Federal carbon-offset proposal will likely give illusion of progress, even as it increases emissions

Sound confusing? Welcome to the world of carbon offsets.

In theory, introducing a carbon offset system to the existing carbon-reduction mandates for large emitters is a clever idea.

With an offset system, a firm that finds it costly to comply with the emissions mandate can pay another, unregulated actor, like a farmer or forest manager, to reduce emissions in its stead. Ideally, the same environmental target is achieved at a lower cost, creating an economic benefit to both offset buyers and sellers.

Consider the example of a steel plant that wants to increase production, which would in turn increase its emissions. If there’s no offset system, the steel plant cannot increase emissions because of the regulatory policy. If, however, a carbon offset system is introduced, the steel firm might comply with the regulation by paying a forest manager to store carbon in the forest, “offsetting” the increased emissions of the steel plant.

Introducing the offset system as a way of complying with the regulation in theory has no overall impact on total emissions, instead just shifting who reduces emissions.

What could go wrong? A lot.

Unfortunately, “no overall impact” on the environment is likely to be a best-case scenario. In the real world it is much more likely that introducing carbon offsets to an existing regulation will cause overall emissions to increase.

This is because many offset credits granted to unregulated sources do not reflect real or permanent emission reductions. In these cases, unregulated actors receive an offset credit but may reduce emissions by less than a full tonne of carbon. On the other side, regulated firms that purchase an offset credit are able to increase their emissions by one full tonne of carbon. This trade leads to an overall increase in emissions.

The fundamental problem is that offsets provide credits for “emission reductions,” which (unlike emissions themselves) are inherently unobservable.

Establishing how much a forest manager or farmer has reduced emissions, for example, requires us to ask what their emissions would have been without the carbon offset. And that’s an extremely difficult question to answer accurately.

It’s a bit like paying people to reduce their emissions by forgoing air travel. It’s hard to know who is genuinely cutting back on air travel, and who is simply exaggerating the number of transatlantic flights they were planning in order to get paid for not taking flights that they’d never really intended to take in the first place.

Early carbon offsets, like the United Nations Clean Development Mechanism, answered that hypothetical question on a case-by-case basis, and retrospective studies show that most of the projects that were awarded carbon offsets would have happened anyway, and so weren’t additional emissions reductions.

More recent offset systems use a standardized approach to determine eligibility, but these also face problems.

In 2002, for example, Alberta authorized carbon offsets to farmers adopting lower-emission “no-till” practices. As shown in the figure below, however, such practices were already becoming widespread before these credits were introduced in Alberta, as well as in neighbouring Saskatchewan, which didn’t have an offset system. Just as in the case of our hypothetical transatlantic flyer, most of these credits were paid for actions that would have taken place even without the offset credits.

As such, it is likely that most of these credits — “by far the most widely used offset protocol” in Alberta’s system — did not truly reflect additional emission reductions. That means the sale of these credits into Alberta’s industrial carbon regulation system has likely led to substantial increases in overall emissions, since industrial emitters in Alberta were allowed to increase their own emissions by buying these credits.

A similar phenomenon occurred in British Columbia, where offset credits were authorized for improved forest management and measures taken to avoid deforestation. B.C.’s auditor general found that emission reductions from forest conservation were significantly overstated, with a substantial fraction of offset credits not representing real emission reductions.

Also worrisome is the fact that forest and soil carbon storage is likely not permanent. If offset credits are authorized for activities that only temporarily store carbon, the result will again be an overall increase in emissions, because the offset credit will allow regulated firms to increase their own emissions, and these emissions effectively remain in the atmosphere permanently. A non-permanent emission reduction used to offset a permanent emission increase leads to an eventual increase in carbon in the atmosphere.

Carbon offsets can also create unintended consequences.

For example, offset credits were available under the Clean Development Mechanism for reducing emissions of hydrofluorocarbons (HFCs), human-made gases used as refrigerants that have an especially large impact on climate. The value of these credits was so large that some firms produced HFCs for the sole purpose of later destroying them and obtaining offset credits. Carbon offsets ended up encouraging the very activity they sought to curtail, increasing emissions and wasting money.

Similarly, analysis suggests that carbon offsets for methane capture in California may lead mines to continue operating for longer than they otherwise would have in order to cash in on the credits — again incentivizing the very action the offsets seek to avoid.

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Overall, prior real-world experience with carbon offsets points to the conclusion that a one tonne carbon offset often does not reflect a full one tonne emission reduction. Since regulated firms that purchase carbon offsets can increase their emissions by one full tonne, introducing an offset system to industrial carbon regulations leads to an increase in emissions.

Canada’s proposed Federal Greenhouse Gas (GHG) Offset System starts with four offset types — forest management, soil carbon storage, landfill gas management, and refrigerant management. As described above, these are the same types of activities that have failed to produce credible additional emission reductions in prior applications.

The introduction of an offset system as a compliance mechanism for industrial emission regulations will therefore likely increase Canadian emissions, as industrial firms procure offset credits that don’t reflect real reductions and use them to increase their own emissions.

Two reforms could help alleviate these problems.

First, offset credits used as a compliance option for regulated firms should be restricted to activities that are near-certain to deliver permanent, additional emission reductions. The list of such actions is small (and costly), focused especially on activities that capture and permanently store greenhouse gases underground.

Second, activities such as forest and soil carbon sequestration, which can generate uncertain but meaningful emission reductions, should be encouraged directly using government regulation or incentives. Removing these activities from the industrial offset system will ensure that Canada’s industrial greenhouse gas mandates achieve the emission reductions for which they are designed.

Offset systems financially benefit both buyers and sellers, and thus tend to be popular with the businesses community. However, without major reforms, Canada’s newest climate policy is likely to give the illusion of progress, even as it increases carbon emissions.