Are carbon offsets useful?
Intro #
This is an excerpt from a tiny newsletter that I used to send to friends when I was intensely learning about climate change. In this issue, I looked at climate policy, and on carbon markets. I summarise Making climate policy work by Danny Cullenward. Cullenward contrasts two views on regulation. One is clever industrial policy - telling companies exactly what they have to do when, banning certain kinds of technologies etc. The other is market capitalism - putting a price on the thing we want to have less of (e.g. carbon dioxide emissions), and hoping that this will cause people to do it less. In his opinion, the second approach will never work, because it creates strong incentives to game and dilute programs to the point where they don't mean anything.
I'm not an expert on this, but I have since presented the book, and arguments that are contained in it, to many people working on carbon offsets. So far, none have managed to convince me that Cullenward was wrong.
Reference #
"Making climate policy work" by Cullenward & Victor - the title is misleading. This book is mostly an explanation of why carbon markets don't and won't ever work.
The general idea of a carbon market is quite compelling. Cap the emissions at a certain level, sell tradeable credits for those emissions, and allow people to figure out the most cost-effective way to stay under the threshold. However, carbon markets have been around for decades, without much success. The authors' thesis is that politics is to blame. Well-organised, powerful industry interests lobby for exemptions and weakening of regulation; they need them to stay competitive with countries without carbon credits. Because the classical model argues for one common market, we end up with markets governed by the least ambitious, lowest common denominator policy.
Governments and citizens want more than this, so they enact additional regulation (e.g. phasing out EVs by a certain year). This forces companies to reduce emissions, which depresses market prices. The authors call this Potemkin markets - they're a facade that merely captures residual emissions that policy doesn't reduce. Low carbon prices signal a lack of importance, not efficiency.
The book is full of thought experiments that describe fundamental issues with different parts of carbon markets. My favourite is their argument against carbon offsets. Again, in theory, offsets allow emitters to purchase emission reduction credits outside of their home market, which should extend the reach of climate policy, provide income to people in poorer countries, decrease the overall cost of climate action etc. The idea of offsets is based on additionality - the concept of 'If you don't give me X amount of money, we'll need to emit Y amount of carbon'. The problem lies in market logic - companies are looking to get the cheapest offsets possible, ones where X is lowest and Y is highest. This favours knife-edge projects which would have been just barely plausible without the additional offset money, and disadvantages difficult ventures that would deliver more obvious benefits. Knife-edge projects are hard to regulate, as there are no hard rules that determine at what price level a particular business is economically sustainable. If it only needs a little bit of extra money, it's likely that it would have been done anyway, without the offsets. Due to the complexities of figuring out which offsets make sense, we hardly regulate them at all. California's $1billion offset program is managed by seven civil servants...
Definitely worth a read if you still believe that markets are a good way to decarbonise.