The Challenge of Offsets

When carbon offsets got off the ground in 1988, long before serious climate change policies and measures were being considered, they had a lot going for them:

• Few greenhouse gas (GHG) emissions were under any kind of a cap, making emissions reductions and carbon removals almost anywhere in the world fair game. And the behavior of GHGs make them ideal for trading anywhere in the world, given how they mix in the atmosphere and do not create “hot spots” as do typical criteria air pollutants.

• Most stakeholders loved the idea of offsets. For environmentalists offsets were a way to get companies onto the “slippery slope” of recognizing and responding to climate change. For companies offsets were a way to mitigate climate change without directly impacting their business model. For policy-makers, offsets were a way to promise that climate policies would be far less disruptive and costly than if based on command-and-control regulations.

But there is no such thing as a free lunch when it comes to mitigating climate change. It has turned out that implementing carbon offsets has involved balancing a whole series of variables.

Cost vs. Integrity

The first is cost containment vs. climate benefit. These are key objectives for different offset audiences, but they cannot be simultaneously maximixed. They have to be balanced.

We’ve learned that when designing the market rules for an environmental commodity like carbon offsets, which can’t be seen or weighed or empirically observed in any way, it is critical to ensure that climate change mitigation interests have a dominant seat at the table. That has rarely been the case.

The Expertise Bias

A related variable is who brings the expertise to the table when offset rules are being developed. Many of the rule-makings relevant to carbon offsets have ended up being driven by, or at least heavily influenced by, organizations and individuals with major financial interests in the outcome. This raises serious questions with respect to the possible capture of the process.

The problem is aggravated by just how easy it easy for those working in the field of carbon offsets to convince themselves that what they are doing is good for climate change. Willful blindness is certainly not unique to carbon offsets, but offsets have proven to be particularly susceptible.

The Achilles Heel of Offsets - Additionality

The biggest challenge that has faced carbon offsets is “additionality.” To be a legitimate carbon offset, the emissions reduction or carbon removal must be attributable to the workings of the carbon market. Because there is no way to empirically test for additionality, it ends up facing the problem that all hypothesis testing does, the need to balance false positives and false negatives. The fact that you rarely hear this topic even brought up in context of carbon offset design illustrates the magnitude of the challenge. The magnitude of this particular challenge is illustrated in the slide below.

Who Decides?

Policy makers often turn carbon offset decision-making over to technocrats or stakeholder groups with direction to: “design a high quality carbon offset process,” assuming that the challenges introduced above are technical issues. But most of the key decisions that need to be made to create a robust carbon offset market are policy decisions, not technical decisions. To make some light of the issue, a question like “how additional is additional enough?” is not fundamentally different from the question of “how many cats is too many?” There is no “right answer,” but in the case of additionality someboday has to decide.