Recent scandals have called into question the ability of current carbon-offset markets to actually reduce emissions.
A combination of junk science and unsound economics threatens to ruin the market for carbon offsets.
C arbon offsets are a popular choice for companies and government agencies looking to achieve net-zero emissions targets. The idea is that for every ton of carbon dioxide (or equivalent gas) a company emits into the environment, it can pay someone else to take a ton out, and that makes the company “carbon neutral” from an accounting standpoint. Recent scandals, however, have called into question the ability of current carbon-offset markets to actually reduce emissions. Some observers even suggest the effort should be abandoned entirely.
Barbara Haya, director of the Berkeley Carbon Trading Project, said that after 20 years in the field she has concluded, “The offset market is broken.” Even after two full decades of research and development — which were supposed to produce reliable registries and trustworthy data — she says, “I’m starting to give up on that.” Greenpeace has declared the offset market to be a scam. The Washington Post travel section also concluded in April that it’s a scam. Even the left-wing activist journalists at ProPublica declared all the way back in 2019 that carbon offsets, especially those based on forest preservation, “may be worse than nothing.” And the one recent glimmer of good news in the carbon-offset market — potential credits for capping the methane emissions from abandoned oil and gas wells — has received a lukewarm greeting from experts in the field. The denouncements of this form of climate policy are coming from inside the building.
Last month, Switzerland’s advertising regulator ruled that FIFA, soccer’s international governing body, could no longer call the 2022 World Cup “carbon neutral,” citing a lack of sufficient evidence to support the claim. Delta Air Lines is also facing a class-action lawsuit alleging that the airline’s declaration as “the world’s first carbon-neutral airline” relies on junk science and is demonstrably false. The French food company Danone is also being sued for such allegedly misleading claims.
Most significant are the allegations against Verra. The organization operates the world’s leading greenhouse-gas-crediting program with sales to big companies such as Shell and BHP. An investigation by the Guardian found that more than 90 percent of the company’s rainforest offset credits do not represent genuine carbon reductions. Climate Home News discovered that Chinese rice-cultivation projects listed on the Verra registry used accounting tricks and attempted to take credit for changes in agricultural methods that were already well established.
There are two primary reasons for a company to buy carbon offsets. First, it is a marketing strategy to appeal to environmentally conscious consumers who demand eco-friendly products. Second, it is a way to comply with government regulations, now or in the future. The first has much more limited application than promoters would have us believe, and the second is based on a smug assumption of eventual political triumph by climate activists. Major companies should not be building billion-dollar investments on these assumptions.
Survey data suggest that while many consumers report a desire for sustainable products in general, few are willing to pay significantly more for them. A recent survey of U.S. consumers found that, while 69 percent say they’re willing to pay more for sustainable products, only 4 percent expressed a willingness to pay 20 percent more — suggesting that the “green segment” of the market that’s willing to pay noticeably higher prices is quite small.
Further evidence comes from a 2015 study of airline passengers in Switzerland, which discovered that the segment of airline passengers who are willing to buy additional green airline services (either carbon offsets or amenities such as organic on-board food) is only around 20 percent. That was a while ago, but in a 2020 survey, the International Air Transport Association, which represents the world’s biggest airlines, estimates that only between 1 percent and 3 percent of airline passengers purchase the offsets that most airlines now offer.
Moreover, the market logic of scaling up such efforts, as climate activists insist is necessary, falls flat with even the most basic analysis. Being the only airline or car company or homebuilder that offers a fully offset (but more expensive) product line might attract a significant portion of the greenest few percent of the consumer base. But if every firm adopts the same strategy, no firms will gain any positive marketing advantage from offsetting (although being the only one left behind might come with a cost). The moment offsetting becomes an industry norm, the “business case” for it evaporates — unless you’re an offset broker.
Worse, while offsets have previously been a cheap way for companies to advertise themselves as “carbon neutral,” increased scrutiny of the actual climate impact of these offsets means that companies will have to turn to more expensive offsetting strategies. This will increase the cost of making carbon-neutral claims, further shrinking the already small segment of interested consumers.
When the Competitive Enterprise Institute asked Americans in 2021, for example, how much they personally would be willing to pay for climate-change-mitigation policies out of pocket, 35 percent were unwilling to spend even $1 a year. Almost 80 percent of the population tops out its willingness to pay at $50 per year. A future economy in which every company is tacking on additional offset costs will exceed that amount by a long way.
Corporations also purchase offsets to comply with expected future climate regulations. Many governments and international organizations have set net-zero emissions targets, and businesses expect that policy-makers will eventually attempt to turn those targets into mandatory regulations.
The United Nations–sponsored organization Principles for Responsible Investment (PRI), a leading promoter of environmental, social, and governance (ESG) business practices, has for years claimed that there will be an “Inevitable Policy Response” to climate change, meaning that stricter greenhouse-gas regulations are just around the corner. PRI claims that those regulations will be “increasingly forceful, abrupt, and disorderly.” In other words, if your company or industry doesn’t get in line with climate-policy goals while they’re still voluntary, you’ll get torn apart when the regulatory rubber hits the road.
Thus, it makes sense for companies such as Delta or Shell to buy millions of dollars of carbon offsets with the expectation that they will eventually be forced to become carbon neutral. But even companies that believe they will be able to achieve net-zero emissions in the future without needing offsets have an incentive to invest in them, because the value of offsets purchased on the voluntary market will go up only if carbon neutrality is mandated.
The much-vaunted “ratchet” mechanism of the Paris Climate Agreement, for example, is “designed to steadily increase [in] ambition over time,” meaning that emissions goals will only ever become stricter. In a world controlled by climate activists, carbon offsets will be guaranteed to increase in value.
There’s little reason to believe that such a strict regime will ever come into existence in the United States, much less globally. Climate activists have been demanding strict emissions controls for over a quarter of a century, since at least the signing of the Kyoto Protocol in 1997. The record of legislative failure since then has been complete.
Everyone from the former senator Joe Lieberman (I., Conn.) and the late senator John McCain (R., Ariz.) to Green New Dealer representative Alexandria Ocasio-Cortez (D., N.Y.) have tried to pass legislation mandating reduced carbon emissions. They’ve all failed miserably, chiefly because those in Congress know that high energy prices are the most reliable way to commit political suicide in American politics.
We have spent trillions on renewable-energy pork, of course, but the willingness to apply the stick of energy scarcity to the U.S. economy simply isn’t there. Even the Obama administration’s Clean Power Plan, which attempted to do with the president’s pen and phone what he couldn’t accomplish legislatively, was finally vanquished by the Supreme Court’s decision last year in West Virginia v. EPA. Similar efforts, like the Environmental Protection Agency’s current rulemaking on tailpipe emissions for new cars, faces similar legal threats. For better or worse, it’s likely to be all (taxpayer-funded) carrots going forward.
Unless companies think Greta Thunberg is about to become secretary-general of the U.N. and Al Gore is poised for a presidential comeback, they might want to exit the carbon-offset market before it crashes and burns entirely.
Max Laraia is a research associate at the Competitive Enterprise Institute (CEI). Richard Morrison is a senior fellow at CEI and the host of the Free the Economy podcast.