Research Finds Carbon Pricing Reduces Carbonwashing, While Carbon Offsets May Increase the Risk

On 29 May 2026, IAEI UK hosted an online research webinar featuring Dr Abdullah Iqbal, Senior Lecturer in Accounting and Finance at Kent Business School, University of Kent. The session focused on his collaborative study, “Climate Shield or Illusion? The Impact of Carbon Pricing and Offsets on Carbon Misrepresentation”, which examines whether widely used corporate climate mechanisms genuinely improve environmental accountability or instead create further risks of carbon misrepresentation. The webinar was moderated by Dr Wahyu Jatmiko, Advisor to IAEI UK and Lecturer at the University of Southampton, who guided an engaging discussion throughout the session.

The study addresses the issue of carbonwashing, referring to situations in which companies present their climate performance in a misleading way. As firms face increasing pressure to demonstrate progress on decarbonisation, mechanisms such as internal carbon pricing, emissions trading, and carbon offsets have become increasingly important. However, the research shows that these instruments do not necessarily have the same effect on the credibility of corporate climate claims.

Using an international sample of 13,486 firms across 12 countries over the period from 2010 to 2023, the researchers examine the relationship between these three climate mechanisms and carbonwashing. The findings show that internal carbon pricing and emissions trading are associated with lower levels of carbon misrepresentation. This suggests that both mechanisms can contribute to more credible corporate decarbonisation efforts and reduce the likelihood that firms overstate their environmental achievements.

The results for carbon offsets, however, are notably different. The study finds that offsets may increase carbonwashing rather than reduce it. This finding raises an important concern, as carbon offsets are widely used by firms as part of their climate strategies. The research indicates that, without appropriate safeguards, the use of offsets may weaken rather than strengthen the credibility of corporate environmental commitments.

At the same time, the study identifies three mechanisms that can moderate this negative relationship. Emission management training, ESG-linked executive compensation, and ESG audits can help transform carbon offsets into a more credible tool for mitigating carbonwashing. In other words, the effectiveness of offsets appears to depend not only on their use, but also on the strength of the governance arrangements surrounding them.

These findings place particular emphasis on the role of internal capability, managerial incentives, and independent oversight. When firms provide relevant training, connect executive rewards to ESG performance, and subject their sustainability practices to ESG audits, carbon offsets are more likely to support credible climate action. The study therefore underlines that carbon instruments cannot be assessed separately from the broader governance systems in which they operate.

The researchers also tested whether the results remained consistent across different institutional and industrial settings. The findings hold in countries with both high and low social sensitivity to climate mitigation, under mandatory and voluntary ESG disclosure regimes, in America and other parts of the world, and across industries with both high and low emissions intensity.

The results were also found to be robust across alternative fixed-effects and clustering specifications, different measures of carbonwashing, and a range of control variables. In addition, the study used several methods to address potential endogeneity, including difference-in-differences analysis, Heckman selection models, propensity score matching, and lagged independent variables.

Overall, the study highlights the importance of stronger climate governance in ensuring the credibility of corporate decarbonisation efforts. Its central message is that climate mechanisms should not be judged only by whether firms adopt them, but also by whether appropriate systems are in place to support accountability and reduce misrepresentation.

The webinar reflected IAEI UK’s continuing commitment to promoting discussion on contemporary issues in sustainability, ESG, and responsible finance. By presenting research with direct relevance to firms, investors, and regulators, the session contributed to a broader understanding of how climate action can be made more credible and effective.

Contributor: Muhamad Rizky Rizaldy