What’s the Deal with Carbon Offsets?

Carbon offsets are payments made to companies that can more easily reduce their greenhouse gas emissions, thus allowing the buyer to continue producing the amount of emissions that are “offset.” Sometimes, this is more cost-effective than the buyer reducing their emissions. Say, for example, one company would have to spend $1,000 to change some process to reduce emissions by X number of units, but another company can do the same thing for $500 because whatever process they are going to change just costs less to implement. The key is that the seller of the carbon offsets must be doing something other than business as usual to achieve the reductions. Well, it turns out there are issues that have to be carefully considered if and when we put this option on the table.

There has been a lot of hub-bub in the news about carbon trading these days. For advocates of carbon trading as part of the solution to global warming, it was a major disappointment when the Senate republicans used procedural rules to effectively kill the Lieberman-Warner Climate Security Act. However, there is apparently some controversy over this approach. I had read an recent article in Mother Jones called “Turning Carbon Into Gold.” MJ is a highly regarded progressive magazine known for its investigative journalism. As such, they are not cheerleaders for the left and have been known to write many articles over the years that really annoyed the progressive crowd. As such, they are considered a pretty reputable source of information. According to the article:

[P]rominent environmental groups such as the Sierra Club and Greenpeace are resisting the inclusion of offsets in the bills. “We feel that offsets are very suspect,” says Shawnee Hoover, legislative director for Friends of the Earth. “The whole system is just rife with the potential for corruption.”

Opponents cite the perverse incentives that have been created under Kyoto’s CDM, which last year authorized hundreds of offset projects to be converted into $1.2-$1.8 billion worth of carbon credits. At the heart of their concerns is the question of whether these projects are “additional”—in other words, do they create new emissions reductions, or simply bankroll endeavors where carbon credits are incidental, yet profitable, byproducts? A 2006 United Nations investigation found that a third of CDM-approved offset projects in India would have happened even without Kyoto funding. In China, almost every new hydroelectric and natural-gas-fired power plant has applied for CDM money, casting doubt on whether they really require the offset revenue to be built. “It looks like the CDM is just turning into a production subsidy,” says Stanford University climate policy expert Michael Wara, “and that’s not a good way to spend our money.”

It seems to be a clever idea to use market incentives to reduce carbon emissions. After all, we live in a world where corporations often do as they please unless they are restrained by the government. However, corporations are pretty good at preventing government from doing things they don’t want or mitigating the true effects in some way. In this case, selling carbon offsets has created a very lucrative market. Thus, an opportunity arose for money to be made in one market while money was lost in another. However, the amount lost to the carbon buyers was not near as much as if they had been forced to clean up their acts. It was a compromise that managed to get a law passed in Europe regulating carbon trading. However, the results are questionable. Consider one out outcome of Kyoto Protocol’s Clean Development Mechanism (CDM):

In total, CDM-approved offsets have captured or destroyed the equivalent of 135 million tons of CO2 emissions worldwide, slightly more than the annual emissions of Pakistan. Yet an astounding 51 percent of those offsets have been generated by paying refrigerant manufacturers to incinerate HFC-23, an industrial byproduct and potent greenhouse gas, instead of spewing it into the atmosphere. The price of HFC-23 offsets can be worth more than twice the market price of the refrigerants themselves, which has had the unintended effect of encouraging refrigerant companies to produce (and then destroy) even more greenhouse gases in the name of eliminating them. The 43,000 tons of HFC-23 incinerated between 2003 and 2012 will generate $6 billion worth of carbon credits, but cost just $150 million to destroy, according to Wara. He describes the practice as “an excessive subsidy that represents a massive waste of resources.”

Now, just because the system has been abused does not mean it cannot be properly regulated. There are already agencies and mechanisms in place to prevent this type of thing from happening. John Bennett has an informative post on this subject on his Sustainable Savannah blog. This part seems to be the key:

If you are interested in purchasing carbon offsets to mitigate airline travel, car travel, all those burgers you’ve been eating, etc. make sure that the company you are purchasing them from VERIFIES and VALIDATES their greenhouse gas reduction projects using an independent standard (TerraPass uses the Voluntary Carbon Standard). Verification and Validation ensure that offsets are producing authentic benefits that are “additional” to business-as-usual activities, measurable, permanent and unique.

My sense is that this is potentially a viable approach, but the current system used in Europe has already been corrupted. That is probably the reason that while the EU claims to be on target for their emissions reductions goals, the details of their own report suggest it has little or nothing to do with carbon trading. As reported on the Breakthrough Blog (a site run by two progressive environmentalists):

When you take out the UK and Germany, whose emissions decreased due to factors exogenous to Kyoto or EU climate and energy policies (UK emissions declined precipitously after Margaret Thatcher broke the coal miners union in the 1980′s and the UK switched over to North Sea natural gas. German emissions declined by similarly after reunification, when East German heavy industry collapsed), the remaining advanced developed economies in the EU (call them the EU 13) saw their emissions increase by almost 12 percent between 1990 and 2005. With full implementation of existing policies, projections for 2010 are in fact marginally worse among these nations, exceeding 1990 emissions by over 12 percent.

Even under the best case scenario in the report for EU 15 emissions, which projects an 11 percent reduction in GHG from 1990 levels, over 70 percent of that reduction can be accounted for solely by the reduction in actual emissions in the UK and Germany between 1990 and 2005 (put another way, the 8 percent reduction required by Kyoto can be almost entirely accounted for by the reduction in emissions in the UK and Germany since 1990).

The guys who run this site are not a couple of hacks or trolls. They have written a best-selling book on the subject, which got rave reviews from major liberal and mainstream publications. Since the CDM does not seem to have accomplished much in its present form, it might be a mixed blessing that Lieberman-Warner failed. So, what’s to be done? Well, we are going to have to wait until the next administration, that’s for sure. Luckily, for the greens among us, both of the presidential candidates have green leanings. If I recall correctly, both of them also supported this bill.