Policies for Reducing Carbon Emissions Can Have Unintended Consequences
From “global warming” to what some international leaders call “global boiling,” the Earth appears increasingly off-balance. Dramatic wildfires, floods, heat waves, sea temperature rise, and polar ice melting, which are expected to increase in “frequency and ferocity," as the World Economic Forum says, keep climate crises at the forefront on people’s minds.
As countries worldwide strive to reduce their carbon emissions, there are potential unintended consequences that could threaten any progress made in combating climate change. Policymakers need to be aware of these unintended consequences that impact the economy and environment.
For example, green policies pushing for efficiency and renewable energy have helped develop renewable energy technologies like solar, wind, hydropower, and green hydrogen, succeeding in generating energy mostly without greenhouse gases—except during initial construction and maintenance. From 2019 to 2020, renewable energy grew from 27% to 29% of the global electricity supply. Power from sun and wind alone increased from 7.8% to 10.1%. The use of fossil fuel coal decreased from 36.6% to 35.4%.
However, some policies have increased energy consumption and created more, often hidden, emissions rather than reducing them. As a result, alternative, market-driven mechanisms—such as carbon credit policies—are also expected to play an important role in addressing climate change.
Carbon Credits to the Rescue?
Carbon credits, or cap-and-trade or emission trading systems (ETS), constitute a market-based approach to mitigating greenhouse gas emissions. They provide financial incentives for individuals, companies, or countries to reduce their carbon footprint by funding projects that reduce or remove greenhouse gases from the atmosphere.
Carbon credits, or cap-and-trade or emission trading systems (ETS), constitute a market-based approach to mitigating greenhouse gas emissions.
Carbon credit policy refers to the use of carbon credits for a reduction in greenhouse gas emissions as a way to mitigate climate change. Carbon credits are certificates representing quantities of greenhouse gases that have been kept out of the air or removed from it, either by avoiding emissions (for example, refraining from cutting down rainforests), reducing emissions (by improved energy efficiency), or enhancing removals (carbon capture and planting forests). Carbon credits can be traded or sold in voluntary or compliance markets, depending on whether the buyers are motivated by their environmental goals or regulatory obligations.
One good example of the earliest functioning carbon credit system is the California Cap-and-Trade Program, which covers about 85% of the state’s emissions from various sectors, such as electricity, industry, transportation, and natural gas. Another example is the European Union Emissions Trading System (EU ETS), the world’s largest carbon market that covers more than 11,000 power plants and industrial facilities in thirty-one countries.
How Do Carbon Credits Work?
Each carbon credit represents 1 ton of carbon or CO2eqv. Each identified emitter is assigned a certain number of credits representing its emission limit. As the company or organization reduces its emissions below the assigned limit, it generates credits that can be retained for future use or traded in the compliance carbon market overseen by a regulatory body.
The CDP Carbon Majors Report 2017 found that 71% of all global emissions from 1988 to 2015 came from just 100 companies worldwide. Carbon credits primarily focus on reducing emissions rather than addressing the root causes of climate change. The need for transformative changes in energy systems, industrial practices, and consumer behavior is often overlooked. When companies rely heavily on carbon credits, they divert attention and resources away from efforts to reduce emissions at the source.
Carbon credits primarily focus on reducing emissions rather than addressing the root causes of climate change.
The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) estimates an increase of demand for carbon credits by a factor of fifteen or more by 2030 ($50 billion) and by a factor of up to 100 by 2050 (more than $300 billion).
While carbon credits effectively reduce greenhouse gas emissions, there are also some potential unintended consequences of market-oriented carbon credit policies. Here are a few examples:
Carbon leakage occurs when companies move their operations to countries with lower environmental standards to avoid emissions regulations and take advantage of cheaper carbon credits. This can lead to an increase in emissions in the relocation countries, offsetting the emissions reductions achieved by other companies in the country of their origin.
