It’s time to kill carbon “offsets”

I normally don’t get into the argument about how to reduce carbon emissions, usually because I find the theory that supports the need to do so to be highly problematic. That doesn’t change the fact that there is an argument about which method to use – or at least there was until the devastating report on the international carbon offset market by the Stockholm Environment Institute (BBC).

The authors say that offsets created under a UN scheme “significantly undermined” efforts to tackle climate change.
The credits may have increased emissions by 600 million tonnes.
In some projects, chemicals known to warm the climate were created and then destroyed to claim cash.

In other words, what began as an idea to reduce carbon emissions became a scheme to generate revenue from carbon emissions, leading – as one would expect – to more carbon emissions.

The carbon offset market is essentially the international version of “cap-and-trade” – a plan to reduce emissions by setting a maximum target and letting market forces determine who actually emits. It was used for acid rain reduction in the northeastern US and Atlantic Canada, as well as for the Montreal Protocol (an international agreement to cut cloroflorocarbon production). As it worked well in both cases – and seemed a decent market-based alternative to straight regulation – it became a center-right cause celebre in the 1990s for pollution reduction. The global warming alarmists quickly adopted it as their own.

Twenty years later, it’s fairly clear that this method is actually quite flawed. For starters, most would agree that the Montreal Protocol was met not due to the cap-and-trade scheme but due to the presence of cost-effective CFC substitutes (in fact, the Reagan Administration refused to sign on until such substitutes were ready for the market). As for the acid-rain issue, a bilateral treaty between allies and neighbors is much easier to enforce than an international agreement that includes everyone in Europe. In this case, Russia and pre-Maidan Ukraine gamed the system to turn it from carbon reduction to “printing money” (SEI’s term).

There is a way to avoid this nonsense and steer clear of the regulatory capture that comes with any 20th-century-like regulation scheme: a simple tax. Easier to enforce and less prone to nonsense like the above, a carbon tax can actually reduce carbon use (if that’s what one really wants) and encourage energy efficiency. From an economic perspective, it’s also much easier to balance with tax reductions elsewhere to ensure that the economy as a whole is affected as little as possible and that taxpayers are not given added burdens. Finally, it should also mean fewer regulatory bureaucrats than either old-style regulation or “cap-and-trade.”

Of course, the data and modeling problems fueling the larger debate on whether carbon reduction is really needed at all are still be sorted out. Moreover, a carbon tax would likely be highly regressive, so countering tax reductions need to take that into account. However, the European lesson learned should be enough for us to recognize this: if carbon use reduction is what we want, then a carbon tax balanced by tax cuts elsewhere is the best way to do it.

@deejaymcguire | facebook.com/people/Dj-McGuire | DJ’s posts

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