The Ins and Outs of Carbon Offsets

What if you could offset your sexual infidelity by paying a relatively small sum of money to foster someone else’s monogamous relationship? That’s the premise behind the Cheatneutral Web site, which is designed to spoof and critique carbon offsetting. Yet millions of individual and corporate consumers have embraced offsets, and finance companies with big names like Goldman Sachs and J.P. Morgan have gotten into the business of offering them.

Indeed, since 2005 the market for voluntary offsets has skyrocketed. In 2008, it doubled in both volume and value from the year before, reaching US $705 million, according to New Carbon Finance, a branch of the global consultancy New Energy Finance.

The physical and philosophical basis for offsets is that greenhouse gases mix rapidly throughout Earth’s atmosphere, so that if less is emitted in one place it truly makes up for greater emissions someplace else. In this sense, the carbon market is fundamentally different from Cheatneutral’s bizarre fidelity bazaar, where a Delhi woman’s faithfulness does nothing to assuage the pain felt by the London cuckold. Lower carbon emissions in India, in the long run, really do make life better in England, or at least less risky.

But that assumes that the Indian emissions are lowered in response to the offsets purchased, which is a big if . So questionable is that premise, some environmental experts believe offsets are no more effective at neutralizing the sins of consumption than medieval indulgences were at ensuring residence in heaven. Some even claim that the offset market is intrinsically harmful.

Offsets are appealing because they offer individuals an opportunity to do something about climate change without having to get involved in politics or office squabbling. If you are concerned about the carbon dioxide produced and emitted when you’re driving your car, traveling by airplane, or heating and cooling your home and running your appliances, all you have to do is pay a small sum of money to a for-profit broker, who (after taking a fee to cover costs) puts that cash into a program that supposedly prevents greenhouse gases from entering or remaining in the atmosphere from some other source. The brokers obtain carbon credits equivalent to your usage—which are retired from the market—and you rest assured that your carbon output is neutralized.

For instance, a round-trip flight from New York City to San Francisco of 8279 kilometers in a standard seat represents 676 kilograms of carbon dioxide, according to leading offset broker TerraPass. For $11.90, TerraPass says it will neutralize the carbon through its contribution to a climate-saving program.

Most participants in the offsets market, however, are not individuals merely wanting to feel better about their summer vacations. Individual eco-conscious consumers account for only about 5 percent of the voluntary market—offsets bought and sold outside the framework of government incentives and regulations—estimates Thomas Marcello, a lead analyst at New Carbon Finance. The rest, for the most part, is corporate. Some U.S. companies buy offsets to get a feel for what will be involved when they need to do so when a cap-and-trade system is inaugurated. But most do so simply to project an environment-friendly image.

Certainly, offsets are an expedient way to paint a green façade. Last August, for example, Dell Computers claimed that it had achieved 100 percent carbon neutrality, mostly by purchasing offsets. The U.S. National Football League used offsets to help neutralize the carbon generated by recent Super Bowls. In January, Motorola unveiled what it called the world’s first carbon-neutral phone. Besides making the phone of recycled plastic, the company vows to offset the carbon produced during the phone’s manufacture, distribution, and operation.

Easily the best known and most beloved carbon equalizer is the tree. Market reports generally claim that approximately one-third of voluntary carbon offsets go to forest sequestration projects, which are based on the rudimentary principle that trees consume CO₂ . But there’s a lot more ambiguity in the arbors than most of those putting offset money into tree-planting projects might imagine. Determining exactly how much CO₂ a particular tree absorbs—and over how much time—is difficult at best. Estimates made by offsetters range from one to seven tons of carbon dioxide over the lifetime of the trees in question, and the lifetime can be as little as 40 years, although some trees live longer than a century. Should the offset purchaser get credit for the entire estimated lifetime of the tree, or just for some portion of it?

There’s an even greater source of uncertainty. Stated in the most general terms, trees not only absorb carbon dioxide but also tend to soak up more sunshine than prairie land, farms, pastures, or tundra. That is because their relatively dark leaves usually absorb more solar radiation than the lighter-colored ground they cover. Thus, as the climatologist Ken Caldeira observed in a 2007 New York Times column, the warming influence of newly planted forests tends to cancel out their cooling properties. The warming influence is strongest in snowy areas and weakest in the tropics, said Caldeira, a Stanford professor and staff scientist at the Carnegie Institution, in Washington, D.C.

