There is little question that humanity must reduce emissions of Carbon Dioxide and other greenhouse gases (GHG’s). To meet this need, there is a growing trend for consumers and companies to purchase carbon credits that “offset” the emissions generated by airline travel and other high-emission activities. JetBlue, for example, is pledging that all U.S. flights will be carbon neutral from 2020 forward and this will be accomplished largely by adding the costs of carbon credits to the price of a ticket. Every new Range Rover comes with carbon credits that offset both the carbon associated with the manufacturing of the car and the emissions generated over the first 45,000 miles driven. The idea that consumers can negate their carbon footprints by funding some carbon-reducing project is appealing, but is it legitimate?
Let’s imagine that an organization uses money spent on carbon credits to purchase more efficient cook stoves for poor people. The products of combustion are relatively straightforward calculations so it should be possible to come up with a decent estimate of the reduction in carbon emissions resulting from giving people these stoves. I can buy carbon offsets from this type of vetted program to justify my new gas-guzzling SUV (assuming I don’t want a Range Rover). I emit more but a bunch of families cook more efficiently, so the net carbon impact is zero. With this type of transaction, I am apparently absolved of any responsibility for my extra emissions. If I have the money to pay for the credits, I can fly as much as I want and drive a Hummer and have zero carbon footprint.
The concept behind carbon credits is that someone who wants to offset a certain amount of carbon emissions pays someone else to do something that reduces carbon emissions by the same amount. One of the most common solutions is to pay to preserve forested lands that would otherwise be cut. Money used to purchase carbon credits may also be used to purchase more efficient cook stoves in poor countries or to fund solar and wind generation. One of the key issues in the meaningfulness of carbon credits is that the offsets are only ‘real’ if the money from credits results in a reduction in carbon emissions that would otherwise not occur. I may only say that I am planning to clear cut my property and take carbon credit payments in order to be convinced otherwise.
To date, many carbon offsetting projects have delivered far less carbon “offset” than promised. A major analysis in 2019 concluded that forest preservation projects used to sell carbon offsets were ineffective and “carbon credits hadn’t offset the amount of pollution they were supposed to, or they had brought gains that were quickly reversed or that couldn’t be accurately measured to begin with. Ultimately, the polluters got a guilt-free pass to keep emitting CO₂, but the forest preservation that was supposed to balance the ledger either never came or didn’t last.”
The good news is that many organizations are now working to ensure that their projects have the desired impact. CoolEffect.org is a provider of carbon credits that is trying to bring rigor and accountability to estimating carbon reductions associated with different projects. CoolEffect.org also provides calculators to help people estimate how much they need to buy in credits and allows people to purchase legitimate credits that are used to offset emissions.
According to CoolEffect.org, the average American can offset all of their annual carbon emissions at a cost of $130.31 per year. If I want to take a weekend trip to shop in New York City or catch a Broadway show, the carbon offset will only cost me $10.36. This seems like a low price to “wipe away the baggage of carbon pollution” (see screenshot below).
For the most recent data I could find (from 2010), the costs to offset the carbon emissions of manufacturing a new Range Rover plus the first 45,000 miles of driving was 140 British pounds. At today’s exchange rate, that would equate to $182.
The missing link in discussions of carbon credits is that the act of consumption and the purchase of offsets are two distinct acts and it is only through mental accounting that they cancel out. My trip on an airplane generates 1.3 tonnes of carbon. I donate $10.36 to CoolEffect.org and they promise to use this money to fund offsets, but it is not as if my 1.3 tonnes of emissions simply disappear from the atmosphere. We may hope and believe that the contributions to forest preservation or funding stoves will result in a certain amount of carbon reduction, but the potential benefits require a series of actions and outcomes that may take decades to play out and, as history shows, may not occur at all.
The limitation in the efficacy of carbon credits results from the difference between expectations and certainty. Expectations for a certain future carbon reduction are predicated on assumptions and projections. Planting a tree will result in carbon removed from the atmosphere but there are many unknowns in estimating how much. Trees sequester carbon over their lifetimes, but the ultimate reduction in carbon depends on what happens to the wood when the tree dies or is cut down. The tree may die from a disease or be blown down by a storm. The final carbon impact of planting a tree will be determined by events over the life of the tree and beyond.
The reason, I believe, that carbon credits are so cheap is that we are ignoring the manifest uncertainties in the ultimate outcomes purchased with the credits. The cost of the carbon credits inevitably reflects very optimistic assumptions. The firms selling carbon credits want to make the credits attractive to buyers. If one firm promises that you are offsetting your flight for $10 and another tells you this will cost $50, which firm’s credits are you going to purchase?
The scientific consensus is that human civilization must reduce aggregate carbon emissions in order to manage the risks of climate change. While it is good for consumers to mitigate their emissions with carbon credits, a credit is not a true offset. Burning more fuel today results in an immediate increase in GHG’s. Buying carbon credits results in some expected, but ultimately uncertain, future reduction. We want to believe the optimistic projections that we can instantly “wipe away” the environmental impacts of our consumption, but wishing does not make it so.
Geoff Considine on Finance and Economics 