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Q: What is the difference between carbon offsets and mortgage-backed securites?

By Joe Romm  

"Q: What is the difference between carbon offsets and mortgage-backed securites?"


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lipstick.jpgA: 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:

For instance, I can’t imagine why you would waste your money on the single most popular offsets, trees (see no trees and certainly not a Northern forest and especially not trees in a world of drought-driven climate change — heck, even offset seller Terrapass disses trees). If you really care about slowing and reversing deforestation — and you should — then don’t waste your time with individual forestry projects, which can’t guarantee net reductions in the deforestation anyway. Instead, find an organization that is trying to support the new U.N. program launched last month that focuses on nation-wide forest-saving efforts, Reduced Emissions from Deforestation and Forest Degradation Programme, which the UN hopes “could be the foundation for a system in which rich countries would pay poor ones to slow climate change by protecting and planting forests.”

And don’t get Climate Progress started again on the other popular offset, RECs, which are the junk bonds of offsets (see “Schendler Part II: Good RECs vs. Bad RECs“). Then we have a major review of the latest agricultural science, which says of another popular offset, no-till farming, “evidence that it promotes C sequestration is not compelling” and “Studies that have involved deeper sampling generally show no C sequestration advantage for conservation tillage, and in fact often show more C in conventionally tilled systems” (see “No-till farming does NOT save carbon and is NOT a carbon offset“). Another emerging offset, enhanced oil recovery, is also not a net carbon reducer. And please, please, follow Rule Three of Offsets: No Geo-engineering.

Finally, I just can’t get excited about most methane offset projects. They aren’t a bad idea, and their benefits are certainly easier to verify than many other offsets. But that is in some sense precisely their problem. Once there is a hard cap on carbon emissions and a trading system, all those cheap, easy to verify methane-saving projects will be the first projects funded. So paying good offset money to fund methane offsets now mainly just accelerates some inevitable projects a few years. Also, from my perspective, one of the few overarching benefits of funding offsets is jumpstarting the transition to an economy built around energy efficiency and renewable energy. Most methane projects don’t do that at all.

As I’ve said before, if you really, really want to spend some of your hard earned money this way, Don’t Offset Your CO2 Emissions, Retire Them. And save the lipstick for hockey moms.

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18 Responses to Q: What is the difference between carbon offsets and mortgage-backed securites?

  1. Auden says:

    Amen, brother.

  2. Larry Coleman says:

    Ok, I’m convinced, mostly. But given that we need to do something starting about GW NOW, doesn’t it make sense to “fund methane offsets now” even though it “mainly just accelerates some inevitable projects a few years”? It’s those few years that can make all the difference.

    Granted, there are no doubt better, more productive ways to spend your money. One can wish for a reliable website that rates offsets/retirements in terms of bang for the buck. That would be highly valuable.

  3. rpauli says:

    Heavy, progressive carbon tax.

    Heavy enough to force energy conservation and non-carbon based energy deployment

  4. David B. Benson says:

    Well, I would certainly prefer a fossil carbon tax; don’t know about progressive, tho’.

    How heavy is enough? Enough to sequester, permanently, the excess carbon added to the active carbon cycle. It appears that $110–140 per tonne of carbon suffices; that’s $30–38 per tonne of CO2.

  5. David B. Benson says:

    Here is the link to the Univ. Calgary press release about air capture of CO2:


    white a link to technical materials at the bottom.

    With costs this low, Joe could think about replacing a wedge of CCS with a wedge (or several) of air capture.

  6. David B. Benson says:

    Ah me, in my crude cost calculation, I left out the step of obtaining the carbon dioxide from the sorbant. This step appears to be recovering it from sodium carbonate and I expect this is expensive. :-(

  7. David B. Benson says:

    Here is a patent regarding the recovery of sodium hydroxide from sodium carbonate:


    but I have no idea what the cost is.

  8. David B. Benson says:

    After reading the sdescription, and as expected, this requires consider process heat: about (273+850) K. :-(

  9. Koen says:

    I can’t find the details, but a number of European companies paid something like 30 billion dollar for a plant upgrade in a few Chinese factories, to replace one CFC gaz with another. The real cost of the upgrade was evaluated around 100 million dollars.

