Last month, Pope Francis released Laudato Si, a papal encyclical devoted to environmental issues. The document combines reflections on environmental ethics from a religious perspective with background descriptions of various pressing environmental problems, including climate change, as well as an analysis of how to respond. The encyclical has been generally well-received, and many have expressed hopes that the pope’s words might help spur increased action on climate change.

I’ve written elsewhere about the document generally. Today, I’d like to focus on one particular point that has generated a bit of controversy. After detailing some of the international aspects of responding to climate change, Francis writes:

The strategy of buying and selling ‘carbon credits’ can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide. This system seems to provide a quick and easy solution under the guise of a certain commitment to the environment, but in no way does it allow for the radical change which present circumstances require. Rather, it may simply become a ploy which permits maintaining the excessive consumption of some countries and sectors.

Exactly what the Pope is saying here has been a matter of some confusion, with some interpreting the passage to be a rejection of cap-and-trade programs generally, or even of any market-based response. Writing in The New York Times, Joseph Heath cites this passage as an example of how the Pope opposes “a market-based approach to controlling greenhouse-gas emissions — through carbon taxes or tradable emissions permits.” Given that much of the movement for climate action has centered on precisely these approaches, a papal rejection of the strategies would send a rather awkward mixed message.

I am personally not a big fan of cap-and-trade as a response to climate change (I can go into my reasons some other time). But I don’t think the pope has cap-and-trade in mind exactly when he talks about the problems with “carbon credits.” Part of the problem is that the term “carbon credit” could refer either to tradable emissions permits that are part of a cap-and-trade scheme or to “carbon offsets,” where a person or organization pays others to not emit a set amount of greenhouse gases to offset their own emissions.

The problem with carbon offsets is that they involve paying people for not doing something that they (purportedly) otherwise would have done. What a person counterfactually would have done, however, can’t be established definitively, and when there is money on the line, this creates incentives for gamesmanship. For example, in his book “The Case for a Carbon Tax,” Shi-Ling Hsu notes how China has taken advantage of the Kyoto Protocol’s “Clean Development Management” (CDM) program by ramping up production of the refrigerant HCFC-22:

A common byproduct of the production process is HFC-23 (trifluoromethane), a powerful greenhouse gas that traps heat 11,700 times more effectively than equivalent amounts of CO2. In developed countries, the greenhouse gas byproduct is routinely captured, but in those developing countries that produce HCFC-22, the greenhouse gas byproduct is released into the atmosphere. A common CDM project has been the construction in China of HCFC-22 plants, but ones built so that greenhouse gas byproduct is captured instead of released. For putatively avoiding the emissions of a small amount of HFC-23, the plant developer receives a tremendous amount of CDM credits… Nineteen approved HCFC-22 CDM projects in China generate an estimated 81 million credits per year. In fact, these CDM credits far exceed the value of the underlying product, the refrigerant HCFC-22; in light of the sudden increase of 19 HCFC-22 plants in China, the inference obvious to everyone is that the HCFC plants would not have been built but for the CDM program.

This is not only wasteful, but it serves to justify increased emissions elsewhere, as people can claim that their emissions have been offset by the ghost emissions from these Chinese plants. In other words, the credit program doesn’t help to reduce emissions, but is a speculative ploy, exactly the criticisms leveled at carbon credits by Pope Francis.

A cap-and-trade system can include offsets, but it doesn’t have to do so, and many carbon offsets are purchased outside any mandated emissions-control system. So while the pope was making an important point about why we should be skeptical of offset programs, I don’t think this can be applied to market-based approaches generally.

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