By Caldeira’s reasoning, anybody buying an offset based on afforestation should be attentive to where the forest project is located. Forests planted in tropical areas might reasonably be credited with twice the average monetary value of offsets, whereas forests in the United States, Canada, or Russia might deserve only half the average.

As it happens, the world’s tropical areas tend to be the habitat of debt-strapped developing countries, which have been eager to set aside great swaths of land to grow such forests and exchange their credits for cash. That introduces a third set of ambiguities—the most troubling ones, from a moral and legal point of view. In addition to drastically reducing biological diversity in some cases, afforestation projects can displace whole populations, leaving the people poorer than ever and without adequate food or water. Almost inevitably, local conflicts are ignited or exacerbated.

A 40-minute documentary released in 2007, The Carbon Connection, describes how tribal people in Brazil lost their water supplies and livelihoods to forest projects that produced credits for an oil refinery in a Scottish town. Although short on production values, the film poignantly depicts how, in order to expand the Brazilian forest plantations, water was diverted to feed the trees, leaving people who had depended on it for generations high and dry.

Situations like that can turn ugly. In the early 1990s, the Uganda Wildlife Authority (UWA) and the Face Foundation, a nonprofit corporation established by Dutch power companies, launched an initiative to plant a forest in Mount Elgon National Park, with carbon offsets in mind. According to various news reports, in order to implement the project, the Ugandan government evicted thousands of local farmers. As the farmers tried to regain their land, the UWA retaliated with beatings and shootings.

Even when all else is in order, benefits promised in exchange for cooperation in projects do not always materialize. A Face project in Ecuador offered local people incentive funds and the rights to sell timber at a later, unspecified date in exchange for their work in planting and maintaining a tree plantation. The foundation retained the rights to sell 100 percent of the project’s carbon credits. But a 2005 World Rainforest Movement report [PDF download] found that, six years into the project, incentive funds were insufficient to cover either the labor or the materials needed to establish the plantation. Adding insult to injury, the new forest overtook land traditionally used for grazing cattle, forcing local people to rent pasture elsewhere and leaving them further impoverished.

Sometimes, projects in which offset funds have been invested simply fail (and you can bet that the investors don’t often get their money back when that happens). Within two years of Face’s planting 400 hectares in Ecuador and claiming credit for the carbon the trees would inhale, fires incinerated 300 hectares. Less than a year after the band Coldplay financed 10 000 mango trees in Karnataka, India, to offset the carbon impact of a new music album, many of those saplings had died due to drought and insufficient funding for maintenance. In that case, Coldplay’s offset broker made up for the fiasco with other projects, but it is unlikely that the broker took into account the reemission of carbon by the decaying dead trees.

Zero-carbon energy sources such as wind, solar, and biomass combustion—biomass is considered carbon-neutral because the CO₂ emitted is equivalent to the CO₂ consumed in its growth—are enticing targets for offset investment, without generally involving the complications that arise with afforestation. If you install a solar panel or build a wind farm, you know how much zero-carbon energy you’re producing, and if you want to take into account how much carbon went into the manufacture of the panels or the turbines, you can pretty easily do that, too. The same goes for methane-capture projects. Methane is a potent greenhouse gas, and so if it’s trapped at landfills rather than being allowed to dissipate into the atmosphere, there’s a readily quantified net gain. But many such projects are vulnerable to yet another line of criticism—the most fundamental of all—which has to do with whether offset dollars were essential to their completion or whether the projects would have been undertaken anyway, without any special support. This basic issue often is formulated as one of ”additionality”—whether the offset money has made something extra happen that otherwise would not have occurred.

To take one example, beginning in 2006 landfill owners across the United States found they could exploit their existing methane-capture programs to ”double dip,” as a Wall Street Journal report put it. In addition to selling captured methane as fuel, which they were already doing, they could now also sell carbon credits for recycling the methane. The director of one county utilities authority, which in 10 months had earned nearly a half a million dollars by selling credits, told the Journal , ”It seemed a little suspicious that we could get money for doing nothing” besides what they were doing at the county landfill all along.

Although most major brokers are careful to avoid projects that double dip, questions about additionality linger. TerraPass CEO Erik Blachford explains, ”Our litmus test is whether or not a project would go forward without carbon credits.”

