Carbon credits—not a technical term but one broadly used—are popular among companies as a way of showing action on the environment part of ESG. They're supposed to be a bridge while a business finds ways to fundamentally reduce its carbon footprint.

But some recent stories show why the carbon offset approach can be a shell game for corporations, claiming to show benefits while actually doing nothing clearly demonstrable other than taking fees for nebulous actions. Even when the names in question are large.

There are several requirements for a coherent and effective carbon offset program:

1. Additionality—carbon reduction would have to be something that wouldn't have happened in any case, for example, electric vehicles that wouldn't have had carbon emissions selling credits to another company because there isn't an actual net reduction of emissions.
2. Leakage—offsets in one location cannot be reversed in another, like converting one field to forest but then cutting down another to plant instead, because again there is no net reduction.
3. Permanence—understanding how long a taken action will last. Will that new forest be cut in 10 years or 25 or never? What is reasonable?

Carbon cap and trade systems, a more developed and defined form of carbon credits, typically are imposed in a geographic area. Carbon credits can be traded, but the total amount of carbon has to shrink every year, making credits harder to get and more expensive, thus creating incentives for companies to improve their footprint in organic ways.