Carbon markets can be volatile, with prices for carbon credits fluctuating based on supply and demand. This can create uncertainty for companies and organizations relying on carbon credits to offset emissions.
Some companies may use carbon credits to create the appearance of environmental responsibility without reducing their emissions. This is known as greenwashing and can undermine the effectiveness of carbon credit policies.
It's important to note that these unintended consequences are not inherent to carbon credit policies but rather can arise due to the way these policies are designed and implemented.
The Good and the Bad
An example of an effective carbon credit project is the Renewable Biomass Project developed by Sustainable Carbon in Brazil. This project aims to replace non-renewable biomass (such as native wood) with renewable biomass (such as sawdust or rice husk) as fuel for producing ceramic bricks and tiles. By doing so, the project reduces greenhouse gas emissions, preserves native forests, improves air quality, and supports local communities.
On the other hand, one of the most egregious examples of a carbon credit project gone awry is the HFC-23 destruction project in China and India, registered under the Clean Development Mechanism (CDM) of the Kyoto Protocol. This project involved the destruction of hydrofluorocarbon-23 (HFC-23), a potent greenhouse gas that is a byproduct of chlorodifluoromethane (HCFC-22) production, which is used as a refrigerant and a feedstock for other chemicals. The project claimed to avoid emissions of more than 100 million tons of carbon dioxide equivalent annually and generated millions of carbon credits that were sold to European countries.
However, several studies have revealed that the project had serious flaws and negative impacts, such as:
Creating perverse incentives: The project paid more for destroying HFC-23 than for producing HCFC-22, which encouraged the expansion of HCFC-22 production and increased the consumption of ozone-depleting substances. This is a perfect example of the cobra effect, where a policy achieves the opposite of its intended outcome.
Overestimating emission reductions: The project assumed a high baseline emission factor for HFC-23, which was not representative of the actual performance of the chemical plants. This resulted in inflated emission reductions and excess carbon credits that did not reflect real environmental benefits.
Undermining climate goals: The project flooded the carbon market with cheap and dubious carbon credits, which lowered the carbon price and reduced the incentives for other emission reduction actions. The project also allowed European countries to meet their emission targets without making domestic abatement efforts.
What Can Be Done?
The role of climate policies such as carbon credit has its strong supporters and detractors, and the results so far have been mixed at best. What can be done?
At the individual level, consumers and investors can demand more transparency and accountability from carbon credit providers and projects and choose high-quality credits with clear environmental and social benefits. They can also educate themselves and others about the role and limitations of carbon credits and advocate for more ambitious and effective policies at the national and international levels.
Consumers and investors can demand more transparency and accountability from carbon credit providers and projects and choose high-quality credits with clear environmental and social benefits.
At the society level, civil society organizations, media outlets, academic institutions, and other stakeholders can monitor and evaluate the performance and impact of carbon credit projects and markets and expose cases of fraud, corruption, or malpractice. They can also promote best practices and standards for carbon credit accounting, verification, and reporting, and foster dialogue and collaboration among different actors in the carbon credit value chain.
At the global level, governments, intergovernmental organizations, and industry associations can harmonize and strengthen the rules and regulations for carbon credit markets and ensure that they are aligned with the goals of the Paris Agreement and the 2030 Agenda for Sustainable Development. They can also support innovation and development of new technologies and methodologies for measuring, reporting, and verifying carbon credits, and facilitate access to finance and capacity building for carbon credit projects in developing countries.
In conclusion, it is critical that policymakers consider both short-term and long-term impacts of each decision they make to assure that progress is not reduced by its sometimes-unintended consequences, either economically or environmentally. Only careful consideration and planning will mitigate damage caused by current human activity so that future generations will live on a habitable Earth.
*Dhanada K Mishra has a PhD in Civil Engineering from the University of Michigan and is currently based in Hong Kong. He writes on environmental issues, sustainability, climate crisis, and built infrastructure.