Policing the Voluntary Carbon Market

Princeton, NJ (October 11, 2007)- Numerous opinion polls have indicated that concern over global climate change has risen dramatically in the US and elsewhere. One tangible measure of this growing concern has been the emergence of voluntary greenhouse-gas (GHG) offset markets, in which businesses and consumers purchase GHG reductions instead of directly reducing their own emissions.


A GHG ‘offset’ is an intangible economic commodity that represents the avoidance or sequestration of GHG emissions. GHG offsets are derived from distinct projects, involving anything from low-carbon energy production, to energy efficiency measures, the destruction of GHGs such as methane and nitrous oxide, and tree planting and soil carbon enhancement activities. Offsets offer buyers a potentially lower-cost alternative to reducing their own emissions (Fig. 1). The geographic source of GHG emissions is irrelevant to their climate change impact. Therefore, GHG emission reductions are a global, rather than local, public good and can be traded in a global market.

Although currently small in comparison to regulated offset markets under the Kyoto Protocol, voluntary offset markets are growing rapidly, especially in the United States, and could expand tenfold by 20106. Even the US House of Representatives is preparing to enter the voluntary offset market as a buyer under its Green Capital Initiative.
The purchase of GHG offsets is economically rational in cases where reducing emissions attributable to one’s own activities is more costly. Paying someone else to pollute less may be wiser- both for the purchaser and for society as a whole – than reducing pollution oneself because more emissions can be reduced for a given expenditure of resources. The atmosphere benefits to the extent that an offset reduction is equivalent to an emission reduction made directly by the purchaser. Recently, however, offsets have been widely criticized in the media as to whether they represent real emission reductions.
GHG offset transactions face three fundamental challenges. First, a common and credible procedure is necessary for selecting emission reduction projects made possible by offset credit sales and for quantifying the reductions achieved against a business-as-usual (BAU) baseline in which no specific actions are taken to reduce GHG emissions. Second, credible monitoring is needed to verify that reductions actually occur as claimed. Third, unambiguous property rights over emission reduction credits are essential for markets to operate effectively.
These challenges are not unique to offset markets, but they are symptomatic of markets that trade in commodities representing public goods. Such markets do not arise naturally or function efficiently without assigned property rights, rules governing transactions, and oversight12. Consumers need credible information on the quality of what they are purchasing. Similar problems exist with the development of product standards, such as for organic food or sustainable forest products. For voluntary GHG offsets, commonly accepted definitions of quality are currently lacking. Although GHG offset markets appear to be expanding on their own, there is a serious risk of their collapse due to a lack of standards, policing and credibility.
For the full article, visit the Journal Nature.