Fiddling with carbon offsets while California burns

Wildfires expose major flaws in the CO₂ market

By Mark Hulbert

Callaway Climate Insights

California’s record wildfires have caused a good chunk of the carbon offset market to, literally, go up in smoke.

That’s undeniably devastating, not just for the forests and the climate but for the carbon offset market itself.

But maybe, just maybe, there is a silver lining: By exposing the carbon offset market’s fundamental flaws, the wildfires could eventually force GHG emitters to actually reduce their emissions rather than use the near-fiction of carbon offsets to claim carbon neutrality while continuing business as usual.

The carbon offset market, for those of you unfamiliar with it, is where companies and organizations go to purchase carbon credits to neutralize their GHG emissions. It’s become a multi-billion-dollar industry over the last couple of decades, with carbon credits issued to date representing more than a billion tons of supposed CO₂ avoidance, reduction and removal. Players in this labyrinthine market, in addition to the thousands of companies and others that purchase offsets, include brokers, exchanges, project developers, third-party verifiers, and both retail and wholesale sellers.

It’s big business.

Am I going too far in referring to these offsets as “near fiction?” I don’t think so.

In an interview, UC Berkeley Professor Barbara Haya told me that the “majority of offset credits on the market today most likely don’t represent real emissions reductions.” Haya directs the Berkeley Carbon Trading Project, which is “a research and outreach program dedicated to studying the effectiveness of carbon trading and offset programs and ensuring that this understanding informs program design.”

Haya was being generous. In a 2019 analysis of forest-related carbon credits issued by California’s Air Resources Board, she found that “82% of the credits generated by these projects likely do not represent true emissions reductions.”

Or consider an analysis of the Clean Development Mechanism (CDM) that was conducted by Germany’s Institute for Applied Ecology. The CDM, which was set up by the Kyoto Protocol, created the first generation of the carbon offset market. The Institute found that “only 2% of the projects (analyzed) and 7% of potential Certified Emissions Reduction (CER) supply have a high likelihood of ensuring that emission reductions are additional and are not over-estimated.” By “additional,” the Institute is referring to emissions reductions that are above and beyond what would have occurred anyway.

How did we get into such a mess? Professor Haya identified a number of culprits:

Unknowable baseline

A carbon offset’s baseline is how much CO₂ would have been produced absent the carbon offset project. If an acre of forest would otherwise have been burned down to make way of a farm, for example, its baseline would be the CO₂ that would have been released into the atmosphere. If the owner of that acre decides to instead preserve the forest, he can sell credits equal to the CO₂ that would have been released plus the additional amounts of carbon the forest hopefully will sequester in perpetuity.

The calculation of this baseline is vulnerable to significant gaming, Haya points out. She says that, in the vast majority of cases, the players in the carbon offset market conspire to significantly reduce the baseline, resulting in “grossly overcrediting” the projects with carbon offsets.

For example, in many cases the owner of this hypothetical acre of forest can sell carbon credits even if he had no intent of burning it down. He gets paid to do what he was going to do anyway.


Leakage occurs when the CO₂ emitter simply goes somewhere else. In my forest example above, a separate acre of forest that is not involved in a carbon offset project could end up being burned to make way for the farm. If so, the same amount of CO₂ will be released into the atmosphere as would have been released absent the carbon offset market; the climate is no better off. But those carbon offsets will have generated significant income to the forest’s owner and enabled the corporation that purchased the offsets to claim progress towards carbon neutrality.


In order to counteract CO₂’s climate-warming properties, a carbon offset project in principle should sequester carbon in perpetuity. That’s because CO₂ lingers in the atmosphere for a very long time—as long as between 300 and 1,000 years, according to some estimates. If the carbon that is avoided or removed by the offset project ends up getting released anyway, then is the climate really any better off?

California’s wildfires are just one way in which carbon offset projects can fail this test of permanence. Another can arise with carbon sequestration projects. These occur when a farmer is paid to adopt more sustainable agriculture practices that increase the amount of carbon stored in his soil. That extra carbon gets released, however, if that farmer doesn’t adhere to these practices year in and year out, or if he sells the farm to someone else who does not.

In theory, the carbon offset market deals with these possibilities by requiring purchasers to buy more offsets than they need in the moment, putting the overage — typically 20% — in a buffer account. But there is almost universal agreement among researchers that the buffer is woefully inadequate.

Perverse incentives

If the above three problems were the only ones that plagued the offset market, then perhaps they could be overcome. But this fourth problem is more intractable than the other three. Haya says that “everyone making decisions in the carbon offset market—buyers, sellers, registries, brokers—benefits from a larger lower quality market.” That’s because each of these groups makes more money if the market develops in this way.

Haya worries that, given these perverse incentives, the carbon offset market is irredeemably flawed.

One immediate worry is that the carbon offset market is evolving so that offsets become securitized and commoditized. But if the calculation of the offsets isn’t trustworthy, then making them fungible will simply institutionalize their untrustworthiness — and make it impossible to conduct any due diligence to ensure that the offsets are doing what they claim to be doing.

Nero fiddled while Rome burned, so we’re told. We’re creating a carbon offset market that is becoming larger, more lucrative and more irrelevant — while California burns.

Mark Hulbert, author and longtime investment columnist, is the founder of the Hulbert Financial Digest. His Hulbert Ratings audits investment newsletter returns. He is a contributor to Callaway Climate Insights, which provides news, critical analysis and original perspectives on the opportunities presented by the growing dedication to finding global solutions to the challenges of climate change.

COVID-19 cases are on the decline in San Francisco

After a recent surge of COVID-19 cases in San Francisco caused by the omicron variant, the number of cases in…

Is City Hall’s ‘document deleting’ cause for alarm?

Mayor’s office and other departments are destroying correspondence at a rate that shocks First Amendment experts

How Jackie Speier elevated the Armenian community

‘There’s a lot of allies in Congress for the Armenian story to be told’