The last few days have been rough for carbon offsets on Gristmill, with our own Gar Lipow launching several broadsides at the whole concept. Adam Stein over at TerraPass offered to reply to some of the criticisms.

Naturally, Stein is an interested party, as TerraPass sells offsets, but he’s also a clever blogger, a smart guy, and at least in my experience, a mensch. So if we can, when discussing this, let’s try to avoid parsing who is and isn’t in hock to The Man, and focus instead on the issues.

Take it away, Adam!

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When I read these repeated attacks on carbon trading, I’m never entirely sure whether I’m supposed to hate carbon offsets because the projects used to create them are flawed and ineffective, or because existing carbon markets are poorly designed and ineffective, or because emissions markets are inherently bad and evil. I do know that the author sure seems to hate carbon markets, so much so that he’s not going to let a few gaps in economic or evidentiary logic stand in the way of a good screed.

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I should mention that the company I work for, TerraPass, sells carbon offsets. You might think this would make me a fan of offsets, and I do believe that offsets are a compelling way to channel funds to the types of projects that will result in progress towards a low-carbon future. Such projects might include renewable energy production, energy efficiency improvements, conservation, and sequestration. One of the things I like best about offsets is their potential to bind all forms of greenhouse gas reductions into a unified marketplace with a clear price signal and efficient flows of capital to the best available projects.

But I’m not a blind believer in offsets. A lot of vexingly hard questions surround the proper design and implementation of carbon markets. To be sure, efforts to date have had failures as well as successes, and we should expect that difficult policy questions will take time to resolve. Further, carbon markets are not the only or the exclusive means by which to address global warming. Carbon taxes, energy policy, regulation — all have a role.

To read some recent criticisms, though, you wouldn’t know that the issues surrounding carbon markets are a subject of lively discussion. In fact, you might reasonably conclude that carbon markets are the product of a cabal of clueless project developers, grasping consultants, hapless bureaucrats, and nefarious polluters. Heck, let’s throw in the whaling industry for good measure. I’m sure they have a hand in this somewhere.

Let’s dig into these criticisms a bit further.

Trees are evil

Critics of carbon offsets like to point to projects gone wrong. These are lazy criticisms, relying purely on anecdote, but they’re also effective, because they have clear villains and make the entire enterprise of offsetting seem somehow tawdry. The Coldplay forest is one of the best known examples of good intentions gone awry, and in general these horror stories do tend to focus on tree-planting projects.

There’s good reason for that. Tree-planting projects are difficult to execute in a high-quality manner, and TerraPass avoids them as a source of carbon offsets. Of course, deforestation accounts for about 25% of greenhouse gas emissions, so we remain strongly interested in the development of forestry projects. But in the meantime, the Kyoto Clean Development Mechanism (CDM) has identified approximately 200 other categories of greenhouse gas reductions.

Regardless, critics of offsets remain fairly obsessed with trees. Grist’s Gar Lipow informs us that the “real world” of carbon trading makes “extensive use of sequestration offsets,” which he identifies primarily as tree-planting projects and “clean coal” technology.

A quick survey of the pipeline of offsetting projects submitted for approval under Kyoto reveals that, out of 1,661 total projects, exactly 5 involve forestry. Exactly zero involve clean coal, because such technology is still experimental. So much for sequestration.

Unknown and unknowable

Another line of criticism regards the issue of additionality, which cuts to the core of what a carbon offset is. An offset represents a reduction in greenhouse gas emissions. For the reduction to have environmental value, it must be over and above (“additional” to) a business-as-usual scenario. If the reduction would have happened anyway, the offset doesn’t have any real meaning.

Additionality is tricky business. No one in the industry would claim otherwise. A battery of tests and criteria have been developed to try to gauge additionality. In some cases these tests work quite well. In others, a measure of ambiguity is tolerated in recognition of the fact that, on balance, the projects in question will yield an environmental benefit.

The nuances of the additionality issue seem largely lost on some.

An offset only exists compared to what would have happened without the subsidy. This is almost always unknown and unknowable. Worse, most of the time, it remains unknown and unknowable.

Unknown and unknowable. This is damning stuff. If additionality is unknown and unknowable, then offsets truly are as worthless as critics contend. Given that carbon is now a $25 billion market worldwide; given that 191 countries have signed on to a global climate treaty that presumes additionality is in fact known and knowable; given that an increasingly large portion of the U.S. economy will soon be operating under carbon constraints built on a similar premise; given all of these things, surely anyone making such a daring assertion would have an ironclad set of arguments underlying the claim.

Not so much. Take their word for it. Sure, it might be possible, for example, to calculate the amount of super-regulatory landfill methane flaring that would occur in the absence of carbon offsets (none). And it might be possible to measure fairly precisely how much occurs when offsets are added as an economic incentive. But to actually determine additionality would require performing some simple math. Unknown and unknowable.

Markets just plain don’t work

When all else fails, invoke an early 20th century Austrian economist to explain why emissions markets simply can’t work. Carbon is mispriced, you see, because the bureaucrats in Brussels are tinkering with supply, and the public relations value of the reductions distorts the demand curve …

Perhaps there’s something to these criticisms. More likely not. One thing is indisputably true, though: emissions markets have been phenomenally successful in the past.

When the U.S. wanted to reduce sulfur dioxide emissions in the early ’90s, it did so using an emissions market. Results came more quickly and cheaply than even the program’s designers dared to hope. Are sulfur dioxide markets a perfect analogy for carbon markets? Certainly not. But neither do I see any good reasons to believe that the same market-based principles can’t be applied to greenhouse gases.

In any case, we’ll soon know one way or another for sure.

Carbon offsets and environmental justice issues

Critics have also pointed to environmental justice issues associated with pollution markets. Again, we see certain tree-planting projects held up as representative of all offsetting projects, despite making up a small portion of the industry. Again, we see cherry-picked anecdotes used to tar by association.

But let’s take the criticism on its face. One potential problem with emissions markets is that they could allow polluters to cluster in small areas, where local residents will bear the brunt of their activities. This is certainly a possibility under the Kyoto system of allowances.

But Gar seems concerned in particular with the developing countries who aren’t under the Kyoto system of allowances. Instead, these countries participate in Kyoto via the system of offsets set up under the CDM. And here there’s good reason to believe that CDM projects are strongly beneficial to the developing world, because by necessity CDM projects always reduce carbon emissions from what would have happened otherwise.

As a result, we have 140 new wind farms in the developing world. Improved lighting. Methane digesters that clean up animal waste. Altogether, the CDM pipeline contains over 1,600 projects reducing 1.1 billion tons of CO2 and producing co-benefits across the developing world.

The bigger picture

Stepping back from the particulars, it’s important to stress one key point: a carbon market is an economic tool useful for bringing about solutions to global warming, not a solution itself.

Just as a carbon tax isn’t itself a reduction in greenhouse gas emissions, a carbon market is a policy framework that helps to bring about change. Markets can be designed to encourage (or punish) virtually any behavior you want.

So when you read statements like this:

Ultimately, only political action and a physical transformation of society that eliminates most fossil fuels can solve the problem.

Understand that you aren’t reading a criticism of carbon markets or carbon offsets. The meaningful question is how that transformation is going to be brought about.