Without regulation, we’ll never know if carbon offsets reduce emissions

This summer’s repeated severe climate events from the ongoing drought in the West to the wildfires in California, the shrinkage of the mighty Rhine, the floods in Pakistan and the boreal forest fires in Siberia underscore that climate change is happening now in front of our eyes.  

We are all living inside a series of interrelated climate change tipping points of no return. America and the world must slash greenhouse gases (GHGs) by 8 percent per year to secure a livable earth for our grandchildren undertaking the equivalent to the cuts in GHGs seen in the depths of the COVID lockdown. 

The epic scale of the challenge is driving many scientists and policymakers to conclude that carbon removal is unavoidable and that we need widespread use of carbon offset investments to speed the private sector response and removal of 6 gigatons of GHG from the atmosphere by 2050.

But what exactly are carbon offsets, and can they deliver for the planet, our economies and the atmosphere? 

A carbon offset can be created when one investor — say a homeowner —  installs solar panels making their house net zero and even net negative in terms of GHG emissions. The homeowner monetizes this, selling the offset to firms who are polluting, allowing them to lower or offset their own GHG emissions.  

Sounds simple. I Invest and zero out my GHG emissions, with excess offsets sold to others in an open market. It looks like a win.  

Governments can also opt to pay to support offsets by guaranteeing the offset and carbon price, providing investor certainty and boosting investment.  

This is what the Biden administration has embarked upon. The administration’s infrastructure law and the Inflation Reduction Act are betting big on offsets and pricing carbon to shift fossil fuel companies from polluters to carbon capture and sequestration (CCS). The support ranges from $4.9 billion to develop carbon capture and sequestration infrastructure, to policy changes and large tax credits worth between $30-$180 per ton of GHGs, depending on the project type. The aim is to increase the amount of carbon capture and sequestration by 13 times by 2030. Big goals indeed. The Inflation Reduction Act provides tax credits to firms investing in carbon capture and sequestration. If oil and gas firms shift to this method this would be an outstanding usage of skills, wells and technology, and could result in large net greenhouse gas reductions.  

But carbon capture and sequestration can also be used to increase pressure in existing operating oil and gas wells to extract more oil and gas from wells — i.e., CCS credits could add to greenhouse gas emissions. It would be a disaster if those credits result in speeding fossil fuel extraction rather than reductions in GHG emissions. I expect the Biden administration wants the reverse outcome. The test will be the application and oversight by the Environmental Protection Agency and the devil will be in the implementation details.

Just as CCS requires regulatory clarity and rigor so too must the operation of regulated and voluntary offset markets. Investors, advisors and asset owners are betting that the markets will be huge — and that demand will skyrocket as more firms buy them to achieve their net zero plans. S&P estimates they could be worth $200 billion to $1 trillion by 2050. 

An offset carbon rush has begun and everyone wants a piece of the action. New global standard setters are creating rules, and they must ensure additionality that offsets must lower actual total GHG emissions. This is extremely hard to guarantee. 

Take the nearly $1 million in carbon offsets sold by the Nature Conservancy to JP Morgan to preserve a forest in Pennsylvania, or similar large sums paid by Disney or Blackrock to preserve other forests in America. Money was exchanged and carbon offsets were sold. But these offsets sales did not result in additional reductions in GHG. The forests were not under threat. The deals did not result in new forests. The net effect was not an additional reduction in emissions. 

The worry here, as in the carbon capture and sequestration case, is that policies and incentives can create markets but not deliver greenhouse gas reductions. We will all lose if this happens. 

Let me be clear: Offset markets that price carbon and support real, measurable, comparable, transparent, reported, auditable greenhouse gas reductions are an essential and important part of the green transition. They can work if we regulate the markets and ensure enforcement, sanctions and oversight are robust. Unsupervised voluntary markets will not deliver. History demonstrates that regulated, transparent, markets can achieve our goals; the successful SO2 market, which put an end to acid rain in the 2000s, is a prime example of this. 

I have no doubt we consumers will begin to buy offsets when we fly, when we buy goods from firms that use them and as we increasingly consider our own carbon responsibilities and footprints.

Voters and citizens must demand that policymakers ensure these new markets deliver for the economy and are not a polluting and damaging planetary dead end that we can ill-afford. 

Stuart P.M. Mackintosh is the author of “Climate Crisis Economics.”