Carbon Offsets

For a while in my earlier work with Singapore companies in the Sustainable Energy space, I was looking at carbon credits and trading; and as an economist, I looked at it in very simplistic terms when I think about having a carbon market, or a market for carbon – especially when thinking about not just the credits to emit, but also offsets or basically net negative carbon projects that can help to zero out certain emissions elsewhere. By trading these tools, you could theoretically make the entire industry better off because the ones who are polluting less could benefit from lower cost of production if they are to purchase emission allowances or even the offsets from others; while those who are unable to switch to less carbon intensive technologies will have to pay more, thus raising prices, reducing demand for their goods and so on.

The idea is for the price signals to reflect the environmental cost of carbon so to speak. But reality is simply so different from what textbook economics contains. What exactly counts as a carbon offset is really not that clear. We could say that power generated using solar power is generally avoiding carbon emissions from power generated by carbon-dioxide-emitting power but that is not an offset of carbon-dioxide (which should be negative). Besides, if the solar farm was built on land by clearing primary rainforest, then the project is actually reducing the environment’s capacity to absorb carbon – that is surely a net carbon positive project over its lifespan or even more.

Of course, the way these things are accounted is different from the way I’m speaking of this because there’s an industry out there which is built around generating these credits/offset. We are still a long way to go in terms of trying to align the incentives in these things so that our economic system is well-aligned with principles of sustainability. But it’s great that the journey has started. Let’s just hope the counterproductive, harmful kind of greenwashing won’t eradicate us before the alignment takes root.