We have all seen those proud labels that companies put on their products: “We are 100% carbon neutral.” It is a fantastic way to ease one’s moral pang associated with our consumption, and it is good marketing for the seller to boot. But unfortunately, a closer look at these carbon neutral claims reveals problems—many of the “carbon credits” purchased provide no climate benefit at all. This takes money away from the many genuine opportunities to cut emissions that private companies do want to invest in.

Currently, if you want to go carbon neutral, you find out how big your carbon footprint is, and then you buy “carbon offsets” that equal it. This would mean that if your company has a footprint of 1,000 metric tons of carbon dioxide, you would buy 1,000 offsets. The offsets often cost under $10, so it often is not very costly to acquire the carbon neutral brand. But what counts as an offset is the problem.

Analysis from Bloomberg has found that nearly half of all carbon offsets come from renewable energy. That might seem great until you realize that renewable energy is so cheap that it would have been built even if people were not buying the offsets. In policy parlance, we call this a lack of “additionality.” This means that whether someone buys the offset or not does not change the overall emission profile globally, and that makes the carbon neutral claim bogus.

And this is not just with renewable energy. Some conservation groups are getting dinged for selling carbon offsets to preserve forests that would persist even if the group was not “protecting” it. Again, this makes the carbon offset worthless from a climate perspective. And then there is China’s history of faking offsets, which seems to be as relevant as ever as fraud in their new emission trading scheme abounds.

Because of these low-quality carbon offsets, the market is flooded with credits that were practically free to produce, so the sellers are willing to take any price, no matter how low. This creates a big problem for the many good, legitimate opportunities for abating emissions that are not free and cannot compete with low-quality offsets.

The Environmental Defense Fund estimated that at a $50 per ton price point, the agriculture and forestry sectors could cut emissions by 765 million metric tons, and the Breakthrough Institute estimated those sectors have the potential to cut emissions by 1.1 billion metric tons. For reference, greenhouse gas emissions from U.S. agriculture is 589 million metric tons. But when a survey of farmers asked what price would convince them to change their practices, nearly half said $60 per acre—but they usually are only offered $10 to $30 per acre. Clearly, there is a huge gap.

One simple way to close that gap would be to tighten up carbon markets so that all the credits offered for sale deliver climate benefit. Such a crackdown could cause prices to rise by 3,000%. Higher costs might seem like a bad thing, but in this case, the costs would go up because fraudulent credits would no longer be sold. The losers from such an arrangement are the ones selling credits falsely claiming benefit, and the companies claiming carbon neutrality that has not been achieved. But the winners are those who want to undertake emission abatement now yet cannot do so under these low prices. 

Our research at the R Street Institute has found that undertaking improvements to the quality of carbon markets is good for both the economy and the environment. These do not have to be big, sweeping changes but small steps to better align the claimed value of emission abatement with what carbon credit customers are paying for. This could happen through existing programs to stand up agriculture emission abatement that were authorized last year or by ensuring that the United Nations’ international aviation emission offsetting scheme sets a higher bar for what offsets it’s willing to accept.

In the end, it is important to appreciate that there is a huge amount of private investment wanting to use their dollars to abate emissions, and they rightly desire credit for it. The status quo and repeated controversies surrounding carbon markets hurt all parties involved. Improving markets to deter fraud will create more confidence in companies claiming carbon neutrality and get more investment into emission abatement that helps the environment, which benefits the public regardless of who foots the bill. Best of all, this can be done without requiring taxpayer investment. Improving carbon markets is a win, win, win.