Global Warming - Climate Change - Climate Destabilization
The Great Carbon Offset Swindle
Carbon Offesets: Offsetting Green Guilt
Voluntary carbon offsets allow people to invest in projects that allegedly
counteract their greenhouse gas emissions. But can voluntary offsets help
slow global warming? Or are offsets simply a way for guilt-ridden consumers
to buy their way out of bad feelings? Heres what an economist has
After purchasing airline tickets through Travelocity a few months ago,
I received this offer from Arlington, Va.-based Conservation
Fund: Effectively offset the negative environmental impact of
your entire trip. Go without guiltGo Zero! For an additional
$3.42, I learned, I could neutralize the carbon dioxide (CO2) my one-day
trip would emit by planting trees that would absorb the CO2 out of the
atmosphere. The organization also noted that my offset purchase would
not only fight climate change, but also restore wildlife habitat, improve
air and water quality, enhance outdoor recreation areas, and leave a lasting
legacy for future generations.
Such appeals to eco-guilt are increasingly common, and indeed crop up
at many rites of passage. For births, London-based Carbon
Clear offsets the greenhouse gases that diapers produce. EcoEvents,
a Brighton, U.K.-based company, negates the greenhouse gases that weddings
generate. And the Natural
Burial Company, of Leicester, U.K., and Portland, Ore., allows the
bereaved to send out the deceased with carbon-neutral funerals.
The voluntary carbon offset market gives consumers a way to pay for their
sins of emissions. Yet many observers worry that, by allowing people to
buy their way out of eco-guilt, the offset market may actually lead people
to emit even more greenhouse gases, perhaps by encouraging them to take
another flight, buy a bigger car, or build a larger house. In other words,
they argue, consumers will purchase carbon offsets and keep polluting,
just as Christians in the Middle Ages bought indulgences and kept transgressing.
Should people who care about the environment buy carbon offsets? Or might
offsets really do more harm than good? These questions are, for me, both
personal and professional. My academic research combines insights from
economics and psychology to understand why people make environmentally
related choices and to determine whether these choices have their intended
effects. My aim in this article is to share some insights, many from the
academic literature, that are useful for understanding voluntary carbon
offsets and for evaluating whether the offset market is likely to help
the environment. To be clear, I am focusing on voluntary offsets and not
offsets that are part of national or international climate change policies,
such as cap-and-trade legislation. I show that the voluntary carbon offset
market exists and has been growing for psychological and sociological
But an economic perspective reveals that the potential benefits of voluntary
offsets will go only so far. We cannotand should notrely on
the offset market to reverse climate change. Yet there are still good
reasons to buy offsets, as guilt alleviation is not necessarily a bad
thing and the offset market may promote greater environmental awareness.
To maximize this new and growing markets environmental benefits,
however, it needs greater scrutiny and standardization.
HOW VOLUNTARY OFFSETS WORK
Voluntary carbon offsets allow consumers to pay someone else to reduce
their own greenhouse gas emissions by investing in renewable energy, energy
efficiency, forest protection, and other projects that either reduce emissions
or sequester planet-warming CO2. In principle, these offset projects reduce
the overall amount of greenhouse gases in the atmosphere. Later I will
discuss legitimate concerns about whether firms that sell carbon offsets
always deliver on their claims. But for the time being, lets assume
that they do and focus on the consumer side of the market.
For example, I may want to offset the emissions of driving my 2001 Subaru
Outback. According to one provider, San Francisco-based TerraPass
Inc., my driving emits 11,000 pounds of CO2 a year. For $65.45, I
can negate my cars emissions through projects that promote cleaner
power and farm energy.
If Im feeling more ambitious, South Burlington, Vt.-based NativeEnergy
Inc. will offset my entire carbon footprint, which the companys
calculator estimates to be 36,000 pounds per year. Lucky for me, thats
smaller than the whopping 50,000 pounds that the average American generates.
Neutralizing my emissions would cost $252which the organization
accepts in 12 monthly installments and the money would go toward
energy-efficiency programs and the use of biomass to generate electricity.
Overall, the price of offsets is surprisingly variable, with the majority
falling between $10 and $20 per ton of CO2. (See The Market for
Carbon Offsets at a Glance on page 29 for more price information.)
