A Role for Carbon Markets?

Environmental markets work best when they incentivize compliance, rather than relying on enforcement

Last week, ProPublica published an article questioning whether carbon credits for forest preservation are “worse than nothing.” The article cites several carbon mitigation projects that failed to conserve or restore forests, ultimately concluding that carbon credits give “polluters . . . a guilt-free pass to keep emitting CO2 but the forest preservation that was supposed to balance the ledger either never came or didn’t last.”

In subsequent interviews, the author has claimed these failures reflect an inherent flaw in this market-based strategy and that carbon credit schemes will not deliver the results their architects hope. That broad generalization has been criticized by some environmental groups, who respond that these failures only show that the design of carbon credit schemes matters–something which few doubt.

The examples cited by the article demonstrate the difficulties of relying on government enforcement to incentivize conservation results. In the case of the carbon credits, the participants in the transaction had weak incentives to ensure results, absent a risk that a regulator would intervene.

This problem is pervasive in traditional, command-and-control regulation, where results depend largely on expensive, intrusive enforcement efforts. If the government strictly regulates landowner activities that affect forests, habitat, or wetlands but does not vigorously enforce these mandates, they will fail to achieve their goals. Or, worse, they will encourage preemptive destruction to avoid the risk that enforcement will increase in the future.

Quasi-market programs face a similar problem, even as they avoid much of the bureaucratic losses of traditional regulation. For instance, California is moving to incorporate international carbon offset programs into its cap-and-trade regime. That has the potential for significant efficiency gains, by allowing prices to signal whether emitters should reduce emissions or mitigate them through offsets.

But it may not solve the enforcement problem. If offsets are only purchased to comply with the regulation, neither the purchaser nor the seller necessarily has the incentive to ensure that the offsets provide results. Instead, those incentives depend on how closely the regulator scrutinizes transactions and monitors long-term compliance. Thus, California’s tropical forest standard is really a framework for enforcement–both by California and countries where offsets are sold.

Moving even further toward free markets could unlock more gains, by creating incentives for environmental results that depend less or not at all on government enforcement. This could be done by structuring transactions so that at least one of the parties has strong incentives to ensure that environmental values are protected for the long term.

Some purchasers may voluntarily do this themselves, for reputational reasons. (One doubts, for instance, that the ProPublica piece escaped the notice of the major brands mentioned in some of the unsuccessful projects.) Consumers, too, can play a role by (with the help of stories like ProPublica‘s) becoming better informed about whether their purchases support meaningful conservation.

Much of the incentive, however, is likely to come from environmental groups participating on both sides of these transactions. This could include voluntary certification programs documenting which offset programs are approved by recognized environmental experts. By lending their brand or endorsement, they provide a strong signal to industry and consumers about which projects are best, both from an environmental and a PR perspective.

Or it could involve greater collaboration between environmental groups and the people who live near places to be protected, many of which are in the developing world. In many areas, this is the main challenge–and a difficult one at that. Unless environmental amenities are worth more to nearby communities conserved than consumed, enforcement will be more difficult and any gains will come at the expense of struggling people (a point emphasized by EDF in its response to the ProPublica article). Where conservation benefits communities while allowing continued economic development, market-based programs can create a virtuous circle—improving the wellbeing of people while nudging development in a pro-environment direction.

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