But ”going forward” is a slippery concept. Popular offset broker NativeEnergy has come under fire for two projects—methane capture in Pennsylvania and wind turbines in a remote part of Alaska—where they funded operation costs and project contingencies but not a penny for construction. (Both projects, in fact, received substantial funding from the federal government.) NativeEnergy maintains that its funding was essential to the project’s success, but critics contend that ”essential” is open to interpretation. Then there is the question of how many credits an offset broker should claim in relation to contributions to a project. NativeEnergy, to take another instance, claimed credits for 100 percent of a project’s carbon reductions over 25 years, even though it contributed only 1 percent of the project’s costs. Here again, NativeEnergy maintains that without its 1 percent contribution, the project would not have moved forward.

Concerns about additionality and criticality, along with the kinds of administrative issues that generally arise when organizations take money for the public good, have threatened to undermine the legitimacy of offset trading. In August, the U.S. Government Accountability Office issued a report stating that it was difficult to determine and guarantee that offset projects were truly new and not being counted multiple times, by more than one broker. Furthermore, the report said, it was tough to tell where purchasers’ money really went—how much was going for administrative expenses and how essential those expenses were to identifying worthy projects and negotiating with sponsors.

With bad public relations threatening to neutralize the offset industry’s efforts, its leaders have moved quickly toward self-regulation, establishing a spate of standards and entering into arrangements with third-party verifiers. In fact, North America currently has about 20 sets of certification standards. But Stephen Handler, a project director for offset broker ClearSky Climate Solutions, predicts that the number of certifiers will be winnowed down within the next few years and that ”the emphasis will be on more robust standards that are also transparent and can track a credit throughout its lifetime.”

That winnowing appears to be evident in the remarkably wide range of prices that offsets command, depending on which standard they are based on. Offsets referencing the industry’s strictest standard, the Gold Standard developed by the World Wildlife Fund and other nongovernmental organizations, sold for an average of $9.70 per credit in April. The relatively lax Chicago Climate Exchange (CCX), on the other hand, offered its credits at $1.40. Other popular standards, the California Climate Action Registry (CCAR) and the Voluntary Carbon Standard, were selling at $6.30 and $3.70, respectively.

Currently this remarkably wide variation appeals to the wide range of voluntary offset purchasers—some are speculating in an emerging market with little concern for additionality, while others want to make a serious commitment to climate-saving efforts. As the market undergoes regulation, prices as well as standards should flatten out.

However, even market regulation cannot always guarantee that all offsets are bona fide, especially when even the verifiers themselves are questionable. In December, the United Nations sent shockwaves through the emissions-trading business when it suspended the work of the main company it hires to validate carbon-offset projects in developing countries, Det Norske Veritas. According to the journal Nature, a spot check carried out in early November at the firm’s headquarters revealed serious flaws in project management. Part of the problem is that verifiers, and companies that hire them, swim in a small pool. As Handler acknowledges, whether verifiers stay in business depends ultimately on projects being approved.

Can market-based mechanisms effectively stem global warming? One problem, observes Neil Smith, an anthropology professor at the City University of New York, is that if the prices for offsets happen to drop, then ”offsetting carbon gets laid aside because the market decides it’s not worth it.” The low carbon prices that initially prevailed in Europe’s emissions-trading system testified to that concern—even those who had helped design and establish the system conceded that, frankly, the prices were far too low to induce anybody to do anything differently.

Today’s global economy has further validated that concern. In the first four months of 2009, New Carbon Finance reported that the wholesale market for voluntary carbon offsets was down by 35 percent. Blachford says he guesses that TerraPass’s individual consumer sales are down by approximately 25 percent in the same period. Although TerraPass’s planned projects are still intact, eventually fewer customers will mean fewer new projects.

But some say that even if offset markets fall short, their mere existence can induce some positive behavior. Matthew Kotchen, an economics professor at the University of California, Santa Barbara, has concluded on the basis of a preliminary study that offset purchasers are more likely than others to reduce their personal energy consumption. At the level of collective action, Handler points out that although the European carbon-trading scheme has failed to reduce emissions significantly so far, it has helped stimulate important outcomes such as the banning of plasma televisions in Great Britain.

At the household level, it would be better in principle if people just refrained from activities that generate a lot of carbon, rather than just do as they please and purchase offsets to compensate. At the same time, consumers need to recognize that most of their emissions are associated not with their individual lives and lifestyles but with the CO ₂ -spewing industries and products that support those lifestyles, not to mention policies that sustain a consumption-based and growth-seeking economy. In other words, effective carbon regulation must take place on an economy-wide level, by political decision. Yet climate change legislation currently being debated in the U.S. Congress includes a version of cap and trade, with offsets playing a significant role. The real question, then, is how big that role will be, and how well it will be played.