When it comes to climate change, few efforts to mitigate climate change have been as contentious as carbon offsets. The arguments surrounding carbon offsets are many, complicated, and contentious.

The image above is key to understanding the whole topic of carbon offsets. The reason we’re interested in carbon offsets is because they represent a more cost-effective approach to climate change mitigation than reducing our own emissions, whether at the individual or corporate level. That cost-effectiveness is represented by the stack of money in the scale above. That cost-effectiveness, however, should be balanced by actual climate change benefit, represented by the earth in the scale above. Unfortunately, that balancing is not happening when it comes to large parts of today’s offset markets. Instead, the money is winning.

To summarize the situation facing the use of carbon offsets today:

• While the theory behind carbon offsets is sound, in practice it is very difficult if not impossible for the average purchaser of carbon offsets to know whether their purchase will benefit climate change. By some estimates, 50-80% of offsets probably fail that test.

• If you want to purchase offsets anyway, be prepared to pay more than $20/ton, and consider purchasing them from an organization where you know that most of your money is going directly to a project(s) with a good philanthropic story. At least your money will be benefitting someone other than the offset salesperson.

• If you do purchase offsets, don’t allow yourself to be convinced that you’ve done your part for climate change, and that you can leave it to others to go the rest of the way.

The bullets below provide you with a rapid overview of the topic of carbon offsets.

• In 1988, CEO Roger Sant had a vision. His company, Applied Energy Services (now just AES), planned to build small coal-fired powerplants around the United States, selling the electricity to local utilities. Coal was the only technology that made economic sense, but Sant was already concerned about climate change. He approached the World Resources Institute in Washington D.C. for a solution. Working with WRI, AES pioneered the idea of "offseting" the emissions of its powerplants, starting with an agroforestry project in Guatemala.

• The idea of offsetting greenhouse gas (GHG) emissions had a lot going for it technically, economically, and politically.

  • Technically:
    
    • Carbon dioxide (CO₂) and the other GHGs emitted by human activities are global gases with no direct health impacts.
    • Any given molecule of CO₂ can be anywhere else on the planet within about a week, regardless of where it was emitted.
    • As a result, it literally doesn't matter from an atmospheric perspective where emissions or emissions reductions occur around the world.
      
  • Economically:
    
    • The costs of reducing GHG emissions or of sequestering carbon (the two main categories of offsets) vary widely across the world, so offsets could make mitigating climate change a lot more cost-effective.
      
  • Politically:
    
    • Companies and individuals love the idea of offsets as a low-cost way to reduce their carbon footprints.
    • Policy-makers like being able to offer companies a low-cost way to comply with emissions reduction targets.
    • Many environmental and social welfare groups have embraced osets as a means of funding initiatives ranging from poverty reduction to endangered species conservation.
      

• As a result, carbon offsets have been part of almost all proposed domestic climate change legislation, were key to the functioning of the Kyoto Protocol under the United Nations Framework Convention on Climate Change (UNFCCC), and for years were at the core of voluntary emissions reduction efforts by individuals and companies. Today, carbon offsets are also increasingly used as a consumer branding tool. Your credit card company may already be buying offsets to make your purchases "carbon neutral," all at potentially no cost to you. And there are many other examples.
  

• That’s the good news. The bad news is that offsets have faced big challenges, one example of which is illustrated in the cartoon below.
  
  

• To make a very long story quite short, there is nothing wrong with the theory behind carbon offsets as originally conceived of. The problem is in the ways offsets have been implemented, and the fact that the cost-effectiveness of offsets has ended up being much more important than their environmental integrity.

• The reasons offset markets have been able to evolve in this way is because they represent a “policy commodity.” You can’t see or smell or feel a carbon offset. You are entirely dependent on the policy decisions of others to determine whether you are buying something real, or the emperor’s invisible clothing.

• For offsets to be legitimate they need to represent “additional” emissions or sequestration, in other words they would not have occurred in the absence of the carbon offset market. Making this determination has turned out to be very difficult. When it comes to additionality, “willful blindness” has made it easy to convince ourselves we’re doing something worthwhile even when we’re selling the emperor’s invisible clothing.
  

• A key problem for bringing “good offsets” to market is that once approved by any of the offset standards organizations, an offset can be marketed as the “climate change equivalent” of any other offset. There has been no way for “good offsets” to differentiate themselves in the offset marketplace. Buyers then end up focusing on the lowest-cost offsets they can find, leading to a race to the bottom of the market.

• An alternative is needed to the “least common denominator” approach to approving carbon offsets today. A “quality score” for offsets, for example, could provide consumers with much more information, and create an incentive for better and self-reinforcing market performance.

• In the absence of such a quality score, about all the average purchaser can do is be prepared to pay more than $20/ton, purchase the offsets from an organization where you can be sure that most of your money is going directly to a project with a good philanthropic story, and avoid the temptation to use your offset purchase as an excuse for not engaging climate change in other ways.

The debates and literatures regarding carbon offsets are many, and we’ve written an entire free Ebook to help you explore the topic.

Alternatively, take your exploration of carbon offsets to the next level by visiting our Carbon Offsets 101 Climate Site. To explore a recent proposal to radically expand the use of carbon offsets to meet climate change goals, visit our Carbon Offsets Round 2 Climate Site.

We’re always looking to improve or expand on the insights organized above. If you have comments or suggestions, let us know!

You can explore other 1-page climate change issue briefs here.