Abstract

Carbon offsets allow greenhouse gas emitters regulated under an emissions cap to comply by paying others outside of the capped sectors to reduce emissions. The first major carbon offset program, the United Nations’ Clean Development Mechanism (CDM), has been criticized for generating a large number of credits from projects that do not actually reduce emissions. Following the controversial CDM experience, California pioneered a second-generation compliance offset program that shifts the focus of quality control from assessments of individual projects to the development of offset protocols, which define eligibility criteria and methods for estimating emissions reductions for categories of projects. We assess how well California’s protocol-centered approach mitigates the risk of over-crediting greenhouse gas reductions. This analysis is relevant because the offset program could make up the full effect of the state’s cap-and-trade program through 2020, and half of its effect through 2030. We review the development of two of California’s offset protocols—Mine Methane Capture and Rice Cultivation—and examine the regulator’s treatment of three sources of uncertainty in emission reduction estimates that led to large-scale over-crediting under the CDM: determining additionality, estimating the counterfactual baseline scenario, and avoiding perverse incentives that inadvertently increase emissions.

We find that while the risk of over-crediting can be reduced through careful analysis, conservative design decisions, and ongoing monitoring of protocol outcomes, even best practices result in significant uncertainty in quantifying true emission reductions. Rather than eliminate the risk of overcrediting, California’s approach shifts risk from project-level to protocol-level quality assessments. To the extent that carbon pricing policies include large offset programs, as is the case in California, government priorities and methodological choices drive program outcomes, contrary to the common perception that carbon pricing policies mainly delegate decision-making to private actors. Ultimately, relying on carbon offsets to lower compliance costs risks lessening total emission reductions and increases uncertainty in whether an emissions target has been met. As a result, offsets can be understood as a way for regulated emitters to invest in an incentive program that achieves difficult-to-estimate emission reductions rather than as quantifiable and verifiable reductions equivalent to reductions under a cap. Substantial ongoing regulatory oversight is needed to contain uncertainty and avoid over-crediting.

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