The Problem With Cap-and-Trade Offsets

Richard Sandor, the chairman of the Chicago Climate Exchange, is an old-school Chicago trader who doesn’t often self-censor. But in this case, he most definitely should have:

The debate over whether or not a polluter would have cut its greenhouse-gas emissions without the financial incentive of credit sales is "quite interesting, but that’s not my business," Mr. Sandor says. "I’m running a for-profit company."

Many more stories like this, and cap-and-trade will never take off in this country. Everybody already suspects it’s just a way of letting a bunch of financial entrepeneurs make lots of money, and Sandor’s doing nothing to dispel that impression. Of course the question of additionality, as it’s known, is Sandor’s business.

Jeffrey Ball has done a very good job reporting this story, finding actual landfill owners who are making hundreds of thousands of dollars reaping carbon credits for technology installed as long ago as 1999. They’re not reducing their carbon emissions at all: they’re just picking up free money.

"It seemed a little suspicious that we could get money for doing nothing," says Charles Norkis, executive director of the Cape May County Municipal Utilities Authority, which has raised $427,475 selling credits since February, or 3% of the authority’s projected solid-waste revenue for the year.

This is a prime example of the dubiousness of what’s known in the carbon-trading world as "offsets" — the things which allow PR-minded companies to declare themselves to be "carbon-neutral". Essentially, you add up all your carbon emissions, and then trot along to Mr Norkis, pay him a few thousand bucks, and claim that you’ve now "offset" your emissions by capturing the methane from Mr Norkis’s landfill which would otherwise have gone straight into the atmosphere.

Except you haven’t captured any methane — Mr Norkis has. And he’s been capturing that methane for years anyway, and then selling it as fuel. Oh, and Mr Sandor, acting as the middleman in this transaction, is making a tidy sum of money too.

Now it’s true that from a carbon-emission standpoint, it’s a really good idea to capture the methane from landfills. But you don’t need a system of offsets to do that. If you just bring landfills under the aegis of a cap-and-trade system, then landfills which don’t capture their methane will have to buy a lot of carbon credits in order to cover their greenhouse gas emissions. Those which do capture their methane will have to spend much less — and will also be able to make money from selling the methane (just not the offsets) in the secondary market. In other words, you don’t need offsets in order to incentivize landfill owners to capture their methane.

But bringing landfills under a cap-and-trade system is complicated: it involves measuring or estimating the amount of methane which every landfill gives off. A carbon tax would have the same effect but be equally complicated: the IRS would have to measure or estimate exactly the same thing. Offsets are simpler, because the work is done at the landfill end, rather than by some government entity charged with measuring all the country’s carbon emissions. But the downside of offsets is clearly seen in Ball’s article.

Now there is an argument for why these landfills should be able to take part in the offset scheme. Unfortunately, in the article, it’s made by Richard "I’m only in it for the money" Sandor:

Richard Sandor, the exchange’s chairman, says that doing so rewards "early action" and encourages other landfills to capture methane too.

There are two arguments here. One doesn’t stand up to much scrutiny: the idea that you need to reward the early adopters in order to "encourage" other landfills to join in. In reality, if the other landfills are eligible for offsets, it’s unlikely to make much difference to them whether their peers are making money from such schemes or not.

But there’s also a fairness argument: why should a landfill which has been emitting methane for years be eligible for offsets, while one which got religion as long ago as 1999 is left out?

The problem with fairness arguments is that there’s really no end to them: it’s not long before people with trees start wanting carbon offsets for not cutting them down. After all, don’t their fully-grown trees absorb more carbon than those being planted by people who are getting forestation offsets?

There is one other argument for offsets, however: when you allow offsets, both nationally and internationally, legislators tend to be more comfortable with a relatively stringent cap on emissions. When you don’t allow offsets, the caps tend to be higher.

All of which is to say: this stuff is complicated; there’s very little which is black-and-white about it. But at some point in the next four years, the president is going to try to get a cap-and-trade bill signed into law. And the more complicated it is, the more difficult it will be to get there. So my gut feeling is to keep things simple, and keep offsets to a minimum.

This entry was posted in climate change. Bookmark the permalink.