Why Companies Prefer Local Carbon Offsets Even When Better Climate Projects Exist

A new study by researchers from the World Bank Development Research Group, George Washington University, and the Swiss Finance Institute at École Polytechnique Fédérale de Lausanne suggests that multinational companies may not always choose carbon offset projects based purely on environmental impact. Instead, firms often favor projects located in countries where they already operate. This finding raises important questions about how voluntary carbon markets work and whether they are directing climate finance to projects that deliver the greatest climate benefits.

Carbon offsets have become a popular tool for companies trying to reduce their climate footprint. Businesses buy carbon credits from projects that reduce or remove greenhouse gas emissions and retire those credits to balance out their own emissions. Because carbon dioxide spreads globally in the atmosphere, reducing a ton of emissions anywhere should have the same climate effect. In theory, this means companies should support projects wherever they can achieve the most reliable and cost-effective emissions reductions.

The Hidden Geography of Carbon Markets

The new research shows that the reality is more complex. Using data covering carbon offset retirements between 2009 and 2024, the researchers analyzed hundreds of thousands of transactions involving publicly listed firms. They combined records from major carbon credit registries with detailed information about companies' global operations.

The results reveal a strong geographic pattern. Companies retire a large share of their carbon credits in countries where they already have business operations. Even though voluntary carbon markets do not require companies to buy offsets locally, firms frequently support projects located in regions where they generate revenue or run facilities.

This pattern becomes even stronger when a company has a larger economic presence in a country. Firms that earn more revenue from a specific country are more likely to receive offsets there. In other words, corporate carbon offsetting often follows the same map as corporate business activity.

Reputation May Matter More Than Impact

Why would companies favor local projects when climate benefits are the same everywhere? The study explores two possible explanations. One idea is that firms simply know more about projects in places where they operate. Local knowledge might help companies evaluate project developers, monitor progress, and assess environmental quality.

However, the evidence suggests a different explanation. The researchers find that projects supported by firms in their operational countries are often rated lower in environmental quality than projects supported elsewhere. Independent rating agencies measure offset quality by assessing whether emissions reductions are real, additional, permanent, and properly monitored.

Companies without operations in a country are more likely to support higher-rated projects. Firms operating locally, on the other hand, tend to buy more credits from lower-rated projects. This suggests that environmental quality is not always the main factor driving corporate choices.

The study argues that reputation and visibility play a key role. Supporting a climate project near a company's operations can help strengthen relationships with local communities, governments, and regulators. Such projects may provide reputational benefits and help companies secure what is sometimes called a "social license to operate."

When Prices Stop Reflecting Quality

These strategic incentives also affect how voluntary carbon markets function. Normally, higher-quality carbon credits should command higher prices because they represent more reliable emissions reductions. The research confirms that better-rated projects generally sell for higher prices.

But the relationship between price and quality weakens when buyers have strong local ties. In markets where many buyers operate in the same country as the project, prices become less sensitive to project quality. When companies value local visibility, they may be willing to pay for credits even if the environmental benefits are weaker.

This weakens one of the key mechanisms that markets rely on to encourage better performance. If prices do not clearly reward higher-quality projects, developers may have fewer incentives to invest in projects with stronger environmental integrity.

What It Means for Global Climate Finance

The findings highlight an important challenge for voluntary carbon markets. These markets are often seen as a way to move private climate finance from wealthy countries to projects in developing regions where emissions reductions may be cheaper. But if companies mainly support projects in places where they already operate, the flow of investment may follow corporate footprints rather than global climate priorities.

The study also finds that companies with more experience in carbon markets tend to make somewhat better choices over time, suggesting that learning improves decision-making. Still, the local bias remains strong, especially in countries with weaker governance, where visible environmental projects may carry greater reputational value.

Overall, the research suggests that voluntary carbon markets are shaped not only by environmental goals but also by corporate strategy. Strengthening transparency, independent project ratings, and quality standards could help ensure that these markets deliver real climate benefits. As more companies rely on carbon offsets to meet climate commitments, improving how the market rewards high-quality projects will be critical for ensuring that carbon finance supports the most effective climate solutions.