The Carbon Offset Dilemma

Last year’s UN Climate Conference (COP28), was described as an “open-air bazaar” of companies and countries hawking their fashionable wares — carbon offsets. Even cultural icon Taylor Swift regularly utilizes carbon offsets. Yet the effectiveness of many kinds of carbon offsets is highly questionable.

A great deal of ambiguity and conflict exists when it comes to what counts as a carbon offset and who gets to sell it. These issues cannot be easily ironed out. Instead, they reveal deep problems inherent within the carbon offset project.

Consider the “simple” carbon abatement project of maintaining one square mile of rainforest. In a simple world, a German or French power company committed to net zero might build a new gas-powered refinery instead of a wind farm because it is cheaper and more reliable. Yet modern gas-powered plants, though having low emissions by historical standards, will still emit a significant amount of CO2. 

Enter a forest carbon offset. 

Perhaps one square mile of forest would pull the equivalent amount of CO2 out of the atmosphere as the power plant puts into it. If the power company planted one square mile of forest, or paid someone else to do so, they could theoretically build that new power plant without contributing net CO2 emissions.

But what if the forest already exists and the power company is paying simply to preserve it? If we knew for sure that the square mile of forest was going to be cut down, and the payment by the power company would prevent it from being cut down, then we could reasonably say that the power company “offsets” its new carbon emissions by maintaining the equivalent amount of carbon capture that would otherwise not exist.

Now for the problems.

What if the forest was never likely to be cut down in the first place? In that case, the “carbon offset” does not meaningfully offset additional carbon dioxide emissions. Many people are concerned about just this kind of fraud, primarily that it does nothing to help the environment. In fact, it harms the environment because companies can justify producing more CO2 emissions while claiming to have no net impact.

But consider the incentives and disincentives policing such an approach creates. Countries might intentionally “endanger” their forests so that they can credibly argue that their carbon offset really makes a difference in preventing deforestation. Similarly, not allowing countries or companies to sell credits for existing forests penalizes them for not allowing deforestation in the past. If country A allowed mass deforestation while country B didn’t, country A may now be in a superior position to offer meaningful forest carbon offsets because they can plant so many more trees.

It doesn’t take a rocket scientist, or an economist, to see that country B might want to reduce the size of its forests so that it can enter the carbon offset game – especially as increasing sums of money are being thrown into that market.

Encouraging countries to cut down their forests to access billions of dollars of climate mitigation money seems counterproductive. So does allowing companies to increase their emissions while pretending that they are not. Virtue-signaling executives, like those at Hess, create a serious dilemma when they spend hundreds of millions of shareholder dollars to “prevent” forest land from being cut down.

Such a dilemma suggests we should look for a different approach entirely. 

CO2 Emissions in the United States have been declining for over a decade, no thanks to carbon offsets. While one might be tempted to attribute that decline to more solar and wind energy production, the real story is that we have shifted to using more natural gas to generate energy, which produces less emissions. 

We should cheer for greater adoption of natural gas, not kill it. Similarly, we should encourage the development of another major energy source, nuclear power, to reduce emissions. This does not require billions of dollars of taxpayer subsidies. It requires rolling back a labyrinth of unnecessary regulatory red tape.

Both of these approaches will be better for the environment without creating perverse incentives and wasting resources on carbon offsets. We also get the benefit of abundant cheap energy thrown in. What’s not to like? 

One really has to question the motives of climate activists who oppose the expansion of natural gas and nuclear power. Do they want to see realistic and sustainable environmental improvement or are they after some other kind of payout? 

If we want to support poorer countries’ economic development, reducing our trade barriers and tariffs would be a better approach. Encouraging institutional reform leading to clearer property rights, rule of law, and limited government is the surest way to improve the lives of people in developing countries in the long-run. 

And for those who want developing countries to preserve and improve their local ecosystems today, contributing their own time and financial resources is a much better approach than fleecing investors to dubious effect. But in the long run, wealth creation, property rights, and the rule of law have the best track record for improving the environment.