Are Carbon Offsets Too Good to Be True?

Feeling a little guilty about that flight to London last month? No problem — you can offset that trip with credits from a reforestation project in Nicaragua, available at carbonfund.org.
The thriving carbon-offset market in the U.S. allows individuals and companies to voluntarily offset their carbon footprints relatively painlessly — just point, click, and pay. If the United States implements a cap-and-trade system to reduce carbon emissions, as it now seems likely to do, carbon offsets will likely play an increasingly large role in carbon-emissions reductions.
The offset credits are a popular component of most cap-and-trade proposals because they have the potential to lessen the economic costs of the programs. The cost of upgrading to environmentally friendly practices is very high for certain industries and carbon-offset credits can ease the transition in these situations. However there are doubts about whether the offset credits actually represent reduced emissions.
A large market for carbon-offset credits already exists in Europe under the Clean Development Mechanism (CDM) and offers a window into the drawbacks of carbon-offset programs. The CDM, established by the Kyoto Protocol, is a provision which allows companies in developed countries to buy carbon credits from emissions reduction projects in developing countries. For example, a company in Europe that exceeds its pollution allowance can purchase offset credits from a hydroelectric dam project in China.
Crucially, carbon-offset projects must meet an “additionality” rule, i.e. the project must create emissions savings which wouldn’t have occurred without the CDM incentive. This is where carbon-offset projects have the potential to make a mockery of cap-and-trade emissions reductions programs. Investigations have revealed that many of the offset projects receiving credits through the CDM would have occurred without the provision.
China, for example, has applied for carbon-offset credits for virtually all of its new investments in hydro, wind, and natural-gas energy, claiming that none of these investments would occur without the CDM. Yet China’s current five-year plan calls for major investments in these alternative energy sources.
There are also questions about the real cost control benefits of carbon-offset projects due to the bureaucratic hurdles inherent in responsibly certifying the projects. A recent Stanford study concludes:

… the actual issuance of emission credits through the CDM mechanism operates at a pace and with exposure to severe administrative bottlenecks that make it unlikely that CDM can supply the emission credits needed, and with sufficient reliability, to be a good cost control mechanism.

In other words, companies might be better off investing in the technology required to become environmentally friendly upfront.
The cap-and-trade systems the Obama administration and congressional Democrats are debating rely on carbon-offset projects to control compliance costs. The U.S. House of Representatives recently released a draft of The American Clean Energy and Security Act, which calls for emissions reductions of 20 percent below 2005 levels by 2020. The bill allows two billion tons of the required reductions to come from carbon-offset credits. That’s a lot of trees in Nicaragua.