What Carbon Offsets Tell Us About Why Environmental Programs Fail

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Carbon offsets exemplify the challenges in creating effective environmental regulations.

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A growing chorus of researchers and practitioners are coming to the belated recognition that carbon offsets are not working. For example, recent articles entitled “Offset Market Hit by Fresh Allegations of False CO2 Claims” and “Forest Carbon Offsets are Failing” were published in Bloomberg News and Science. Carbon offsets were even called “worthless” in The Guardian. This recent spate of research demonstrating that offsets are likely net negative for the climate would not be surprising to readers of my recent book, Next Generation Compliance: Environmental Regulation for the Modern Era. Many environmental programs have stumbled for similar reasons. Next Gen explains why, and more importantly, what we have to do to fix it.

Carbon offsets are a textbook example of an idea that sounds good in theory but does not work in practice. Offsets are built on the hope that companies could pay others to cut carbon emissions that cause climate change and thereby avoid having to cut carbon themselves. The concept combines the key flaws that plague other seemingly great ideas that do not survive in the real world.

The foundational error for most environmental programs that falter in implementation is the unsupportable belief that most companies comply. In fact, noncompliance is widespread. In environmental rules, the norm for all types of environmental programs is 25 percent serious noncompliance, and it is unfortunately too common to find serious noncompliance rates of 70 percent or more for the types of requirements we care most about. And those are just the rules for which we have reliable compliance information. For many programs, we do not know how extensive the violations are, although the indications are not good.

Offsets suffer from the same myopia. People were shocked when it turned out that many carbon offset programs, such as paying people to preserve forests that they claimed were otherwise at risk of being cut down, were rife with fraud. Yet people should not have been shocked. When there is a lot of money to be made and almost no effective controls in place, violations will be rampant, as a mountain of evidence proves.

A second fundamental flaw common to many environmental programs is evident in offsets as well: the assumption that when there are violations, it is up to enforcement to address them. When serious violators are discovered, it nearly always leads to calls for stronger, tougher enforcement. The same thing is happening now for offsets. The recognition that recipients of offset money are not delivering the claimed carbon benefits, through fraud or otherwise, is provoking demands for heightened oversight.

In reality, enforcement and oversight can never be our first line of defense against unrestrained violations. Without strong compliance design there will be extensive noncompliance no matter what enforcement may do. The difference between a good implementation outcome and a predictable disaster is not primarily enforcement, it is rule design: Is the rule set up to make compliance the path of least resistance?

As Next Gen explains, monitoring is one of the key building blocks of strong compliance design. Can you measure the thing you care most about? There are many ways to measure that can create accountability, but if a program lacks a reliable form of measurement there is little hope for a good outcome. Most offsets are a failure on this score. You cannot measure directly the carbon benefits from protecting a forest or wetland, for example. Credits for such projects are based entirely on the assumptions and projections made by the project proponent. A devastating take down of carbon offsets by The Guardian explained it this way: “Offsets are an imaginary commodity created by deducting what you hope happens from what you guess would have happened.” Because credit value is based on supposition and judgments, it is inherently unmeasurable. Strike one against offsets.

Another central feature of effective rules is a quick and easy way to know if a company is complying. If figuring out if the company is performing as the rule requires takes a lot of fact intensive investigation or difficult judgment calls, it will be close to impossible to determine whether the program is working. Even complex problems can be reduced to simple determinants of performance, as shown by multiple EPA programs.

But complexity in determining compliance creates a mess that is usually impossible to fix. Offset programs run afoul of this feature as well: every offset project is unique and has its own complicated, site-specific calculations and projections. The impossibility of a simple way to evaluate performance creates space for confusion in the best case, and rampant fraud in the worst. Offsets suffer from both. That is strike two.

In addition to these two insurmountable flaws, offsets suffer from a third and ultimately fatal characteristic that is common to many under-performing programs discussed in my book: Every participant benefits from overstating the carbon benefits of the offset programs. The purveyor of the credit wants it to be worth more than it is; the purchaser wants to be able to claim a bigger benefit for their investment; and governments want to be able to claim progress toward net zero. Rule design is at its highest stress point when all the players benefit by under-delivering on the primary purpose. What do the participants want? Appearing to be accountable, yes. Actual accountability, no. The only recourse in this very difficult situation is designing a program that is close to airtight and makes fraud and unreasonable optimism easy to detect. That often is possible, as the examples in my book demonstrate. But sometimes it isn’t.

Offsets are one of those times. They are based on  inherently unmeasurable outcomes and require many individualized decisions, both of which create opportunities for cheaters. And those complications mean that there is no way to counteract pressure from all directions to overclaim benefits. That is what is happening, as many credible studies are now demonstrating. Anyone with a Next Gen understanding of how programs work in the real world would understand that the dismal performance of offset projects is not just predictable, it is inevitable.

Enforcement or stronger oversight cannot compensate for bad compliance design. That is true for most poorly designed programs but is especially true for offsets, because determining who is or is not complying is so difficult. Recent studies show that the much-touted reliance on third party oversight that was viewed as the savior of offsets is not the panacea it claims to be; in fact, some of the worst performers’ results were verified by a third party. This is no surprise, considering that third-party companies make money by approving offsets. If they deem offsets unreliable, they will not only lose business, but will make the whole program more expensive. Studies also show that many allegedly independent verifiers across a range of programs often distort the facts and look the other way. This challenge with independent verifiers will be even worse with offsets because there is so much money at stake.

So what? Why should we care if offsets are not working? We should care because offset failures mean companies emit more real, measurable, we-know-for-sure carbon, based on the illusion that carbon is being reduced elsewhere through offsets. In addition, offset programs have high opportunity costs that divert time and money away from programs that actually have a prayer of working.

That is the same predicament that ineffective rules of every stripe create; we spend money without getting the intended benefits. And in some cases, we might actually make the problem worse. These costs are unaffordable for our out-of-time climate crisis.

The same problems that plague offsets—and the same faulty assumptions that most companies comply and that bad compliance design can be fixed through tougher enforcement—beset nearly all regulatory programs, in environmental protection and elsewhere. The good news is that creative, thoughtful design can often improve outcomes, as my book explains. But sometimes a much-beloved strategy becomes an inevitable compliance catastrophe. A plan that will never work cannot be made to work just by doubling down, as if desire can substitute for hard-headed reality.

Offsets are a top-of-mind, recent illustration of the fundamental issue that my book addresses: designing public programs so they do not just look good on paper, but actually deliver in the messy and complicated real world. Because that’s the place that matters.

Cynthia Giles is a former Assistant Administrator at EPA’s Office of Enforcement and Compliance Assurance.

This essay is not a product of the U.S. government or the U.S. Environmental Protection Agency (EPA). The author is not doing this work in any governmental capacity. The views expressed are her own and do not necessarily represent those of the United States or the EPA.

This essay is one of a six-part series on The Next Generation of Regulatory Compliance.