Green or Greenwashing: The Incentive Problem with Carbon Offset
An article in The New Yorker, which is well worth reading in full, does a deep dive into one of the most established players in the carbon exchange business: South Pole. The basic idea of carbon exchange is that a company responsible for a lot of carbon emissions, say an oil company or an airline, pays South Pole to prevent the destruction of a mature forest, which means that the carbon in that forest remains sequestered. This payment is made in exchange for carbon credits, which the company balances against its carbon creation and says triumphally that they are carbon neutral, meaning that you, the consumer, can participate in the nonsensical purchase of carbon neutral gasoline! The full statement is, "We prevented 300,000 metrics tons of carbon from this rainforest from being released into the environment, so we can now release 300,000 metric tons of carbon from the oil we sell."
Most folks are surprised by this scheme when I run it by them. People are expecting, as I was when I heard "carbon offset" for the first time, that an amount of carbon producing activity would be offset by a equivalent amount of carbon sequestering activity, in other words, something that took carbon dioxide out of the air such as farming new kelp. (Mature forests don't take carbon out of the air, net-net. They just maintain what they have already sequestered.) But that's not how it works. You make a negative prediction about how much of a certain forest would be burned absent your actions and then credit the counterfactual of the forest being burned down to a company who is sponsoring your actions. This leaves one with many questions. Can go back in a few years and say, "Hi there, remember me with the forest? Well, I still haven't burned it down, so can I get another carbon offset fee?" How many times can you go back to that well? (If I say I'm going to cut down a tree in my back yard, can I get a few bucks for not doing it?)
It seems pretty cynical from that vantage point, so let's look at the most optimistic version of this kind of Carbon Offset, which is something like, "Conservation is not free and we need to support activities in some parts of the world that have forests at risk of burning or being cleared for agricultural activity, so we get companies engaging in high levels of carbon production to sponsor the activities to keep the forest carbon sequestered."
From this vantage point, it has the potential of being a virtuous exchange, so why does it go so wrong? I encourage you to read the New Yorker piece and come up with your own opinion, but in my opinion, the answer to that is about the customer never seeing the product and a general problem with incentives.
Customer never sees the product:
If you pay for a sandwich and then the person you paid doesn't give you a sandwich, you would immediately start a process of resolving the problem with the exchange by either getting the sandwich or getting your money back. But funny things start to happen if there is not product to get or if you were satisfied with a piece of paper saying, "On this date, Adrian Colesberry got a sandwich."
For decades, the mob has been involved in hazardous waste disposal. Why is that? Pricing is high and since the mob was never planning to go through the expensive process of properly disposing of the hazardous waste, but rather was going to dump it into a quarry or in the ocean, their costs were very low, so profits were sky high. This level of fraud is possible because the customer doesn't get the product (waste being disposed of properly). They get a certificate saying it was disposed of properly. The mob-run company had a license, if only because they broke someone's legs to get it, so the company getting rid of the hazardous waste isn't liable for anything the mob didn't do.
In the dimension of the customer not getting a real product, Carbon Offset is the same, hopefully without the murder. The customer is the high-carbon producing company looking for an offset. The provider is the for-profit operation that sells carbon offset points. The provider is meant to take the proceeds from selling the offsets and use it to fund NGOs or local communities who protect the endangered forest. The customer, say it's British Petroleum (BP), never gets the product, which is an intact forest. They only get the credits and a promise from South Pole.
Incentives:
More problematically, the customer of carbon offset points doesn't actually want to know anything after they get the offset. They have no incentive or in fact have a negative incentive to verify or investigate that the offset they paid for is justified. If it's found to be a fraud, they would look bad all over again, so how little are they interested in that coming to light.
Bottom line:
Any business that doesn't have to deliver the product to their customer skips the main accountability step of economic exchange. On top of this lack of natural accountability, the customer has a negative incentive to verify that the supposed product is real or not. Such a business will, by the law of human nature, attract shady characters and fraudulent activities. The article in the New Yorker does not present evidence that the leaders at South Pole were themselves fraudsters, but it describes a shady character that got into the business of being paid to protect a forest through the sale of credits. The ESG (Environmental, Social, Governance) world is generally plagued by poor incentive structures and a lack of accountability and, like I said on the original post on LinkedIn, I'm sure there is more to come.
© 2023, Buoy, LLC
Republished December, 2025