The market for voluntary carbon offsets has expanded rapidly in recent
years, along with the publics awareness and concern about climate
change. Former Vice President Al Gores documentary, An Inconvenient
Truth, not only earned him the Nobel Peace Prize, but also had a measurable
effect on the offset market, shows my graduate student Grant Jacobsen
in a new study. He finds that during the two months immediately following
the films release, offset purchases grew 50 percent.
Now, according to Carbon Catalog,
the largest online directory of carbon offset providers, 97 companies
are in the marketan increase of more than 200 percent since 2002.
The majority of providers are in Europe and North America, but they invest
in 328 projects around the world. (See graphs at the top of page 29 for
a snapshot of the carbon offset market.) Reforestation projects are the
most common, followed by renewable energy initiatives. Other popular categories
of projects promote energy efficiency and the use of less polluting fuels
and materials. In total, the voluntary carbon offset market accounted
for expenditures of $330.8 million in 2007up more than 300 percent
from the previous year.1
Despite the impressive growth of the voluntary offset market, its current
effects are not even drops in the bucket of what is necessary for meaningful
climate-change mitigation. In 2007, voluntary offsets reduced the amount
of CO2 in the atmosphere by 65 million tons. Yet the three largest U.S.
power plantsamong a total of 8,000emitted roughly the same
amount of CO2. Meanwhile, global emissions in 2007 exceeded 40 billion
tons, and they are increasing at an alarming and accelerating rate.
WHY THEY AREN'T ENOUGH
Although people are investing large and growing amounts of time and money
in the voluntary carbon offset market, the scale of their efforts is entirely
incommensurate with the problem of climate change. From an economics perspective,
this is not surprising, because voluntary offsets function like charitable
contributions to a public good. And a fundamental finding in economics
is that voluntary contributions never provide enough public goods.
Public goods have two defining characteristics: nonexcludability and
non-rivalry. Non-excludability means that no one can prevent an individual
from enjoying the good once it is offered. Non-rivalry means that one
persons use of the good does not diminish other peoples ability
to enjoy it. Reducing CO2 emissions is a public good because, once provided,
everyone can enjoy the benefits without adversely affecting anyone elses
ability to do the same.
But this situation means that private people and institutions fall prey
to the free rider problem. If people can enjoy the benefits of the good
without providing it themselves, they have little incentive to contribute
to the good. The free rider problem is even greater when each contribution
to the good has only a trivial impact, as in the case of individual reductions
of greenhouse gas emissions. People might reasonably ask themselves, Why
should I pay more to offset my emissions if it isnt even going to
make a difference? The result of this reasoning is a so-called market
failure, as everyone would be better off with more of the public
good, if only enough people could avoid the free rider problem. To overcome
the market failures, governments often intervene by levying taxes and
using the revenue to provide public goods, such as roadway maintenance
and national defense. Despite the free rider problem, private individuals
and firms often provide more public goods than traditional economic theory
predicts. Charitable giving in the United States, for instance, reached
$295 billion in 2006, at which time 26.7 percent of American adults also
volunteered for some organization, spending a total of 12.9 billion hours,
reports the National Philanthropic Trust. To help explain this behavior,
economists have developed the notion of impure public goods, which are
products or services that combine both public and private benefits. Through
impure public goods, people gain additional private benefits by providing
Recognizing the power of impure public goods, many nonprofit organizationsthink
Girl Scouts of the USA and National Public Radiofinance their publicly
beneficial activities by selling private goods, such as cookies, theater
tickets, and magazine subscriptions. Likewise, consumers can donate to
charitable causes while purchasing the private goods they like through
corporate programs such as Bonos (Product) RED
campaign and 1% for
the Planet, both of which register companies that donate a portion
of their profits to charitable organizations. Government agencies are
also taking advantage of impure public goods. The city of Palo Alto, Calif.,
for instance, encourages residents to participate in a voluntary green
electricity program by offering them discount coupons at dozens of local
businesses, including dentists, hair salons, and gyms.
