A: Lipstick.
Carbon offsets and mortgage-backed securities are quite similar in that is impossible for the vast majority of people, even experts, to know what value they have, if any.
In the case of the securities, before paying good money for them, you have to figure out what the value of the underlying mortgages are. Oftentimes they are almost worthless. In the case of carbon offsets, before you pay good money for them, you have to figure out the value of the underlying projects they fund. Oftentimes they are almost worthless.
The only difference between the two is one of perception. Most people now realize how dubious the securities are. But most people apparently don’t realize how dubious the offsets are, because sales of offsets keep rising. So I repeat, the only difference is “lipstick” — the offsets look on the surface to be more attractive.
At a policy level, offsets can destroy the environmental value of climate legislation (see “Boxer bill update: Probably no U.S. CO2 emissions cut until after 2025” and “McCain speech, Part 2: Relying on offsets = Rearranging deck chairs on the Titanic“). Indeed, at a large scale, offsets are probably worse than the securities, because even if the mortgages are underwater, you know the houses aren’t valueless. But as a major 2008 analysis from Stanford found
… “between a third and two thirds” of emission offsets under the Clean Development Mechanism (CDM) — set up under the Kyoto treaty to encourage emissions reductions in developing nations — do not represent actual emission cuts.
And this led to the study’s stark conclusion:
… any offset market of sufficient scale to provide substantial cost-control for a cap-and-trade program will involve substantial issuance of credits that do not represent real emissions reductions.
Talk about your sub-sub-sub-prime loans.
Yet even at an individual level, lots of vendors are selling very dubious offsets, including the Chicago Climate Exchange, as many journalists have found when they examined the underlying projects (see here and here and here).
In particular, I have argued that the most popular offsets are the most dubious:
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