Act amendments of 1990, where it successfully reduced the sulfur dioxide emissions responsible for acid rain. The economist who pioneered the integration of carbon pricing into economics, William Nordhaus, received the Nobel Prize in Economics in 2018. The EU took that foundation, embedded it in binding regulation and built the plumbing on top. That sequence — laying the foundation of the market first, then building the market infrastructure second — is the crucial lesson voluntary markets have yet to fully absorb.
The oracle problem
Tokenization keeps hitting its limit on a structural problem that sits at the heart of any attempt to represent real-world environmental assets on a blockchain. This is a version of what is commonly called the oracle problem.
The core of the issue is this: Blockchain protocols are exceptional at enforcing rules within their own closed system. A smart contract can guarantee that a token is not double-spent, that a transaction is recorded immutably, and that ownership transfers are executed exactly as specified. What no blockchain can do on its own, however, is verify that the real-world event the token claims to represent has actually occurred.
For carbon credits, this matters enormously — and poses a problem that the carbon credit industry has been slow to confront directly. A token can represent, for example, one ton of CO₂ sequestered in a standing forest, and handle any transactions involving that ton with perfect on-chain integrity. But whether that sequestration is actually happening in a real forest, whether the trees have really been left standing, or whether the baseline was set honestly, are matters that do not live on the blockchain and that cannot be verified through tokenization or on a ledger. The verified information has to come from somewhere else. That “somewhere else” — the bridge between physical reality and the digital record — is what engineers call an oracle, and it is precisely where the Verra scandal unfolded.
‘A more efficient market in phantom credits can be worse than an inefficient one.’
This is not a technical problem that better blockchain design can solve; it is a governance and measurement problem. Failing to resolve the oracle problem before building out the tokenized market infrastructure can have troubling implications, as increased liquidity does not make the market better. In fact, it can make bad credits faster to trade. A more efficient market in phantom credits can be worse than an inefficient one, by allowing more capital to be misallocated before the fraud becomes visible, and making the eventual reckoning more damaging.
The most promising approaches to solving the oracle problem do not come from within blockchain technology itself; they come from combining on-chain registries with continuous high-resolution monitoring of the physical assets that tokens represent — satellite-based forest monitoring, remote sensing and automated anomaly detection. Some projects are beginning to build exactly this kind of integrated infrastructure, where the digital token and the physical reality are kept in permanent, verifiable correspondence. That architecture of real-world verification tools is what could eventually justify the liquidity and scale that blockchain proponents promise.
Confronting three structural tensions
What tokenization usefully does is make visible three structural tensions that environmental markets have not resolved, and that no amount of financial engineering — on the blockchain or elsewhere — can resolve on its own. Seeing these challenges clearly is the first step to building a more robust, trustworthy and impactful foundation for environmental markets.
Standardization versus ecological complexity: Financial markets require fungible assets. Any particular carbon credit must be comparable to any other for a market to function. But ecosystem services are inherently local, context-dependent and ecologically complex. A ton of CO₂ sequestered in a Scottish peatland is not equivalent — ecologically, in terms of co-benefits or permanence risk — to a ton avoided through cookstove distribution in Uganda. Tokenization accelerates the pressure to standardize because interoperability across platforms demands common units. But the danger is that standardization applied too bluntly to complex ecological processes produces credits that are easy to trade but hard to trust. The EU ETS navigated this tension by anchoring standardization in regulatory mandates. Voluntary markets have not found an equivalent anchor — and tokenization, without one, simply makes the problem faster and more liquid.
Financialization versus environmental integrity: As environmental assets become more tradable, they attract more types of capital — including capital with no particular interest in the environmental outcome. This is not inherently a bad thing. Price discovery and liquidity are genuine goods; carbon markets exist precisely to harness capital that would not otherwise flow to environmental outcomes. But financialization also introduces dynamics that can actively work against the environmental purpose of these markets. The danger is not that prices fluctuate (that is normal market behavior), but that in a poorly verified market, price conveys little information about whether the underlying credit is real. In a fully tokenized market with derivatives and structured products layered on top, the distance between the financial instrument and the ecological reality it represents could grow very large, very quickly. Integrity mechanisms need to be built into the market’s architecture from the beginning, not retrofitted after a scandal arrives.
Global scalability versus local verification: One of tokenization’s most compelling promises is geographic reach. A smallholder farmer managing forest in the Congo Basin could, in principle, access global carbon finance without intermediaries capturing most of the value. That matters both for climate outcomes and for equity. But this vision depends on local verification capacity that does not yet exist at scale. Who measures the sequestration rigorously? Who monitors permanence over decades? Who governs methodology disputes? These functions require local expertise, institutional capacity and regulatory legitimacy. Blockchain protocols can’t directly provide any of those. But because well-functioning environmental markets will depend so heavily on being able to actually certify the impacts, there is a risk that uneven verification capacity could skew where in the world credits are funded, undermining some of the benefits. Without thoughtful planning, scalable token infrastructure could end up concentrating activity where verification is easiest, not where ecosystem services are most needed.
Where digital infrastructure genuinely helps
Tokenization can still make a meaningful contribution to environmental markets, but only if we are clear about what the technology can and cannot do.
On-chain records of credit issuance, transfer and retirement can meaningfully reduce double-counting, one of the most persistent failures of voluntary registry infrastructure. Every token has a traceable history, and retirement is final and publicly verifiable. These are real contributions. But they are contributions to market plumbing, and they are insufficient to address the market integrity issues that continue to bedevil carbon markets. The distinction matters more than the industry has so far been willing to admit.
The key is thinking about how to combine blockchain technology with real-world verification methods to make sure that the credits being offered on the market are sound before building out the financial infrastructure. When tokenized credits are combined with continuous satellite monitoring and remote sensing, digital infrastructure can support more dynamic and granular measurements than periodic third-party audits allow. And using a common technical layer could reduce the fragmentation across competing registries — Verra, Gold Standard, American Carbon Registry — even without requiring full methodological standardization.
The right sequence
Sequencing is the essential factor for market participants and policymakers. The temptation so far has been to build the financial layer first and worry about the foundation later. That’s understandable, given how much capital is searching for somewhere to go. But putting financialization first has already produced a credibility crisis in voluntary carbon markets. Simply repeating it with better trading technology would be at best a waste, and at worst would risk destroying the credibility of the industry.
The better alternative is to get the measurement infrastructure right first: satellite monitoring, rigorous and peer-reviewed methodologies, transparency about uncertainty and — critically — solving the oracle problem so that what lives on-chain actually corresponds to what is happening in the physical world.
Governance comes second. Standards with genuine authority, regulatory frameworks that give credits legal meaning, and enforcement that creates real consequences for fraud could all contribute to making markets more robust and reliable.
Digital infrastructure comes third, built on top of those foundations to enhance traceability, access and efficiency.
Environmental markets have a real role to play in mobilizing capital toward ecosystem protection at the scale the problem requires. Tokenization could be part of how that happens. The Verra scandal was not caused by insufficient technology; it was caused by insufficient honesty about what the technology of the time could and could not verify. That lesson applies, with equal force, to the tokenization wave now underway.
