I have been asked to write a piece about carbon offsetting: in particular, its merits and demerits. So here goes.

Carbon offsetting is the practice of paying someone else to take action to reduce carbon emissions somewhere else in order to compensate for one’s own carbon-emitting activities. Offsetting may be done individually or collectively. I cannot do better than Google or Wikipedia when it comes to listing the ways it is done or the companies that will take your money. But what are the pros and cons?

Let’s begin with the pros.

The merits of offsetting

Greenhouse gas emissions are a global problem: what matters is the overall level in the atmosphere, not where they were produced. As such, it makes sense to tackle the problem by searching internationally for the cheapest and easiest abatement measures. If carbon emissions can be reduced in Brazil, say, for a small fraction of the cost of reducing them in Britain, then humanity should collectively take the Brazilian action first. (It does not have to be either/or of course.) It need not be Brazil that pays: in fact it seems fairer for citizens or shareholders in richer (and more polluting) countries to foot the bill. This, in principle, is what carbon offsetting achieves: cost-efficient emissions reduction funded by polluters around the world.

This is akin to the idea of comparative advantage in economics: if a particular nation is able to produce a good more easily and cheaply than other nations, due to having better natural resources, human resources, access to capital and/or infrastructure in place, then – assuming production of the good is beneficial overall – it makes sense for that nation to produce at least as much of it as other countries.

Offsetting measures are usually advantageous in themselves. Cleaner forms of electricity production, methane capture, water purification, efficient cooking stoves, tree planting: if carefully managed to ensure that individuals are not unfairly treated (e.g. landowners losing their land to a new electricity generation project), such projects are likely to increase net welfare.

After a while, the offsetting measure may be ‘used up’ or become more expensive and no longer be efficient from this global cost perspective. That’s fine – there is no reason why the choice of offsetting measures cannot be altered in future.

The problems with offsetting

But there are difficulties, the first of which is verification – verification both that the money is getting to the project and that the project is effective. Can it be demonstrated that the funds are not being siphoned off by corrupt officials? Can it be verified that the same project has not already been sold to others, due either to corruption or mismanagement? Can it be demonstrated that the offsetting scheme is successful in reducing carbon emissions? At the cost expected?

A more complex issue is called additionality. Can it be demonstrated that the offsetting measure is ‘additional’ in the sense that it would not have happened anyway in due course? If, say, a new hydro energy scheme is probably going to be developed whether or not it receives extra support in the form of carbon offsetting revenues, then these revenues increase the profit of the developer but fail to support an overall reduction in emissions. Additionality is hard to establish because it needs people to agree on what would have happened without offsetting.

Then there is an interesting debate to be had on the topic of moral hazard. If people feel protected or absolved from the consequences of actions that are risky or harmful, they may be more likely to engage in those actions. George Monbiot has compared carbon offsetting to the 16th century Catholic Church practice of selling indulgences. By giving money to the Church, people could buy pardons for perceived wrongdoing and without repentence shorten a nasty stint in purgatory. Analogously, paying for offsetting expiates the sins of a polluting lifestyle, allowing the purchaser to avoid the inconvenience of altering it.

From a practical viewpoint, the validity of this argument depends on whether the difference between the carbon footprints of the guilt-free offsetter and the remorseful non-offsetter exceeds the savings from the offsetting measure itself. If the lifestyle of the would-be offsetter is the same whether or not they make payment, then this argument is more of a moral one than a practical one. In an effort to make sure this is the case, some offsetting companies (in contradiction to the pure theory of comparative advantage) actively encourage participants to reduce their own emissions first, where they can, before they buy carbon offsets.

There is, however, a risk that in setting a monetary price for offsetting, companies establish a benchmark in people’s minds as to the value of climate change. To date, the price of offsetting has been relatively low – e.g. £7/tCO2, a price at which the additional cost of say a trans-Atlantic flight is relatively insignificant. Low prices create the false impression that we don’t need to spend much, and hence don’t need to change much, for serious climate change to be averted.

It is frustratingly difficult to know exactly what a carbon offsetting company does with the money one gives it. There is a need for more auditing of these companies. It feels that overall there is a place for carbon offsetting – that it should be ‘net positive’ – but it can never obviate the need for the Western world to change its ways.