Charitable acts also yield less tangible, but nevertheless powerful psychological
and social benefits. When donating money or volunteering, people often
experience a warm glow of good feeling, approval from their
peers, and a reputational boost from being wealthy enough to donate. Fundraisers
recognize the importance of these benefits and often seek to capitalize
on them through public auctions, naming rights, and published lists of
The same strategies are clearly at play in the market for voluntary carbon
offsets. The reputational benefits are most obvious. People who buy offsets
for their cars often receive a window decal to make others aware of their
carbon neutrality. And when companies or institutions purchase offsets,
they typically advertise having done so.
As with other charitable contributions, purchasing voluntary carbon offsets
can generate the warm glow of doing good, as well as social approbation.
But it also alleviates guilt. As I described earlier, many offset providers
seek simultaneously to instill guilt and to offer a way out of it.
Yet economic theory has less to say about what happens when guilt alleviation
is the private benefit of an impure public good. This means that voluntary
carbon offsets pose new and challenging questions for economists to studynamely,
could voluntary carbon offsets, like indulgences of yore, actually increase
peoples gas-guzzling, energy-consuming ways? 2
Lets start with the observation that people who care about the
environmentthat is, people who are likely to purchase carbon offsetsare
likely to pollute less. They seem to drive less, take fewer flights, turn
off the lights more readily, and use less heating and cooling in their
homes. And indeed, in our recent study of residential electricity consumption
in Traverse City, Mich., we find that households identified as conservationists
(because of their membership in an environmental organization) use 10
percent less electricity than did comparison households.3
But what happens when environmentally minded people purchase carbon offsets?
Lets consider two possibilities. The first is that they do not change
their pollution-generating behaviors, which means that their offsets truly
reduce their greenhouse gas emissions.
The other possibility is that they change their behaviors in ways that
generate more emissionsa rebound effect. Because purchasing offsets
is easier than continuing to restrain consumption, even conservationists
may use offsets to justify more travel, a bigger car, or (as Al Gore has
demonstrated) a larger house. If these changes more than offset the offset,
they increase a persons emissions. Stanford University social psychologists
Benoît Monin and Dale Miller have discovered such rebound effects
in their research on prejudice.4 The researchers find that when people
are given the chance to demonstrate their egalitarianism, they are more
likely to discriminate against a minority member. In one experiment, for
example, people who are allowed to publicly short-list a woman or an African-American
person for a job are later more likely to hire a white man than are people
who didnt first create the short list. Another experiment showed
that people who are given the opportunity to refute blatantly sexist statements
later favor a man for a job more than do people who didnt get to
advertise their nonsexist credentials. Likewise, people who prove their
environmental credentials by purchasing voluntary carbon offsets may later
feel justified to act in less environmentally friendly ways.
Paying to alleviate guilt did lead to worse behavior in one well-known
study of parents of children in day care.5 Uri Gneezy of the University
of California, San Diego, and Aldo Rustichini of the University of Minnesota
experimented with charging parents a fee when they were late picking up
their children. The surprising result was that the number of late pickups
increasedmore than doubling. The ability to pay a late feeessentially
an offsetalleviated guilt and justified tardiness.
The Web site http://www.cheatneutral.com
is already satirizing the possibility that carbon offset purchasers are
merely appeasing their own guilty consciences. Its pitch: When you
cheat on your partner you add to the heartbreak, pain, and jealousy in
the atmosphere. Cheatneutral offsets your cheating by funding someone
else to be faithful and NOT cheat. This neutralizes the pain and unhappy
emotion and leaves you with a clear conscience.
Unfortunately, few researchers directly study how the purchase of carbon
offsets affects consumers actions. Some of my own research, however,
is beginning to get at this question. Returning to those conservationists
in Traverse City, we were able to compare electricity consumption before
and after participants had the opportunity to purchase carbon offsets
through voluntary participation in a green electricity program. Participating
households agreed to pay more to support wind energy that offset their
households emissions from electricity use. Comparing these households
to those on a waiting list to join the programand therefore not
yet offsettingwe found that participating households did not increase
their electricity consumption. In this case, the offset had the intended
effect of decreasing net emissions.
In sum, voluntary carbon offsets not only allow environmentally minded
people to alleviate their guilt, but also seem to decrease their net emissions.
Although existing economic theory can help us understand offsets as impure
public goods, further research that draws on both economics and psychology
is necessary to understand important features of the market. Voluntary
offsets on their own are not going to save the planet from climate change.
