In January 2023, a Guardian investigation found that more than 90% of Verra's rainforest carbon credits, the most widely traded offset type in the world, showed no evidence of preventing actual deforestation. Companies had purchased these credits, declared themselves carbon neutral and continued emitting without consequence. This was not a scandal caused by fraud or incompetence, but the carbon offset market doing exactly what its structure incentivises. Understanding why requires looking at carbon offset markets through the lenses of three market failure that existed from the beginning. The TheoryThe logic behind carbon offsets is theoretically compelling. If a company in Singapore cannot cost effectively reduce its own emissions, the offset market allows these companies to pay for reductions elsewhere, through protecting a forest in Indonesia, funding solar panels in rural India, or capturing methane from a landfill in Brazil. The price mechanism does what it does best: allocating resources to where they create the most value. This can be analyzed through the economic theory of Coasian bargaining, applied to climate change. Assign property rights to Carbon and lower transaction costs, then private actors will negotiate towards the most efficient outcome. Market Failure One: The Information asymmetryOnly the project developer knows whether their activity is truly additional to the environment or not, whereas the buyer of the offset does not. In George Akerlof's used car market, bad cars drive out good ones because buyers cannot distinguish quality. In carbon markets, non-additional offsets(offsets that creates no values) drive out genuine ones for exactly the same reason: both trade at similar prices, but only one costs real money to produce. The result of this is adverse selection, where the market fills with low-quality credits because they are paid the same price with genuine reduction projects but costs nothing. This economic theory is also backed by statistics. The West et al. study published in PNAS in 2023 found that REDD+ projects in the Brazilian Amazon reduced deforestation by only a fraction of their claimed reductions. Market Failure Two: Permanence and the Carbon CalendarThe science shows that carbon dioxide persists in the atmosphere for centuries, while trees do not. This mismatch causes the structural problem that offset markets have never solved.When a company purchases a forestry offset, it receives an immediate credit for carbon stored over decades. If that forest gets burned, for example, through wildfire, drought or land clearance, the stored carbon returns to the atmosphere. The offset, however, has already been retired. The company has already flown the flight, shipped the cargo, powered the factory and emitting pollution. The 2023 Canadian wildfire season released approximately 480 million tonnes of carbon dioxide, exceeding Canada's total annual emissions. An unknown portion of that represented previously credited forest carbon. Market Failure Three: Who Audits the AuditorsOffset quality depends on verification, while verification depends on certifiers and certifiers are paid by the projects they certify. This is the fundamental problem with quite predictable consequences. Verification firms face incentives to approve projects, because stricter standards reduce the volume of certifiable projects which directly reduce revenue. The result is not necessarily a fraud, but a push towards leniency that serves every party in the transaction except the atmosphere. Three Questions Worth AskingFor sustainability professionals and executives evaluating carbon neutrality claims, whether from suppliers, investees or their own organisations, they must ask themselves three questions that cut through the marketing of sustainability. 1. What percentage of the claimed reductions come from direct operational changes versus offset purchases? A credible transition strategy should show improving ratios over time, with offsets declining as a share of the total.2. Who verified the offsets, and who paid for the verification? Credits verified by independent third parties with no relationship to the project developer carry more weight.3. What is the permanence mechanism? Forestry offsets without monitoring commitments doest represent permanent reduction. Carbon markets are not inherently broken, but are just operating as their incentive structures provide. Fixing them requires multifaceted regulatory approaches to refine them. Until then, the fastest way to assess a carbon neutral claim is to ask what happened to the outcomes.