Carbon Offsets: Scam, Not Salvation

Commentary by H. Sterling Burnett

Source: Power Magazine

In the battle against climate change, most media attention has been paid to "cap-and-trade" schemes, under which countries set upper limits ("caps") on greenhouse gas (GHG) emissions and allow companies to sell ("trade") unused emissions rights to other firms. However, there is a second path to global warming salvation: Carbon offsets.

Carbon Reduction Goals

Under the carbon offset scheme, a country (or company) can meet its emissions targets by paying others to reduce their emissions. To facilitate this process, the United Nations created the Clean Development Mechanism (CDM), an international market where buyers who need to offset their emissions can purchase carbon credits from developing countries - effectively paying for emissions reductions by others.

Typical emissions reductions include replacing old plant and equipment, adopting new agricultural practices, or sequestering carbon dioxide (CO 2) underground or in trees. The CDM converts proposed emissions reductions into tradable certified emission reductions credits. The main criterion the CDM uses to confirm emissions cuts is additionality. A project is additional when it makes emissions reductions that would not have happened without extra financing from carbon credits. In other words, credits are issued only for emissions reductions that would not have occurred otherwise.

Domestically, the U.S. has considered its own carbon reduction plans that included a proposed offset program. For instance, 2008's cap-and-trade bill sponsored by Senators Joseph Lieberman (I-Conn.) and John Warner (R-Va.) would have allowed 85% of emissions reductions to be met through domestic carbon allowances and 15% through domestic carbon offsets.

CDM and Offset Programs' Shortcomings

Unfortunately, both internationally and in the U.S., proving that emissions cuts are reductions that would not have occurred without the offset payments is proving difficult. Indeed, recent evidence reveals that offsets are vulnerable to fraud and actually increase costs. For example, India's largest exporter of basmati rice, KRBL, was set to receive several hundred thousand dollars' worth of CDM credits a year for installing a $5 million generator to produce electricity from rice husks, a renewable energy source. Although the company claimed the biomass generator would not have been installed without funding from the credits, the senior manager at the plant admitted to the British Broadcasting Corp. that KRBL "would have done the project anyway."

In addition, research by the nongovernmental advocacy group International Rivers has found that almost three-quarters of CDM-registered projects were already complete at the time of approval and thus did not need carbon credits to be built. And a report by Lambert Schneider of Germany's Institute for Applied Ecology found that 40% of CDM projects represented "unlikely or at least questionable" emissions cuts. David Victor, the head of Stanford University's Energy and Sustainable Development Program, found that "between a third and two-thirds" of CDM offsets do not represent actual emissions cuts.

The voluntary offset market in the U.S. faces the same problem as CDM projects. For example, to offset all the emissions from the 2007 Academy Awards, the company TerraPass bought offsets from a landfill project in Arkansas. BusinessWeek investigators later found that the project would have been undertaken even without offset funding.

It is inherently difficult to measure emission reductions under a carbon offset project. Take carbon offsets for the absorption of GHGs by planting new trees. Estimating greenhouse gas uptake depends on the age of the trees, their growth rate, and climate and soil conditions. Even after all these factors are considered, if the trees do not live as long as 100 years, they will not become net carbon absorbers.

Even when CDM projects reduce GHG emissions, the CDM system is an inefficient way to cut GHGs.

One example of the problems with this type of approach is shown in the recent regulatory treatment of another contaminant. Currently, 30% of carbon offset credits pay for the capture and destruction of trifluoromethane (HFC-23), a GHG created as a by-product of manufacturing refrigerant gases. HFC-23 has 11,700 times more heat-trapping potential per unit than CO2. The carbon offset credits that were sold to reduce HFC-23 are twice as valuable as the refrigerant itself. Indeed, researchers estimate that HFC-23 emitters could receive as much as $7.15 billion from the sale of carbon offsets through the CDM. By contrast, if companies paid plants directly to capture and destroy the emissions, the cost would be less than $155.4 million. However, doing so would be outside of the CDM system, which requires the companies to buy certified offsets. Thus, the reductions would not count against the company's carbon reduction requirements.

Such perverse incentives have led some analysts to fear that refrigerant producers are increasing their output solely so they can sell more carbon offsets to reduce the additional waste gas.

The Need for Healthy Skepticism

It is debatable whether Congress should even take up climate legislation as evidence continues to mount that the climate disaster tales told by the likes of Al Gore and James Hansen are more imaginary (based on models) than real. However, if Congress does act, it should be skeptical of the merits of carbon offset schemes. Thus far, they have proven expensive and open to fraud and abuse.

-Dr. H. Sterling Burnett (sterling.burnett@ncpa.org) is a senior fellow with the National Center for Policy Analysis.