But the market is providing new and substantial opportunities for both
academic study and business innovation. People are spending real money
on carbon offsets, and with demand expected to grow, we can expect an
expansion in the supply of offset providers.
MAKING OFFSETS WORK
I have so far focused on the consumer side of the market and said little
about the suppliers of carbon offsets. But offset projects themselves
have been a source of substantial criticism and controversy. Problems
arise because consumers cannot see what they are buying and whether a
project actually reduces atmospheric CO2. Third parties that set standards
and certify offset projects will play an increasingly important role in
maintaining the offset markets integrity and in giving it the best
shot at having real environmental benefits.
The market for voluntary carbon offsets is plagued by asymmetric information,
which arises when one party in a transaction has more or better information
than another party. Offset providers know a lot about the projects in
which they invest, but offset buyers know only what the provider tells
them. Because potential buyers have no way of verifying that the providers
are investing their money, or that their investments are actually reducing
emissions, they may be discouraged from purchasing offsets. They may also
buy from unscrupulous providers.
Many other industries deal with asymmetric information through third
parties. In general, third parties set standards, audit firms, and verify
whether firms are delivering on the quantity and quality of their claims.
Examples of third party-certified industries within the environmental
sector include organic agriculture (U.S. Department of Agriculture), green
electricity (Green-e), green buildings (U.S. Green Building Councils
LEED program), energy efficient appliances (U.S. Department of Energy
and the U.S. Environmental Protection Agencys Energy Star program),
sustainable forestry (Forest Stewardship Council), and management (ISO
14000). Third parties may be nongovernmental organizations, industry associations,
or governmental agencies.
The market for voluntary carbon offsets also needs third parties to set
standards and provide certificationand both are emerging. According
to a report by Ecosystem Marketplace and New Carbon Finance, third-party
standards are considered the most significant trend in the voluntary offset
market in 2007.6 The report identifies 13 different standards and describes
the scope of each. The most popular standard is the Voluntary
Carbon Standard (VCS), which was created through a collaboration of
the Climate Group, the International Emissions Trading Association, the
World Economic Forum, and, more recently, the World Business Council for
Sustainable Development. Among the VCSs objectives are to standardize
and provide transparency and credibility to the voluntary offset market,
and to enhance business, consumer and government confidence in voluntary
Other widespread standards are those established by the Clean Development
Mechanism (CDM) and the Gold Standard. The CDM criteria regulate the way
that developed countries can accrue carbon credits to comply with the
Kyoto Protocol, as well as certify emission reductions that are sold on
the voluntary market. The Gold Standard is an independent organization
that promotes long-term emission reductions that are compatible with sustainable
development. The Gold Standard establishes criteria above and beyond the
CDM, making sure that no offsets are sold multiple times and that offsets
are backed by real emission reductions. Although existing standards and
certifiers differ in many ways, they all address concerns about additionality
and permanence. Ensuring additionality means showing that a carbon offset
would not have occurred in the absence of a voluntary contribution. Offsets
may not be additional because of double-counting of offset sales, existing
regulations that required the emission reductions anyway, and intentional
increases in baseline emissions for the purpose of later offsetting them.
Establishing additionality has been the biggest challenge for the offset
Concerns about the permanence of carbon offsets arise mostly about forestry-based
projects. Trees absorb CO2 as they grow and hold on to it as long as they
remain standing. But cutting, burning, and future land uses are difficult
to predict. If, for example, you buy an offset that works through the
prevention of deforestation, it may have no benefit next year if the forest
burns and trees are not replanted. Such concerns about permanence are
significant enough that the Gold Standard does not even certify forestry-based
Nevertheless, forestry-based offsets are the most common type of offset
sold on the voluntary market, and proponents of them stress their many
additional benefits, such as the protection of wildlife habitat and the
provision of recreational opportunities. At this point, efforts are ongoing
to establish generally accepted forestry-based standards and best practices.
