Carbon Offsets are a Bridge Too Far in the Tradable Property Rights Revolution

Abstract

Tradable property rights-based carbon offsets are widely used as a policy tool for combating the greenhouse gas emissions that cause climate change. However, academics, non-governmental organizations, and market participants have criticized carbon offset mechanisms’ economic inefficiency and dubious environmental benefits. This Article traces these criticisms to the microeconomic structure of the offset market. Offsets were envisioned as a way to use self-regulating market forces to stimulate investment in emissions mitigation projects efficiently, but tradable property rights are inherently ill-suited to that task. Consequently, policymakers ended up designing a Rube Goldberg-esque scheme that is neither efficient nor self-regulating. The financial intermediation industry through which offsets are certified and traded consumes approximately thirty percent of all carbon offset funding, such that less than seventy cents out of each dollar invested in international greenhouse gas mitigation reaches its target. At the same time, the private sector-led system inappropriately cabins the authority of public sector regulators — the only market participants with an incentive to ensure the environmental quality of the assets exchanged. Systemic risk is also a concern: the offset mechanism’s substitution of abstract, tradable securities for simpler contract-based lending bears an uncanny resemblance to developments in the securitized mortgage lending industry prior to the 2008 crisis. Direct subsidies issued to emissions-reducing projects by a publicly-administered fund could likely achieve better environmental outcomes at lower cost.