Policy Studies Carbon Pricing

Economic and Environmental Potential of Carbon Offsets may be Underestimated

Key Points

When we talk about mandates, there’s not much appreciation for just how high the costs can be in our hard-to-abate sectors like airlines. Carbon offset markets may present an opportunity for those sectors to provide a climate benefit at a lower cost.
The potential economic benefits of carbon offset markets have been under-appreciated up to now, because they are usually just looking at the potential sales volume. Our analysis shows that if carbon offsets substitute for more expensive potential climate policies, there is a much greater economic benefit compared to emission mandates on hard-to-abate sectors.
While carbon dioxide is dispersed evenly globally, the opportunities to mitigate are not: expansion of markets allows us to rely on the tried and true economic principles of comparative advantage to get more climate benefit than we would without the presence of a market.

With policymakers pursuing climate objectives through ambitious emission mitigation targets, such as President Joe Biden’s new nationally determined contribution under the Paris Agreement (50-52 percent reduction by 2030), there are questions regarding the feasibility of reaching those targets—especially in difficult to abate sectors. Consequently, carbon offsets have increasingly emerged as an opportunity to “offset” emissions that are otherwise uneconomical to abate, which allows for private sector investment to produce equal or better climate benefit via low-cost opportunities from offsets relative to the higher-cost abatement opportunities.

However, there is considerable skepticism around the feasibility of offsets to produce reasonable climate benefits that are substitutable with other emission mitigation measures. Carbon offsets may not always provide additional climate benefit or offer permanent storage of carbon. Nevertheless, this paper explores some of the existing literature on estimating the potential for carbon offset growth and its economic utility.

While the potential for carbon offsets seems uncertain, their potential is considerable. Efficient allocation of carbon offsets is more economically efficient than alternative, command-and-control emission mitigation measures. The cost of a carbon offset can be under $10, while emission abatement opportunities can exceed hundreds or even thousands of dollars per ton. Furthermore, offsets also deliver a global incentive for private sector investment in emission mitigation. Despite the difficulties, carbon offsets offer a fruitful opportunity for improving greenhouse gas emission concentrations beyond solely relying on emission mitigation.

Image credit: zlikovec

Press Release: The Benefits of Carbon Offset Markets

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