One useful idea is to discount the price of forest-based offsets in order
to reflect the uncertainty.7
Amidst the information asymmetry and surge in competing and confusing
claims, the U.S. Federal Trade Commission (FTC) has also taken an interest
in voluntary carbon offsets. Specifically, the FTC has begun investigating
whether the market poses problems for consumer protection. As a first
step, the FTC convened a workshop in January 2008 to identify issues in
the voluntary offset market so that it could review the Guides for the
Use of Environmental Marketing Claims. It remains to be seen whether these
guides established by the FTC will serve as a complement or substitute
for those established among nongovernmental certifiers.
In the meantime, consumers interested in purchasing offsets should check
out the Carbon Catalog at http://www.carboncatalog.org.
The Web site maintains a comprehensive listing of projects and providers,
along with an array of additional information including the companys
location, its status as for-profit or nonprofit, the specific projects
it works with, its offset price per ton of CO2, and whether it satisfies
various criteria for transparency and project quality. The site also includes
detailed information about each project, along with links to further information.
SHOULD YOU OFFSET?
Climate change is now widely recognized as one of the most pressing problems
affecting people all over the planet. As governments on all levelsnational,
regional, and localwrestle with ways to address the problem, some
people have begun taking matters into their own hands. These people care
about minimizing their own contribution to the buildup of greenhouse gases,
and they are the driving force behind the emerging market for voluntary
carbon offsets. Although the voluntary carbon offset market has grown
substantially in recent years and is expected to keep expanding, it will
not make real progress on solving the problem of climate change. The purchase
of voluntary offsets functions much like the provision of public goods,
and so the incentive for free riding is simply too strong. But free riding
is overcome to some extent because people who purchase offsets obtain
private benefitsmost notably guilt alleviation.
Even if the voluntary carbon offset market will not save the world from
climate change, it is providing real opportunities for eco-entrepreneurship.
For example, people looking for capital to invest in renewable energy
projects will find willing investors in the voluntary offset market.
Meanwhile, the demand for offsets is present and growing. Offset companies
are making real money. And third parties are starting to keep sellers
honest and buyers interested.
One of the largest criticisms of the voluntary carbon offset market is
that purchasing offsets will, at best, justify business as usual behavior
and, at worst, actually increase emissions of CO2. Although there is little
research about the effects of purchasing offsets on behavior, the existing
evidence suggests that people do not indulge in carbon emissions as a
result of purchasing offsets. After all, the type of person who is willing
to buy a carbon offset in the first place is likely to be quite green.
I dont see too many Hummers on the road with window decals touting
that the owner purchased carbon offsets.
My own view is that purchasing carbon offsets is better than nothing,
assuming that you are careful about where you buy them. Yet when considering
ways to reduce your own carbon footprint, you should compare offsetting
to the more certain alternative of directly reducing your own emissions.
As offset provider Carbonfund.org states, your motto should be, Reduce
what you can, offset what you cant.
1 Katherine Hamilton, Milo Sjardin, Thomas Marcello, and Gordon Xu, Foraging
a Frontier: State of the Voluntary Carbon Markets 2008, report by Ecosystem
Marketplace and New Carbon Finance, 2008.
2 For some initial attempts to model the theory of carbon offsets, see
the following papers: Joshua Gans, Carbon Offset Provision with
Guilt-Ridden Consumers, 2008 (working paper available at http://www.mbs.edu/home/jgans);
and Matthew Kotchen, Voluntary Provision of Public Goods for Bads:
A Theory of Environmental Offsets, Economic Journal (in press).
3 Matthew Kotchen and Michael Moore, Conservation: From Voluntary
Restraint to a Voluntary Price Premium, Environmental & Resource
Economics, 40, 2008: 195-215.
4 Benoît Monin and Dale Miller, Moral Credentials and the
Expression of Prejudice,Journal of Personality and Social Psychology,
81, 2001: 33-34.
5 Uri Gneezy and Aldo Rustichini, A Fine Is a Price, Journal
of Legal Studies, 29, 2000.
6 See Note 2.
7 Man-Keun Kim, Bruce McCarl, and Brian Murray, Permanence Discounting
for Land-Based Carbon Sequestration, Ecological Economics, 64, 2008:
Matthew J. Kotchen is a professor of economics at the University of California,
Santa Barbara, and a faculty research fellow at the National Bureau of
Economic Research. His research focuses primarily on topics related to
environmental economics and policy.
Source URL: http://www.ssireview.org/articles/entry/1240