    So this is carbon offsets paying around 300 times the price of the asset.

    Makes for expensive lipstick.

  10. Sensible Centrist says:

    Strikes me the offset issue is the soft spot in a cap & trade world, and the key is to have responsible parties oversee the process of designating which offsets should be ok. I thought that was the point of the CDM. Yet apparently it is flawed.
    I am not sure what the problem with the CDM framework is, nor what the solution is, and would like to see some intelligent discussion of such. Could you offer a few paragraphs without the trash talk and hyperbole, and simply explain what is wrong with the CDM and what needs to be done to fix it, or point me to such?

  11. Hank Ryan says:


    I’ve asked you recently to address this issue again. I serve on the advisory panel for thePG&E ClimateSmart program. I am impressed with how PG&E has taken great care to protect additionality.

    At the same time, offsets are becoming a significant subject in terms of AB32 with more pressure recently to include offsets with fewer limitations as part of the Scoping Plan.

    One approach our organization, Small Business California, has suggested in our Comments and testimony to CARB is for larger firms in CA to use “supply chain” offsets. For instance, Chevron could perhaps address their existing gas stations/convenience stores and claim credit ONLY where they can show additional verifiable savings BEYOND where current energy efficiency programs can affect usage. For instance, stretching existing EE using internet based continuous commissioning and real time controls may be a valid use of funds to support that added level of savings (approx 5-15%) beyond the norm.

    [Hank -- I'll blog specifically on ClimateSmart next week, but I think my bottom line is probably clear to everyone. At a state, national, or global level -- offsets must be kept to a minimum. If you have a credible, quantifiable means of reducing GHGs, then just put it in the cap!! At an individual level, I personally can't recommend anybody waste their money on offsets.]

  12. Justin Felt says:

    I will be the first to state that there are a large number of low-quality offsets in the markets, even more so in the voluntary market. Buyer beware is definitely the phrase to live by in this market.

    However, we should not tarnish offsets with such a broad stroke. There are good offsets and bad offsets. Just as a mad cow outbreak doesn’t convince people to give up beef forever, this shouldn’t convince people that offsets are valueless, but rather there should be better oversight, transparency, and standards governing them. Offsets will be key in bringing in markets that can’t be capped easily (agriculture, transportation, forestry) and will reduce costs for the overall system (which in these economic times, is very important as well).

    For the North American market, one can only hope for better regulation, not unlike what the FDA does for the food industry. Cap-and-trade legislation will only raise their value and quality by providing eligibility to mandatory markets.

    Of course, reductions should be made first in the home and at the point of generation, but offsets should be have a place at the table as well.

  13. For such strongly-stated negative views on the value of temperate forests in carbon sequestration, you’ll do better to cite more robust and more up-to-date sources.

    My own glib summary of the state of current research, based on numerous recent research studies published in Nature, Science, and similar, is that virtually every intact natural ecosystem sequesters carbon, and if disturbed, releases carbon. This has been specifically demonstrated in recent publications with regard to temperate forests.

    The simplistic 2005 study that seems to provide the basis of your “First Rule of Carbon Offsets: No Trees”…

    …is really little more than a joke at this point. This useful rebuttal only scratches the surface of the problems with that study:

    And there is much more robust, more recent work that contradicts it in detail,

    I’m no lover of offsets – emissions reductions are vastly more important and reliable – and I certainly agree that there are real challenges in designing and enforcing meaningful offsets based on forest management scenarios.

    But the problem with such offsets is not that temperate trees are not valuable in reducing global warming. It is really important to be clear about this:

    Trees, tropical, temperate, and arboreal alike, and the bigger and older the better, provide vital and significant carbon sinks for the global climate.

    [JR: You really need to read all the links before you post comments like this. Temperate trees are great things, but as climate offsets they are at best unquantifiable and at worst undependable. Let's preserve them, definitely, but not at the expense of cutting industrial carbon emissions.]

  14. Deborah says:

    I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.



  15. ed says:

    i love reading your blog whenever i can, i dont often get the time these days, but usually have a quick read in my dinner break or just after i get home from work, sometimes its quite interesting reading – thanks.

  16. alison says:

    i dont think they can put a cost on this as its still in development.