NCPA - National Center for Policy Analysis


February 24, 2009

The 1997 Kyoto Protocol requires developed countries to reduce greenhouse gas emissions to below 1990 levels.  In 2005, the European Union implemented a "cap-and-trade" scheme based on an arguably successful U.S. program to lower sulfur dioxide emissions.  Participating countries have set upper limits ("caps") on greenhouse gas emissions and allow companies to sell ("trade") unused emissions rights to other firms.  The caps are supposed to be gradually reduced to reach Kyoto's emissions reduction targets.

A second way a country (or company) can meet its emission targets is to pay 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 emission reductions by others.

These programs have not lowered overall emissions in developed countries, says H. Sterling Burnett, a senior fellow with the National Center for Policy Analysis:

  • In the European Union (EU), emissions of carbon dioxide (CO2) have gone up, not down.
  • By contrast, CO2 emissions in the United States, which did not ratify the Kyoto treaty, have grown much more slowly than in the EU.
  • U.S. emissions even declined in 2006.

One problem of this approach is verifying the emissions cuts, says Burnett.  Typical emissions reductions include replacing old plant and equipment, adopting new agricultural practices, or sequestering CO2 underground or in trees.  The CDM converts proposed emissions reductions into tradable Certified Emission Reductions (CER) credits.  The credits are issued only for emissions reductions that would not have occurred otherwise.

How do we know the emissions cuts are reductions that would not have occurred anyway -- without any offset payments?  This is difficult to determine, says Burnett.  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 a reporter for the British Broadcasting Corporation that KRBL "would have done the project anyway."

Source: H. Sterling Burnett, "Carbon Offsets: No Sure Bet to Prevent Climate Change," National Center for Policy Analysis, Brief Analysis No. 646, February 23, 2009.

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