Do Carbon Offsets Work in Reducing Overall Emissions? Numbers Say No.

The Clean Development Mechanism is central to the global movement to reduce greenhouse gas emissions. According to the United Nations, the Clean Development Mechanism (CDM) allows countries with emission-reduction or emission-limitation commitments under the Kyoto Protocol to implement an emission-reduction project in developing countries. Through these projects, high-income countries earn certified emission reduction credits which are counted towards meeting Kyoto targets. Examples of these emissions-reducing projects include the purchase of solar energy and the preservation of endangered forests. At first glance, the CDM appears to be a win-win. High-income countries can find cost-effective ways to reduce global greenhouse gas emissions while also helping low-income countries sustainably develop.

As the CDM expands, however, it is worth questioning how effective this policy truly is. New research from Raphael Calel, Jonathan Colmer, Antoince Dechezlepretre and Matthieu Glachant, published in October 2021 by the Munich Society for the Promotion of Economic Research, addresses this question by examining the development of wind farms in India.

The goal of the CDM is to convince individuals to build wind farms that they would not have built otherwise. However, it appears that several of the projects in India that received CDM subsidies would have been built without this funding. The authors compare wind farms that received subsidies to unsubsidized wind farms. Crucially, they find several unsubsidized farms to be less profitable than subsidized farms. Intuitively, this means CDM subsidies were not encouraging new development to take place. These projects that would have been built without subsidies made up 52% of carbon offsets approved for all Indian wind projects. This means that the CDM may have increased emissions rather than reduce them, as high-income countries were allowed to continue polluting while the renewable energy supply did not expand. The authors found this might have increased global emissions by 28 million tons—enough to run a one-gigawatt coal plant for five years.

This is a massive finding, as CDM projects are largely industrial processes conducted on a large commercial scale. If the study holds true, it means that true emissions could be well above projected global emission levels. This finding contributes to broader critiques of the CDM:

1. CDM projects are automatically renewed without proper assessments.
2. The CDM increases transfer costs (costs attributed to middlemen) which increases the size of projects.
3. “Carbon leakage” is possible, where prevented emissions under a CDM project may lead to increased emissions elsewhere in markets not included in the project.

There are ways to modify the CDM in order to strengthen its impact. The European Commission recommends that potential buyers limit the purchase of certifications to expiring projects that risk discontinuing greenhouse gas mitigation, or upcoming projects that are very likely to “ensure environmental integrity”. The Center for Climate and Energy Solutions, among others, agrees and recommends that the CDM should only fund projects that can guarantee a higher likelihood of additional emissions reductions.

As the research of Calel and coauthors shows, relying on the Clean Development Mechanism to reduce carbon emissions can backfire dramatically. When aspiring to curb global warming, it is important to design and recalibrate policies so they achieve their desired outcomes, or recalibrate them to be as efficient as possible in achieving those outcomes. While this can be challenging, social science research can help policymakers become more intentional and effective in reducing environmental damages.