Carbon offsets have become a popular tool in global efforts to mitigate climate change. These programmes work by offering regulated polluters the opportunity to increase their own emissions if they subsidise equivalent emission reductions in unregulated markets. But a key unanswered empirical question is whether these carbon offsets have resulted in additional emissions reductions in unregulated markets.

In this paper the authors develop and implement a new method for identifying ‘wasted’ subsidies, and use it to provide systematic evidence on the misallocation of carbon offsets in the Clean Development Mechanism – the world’s largest carbon offset programme.

Using newly constructed data on the locations and characteristics of 1,350 wind farms in India, a context where it was believed, prior to its introduction, that the Clean Development Mechanism could significantly increase development above baseline projections, they estimate that at least 52% of approved carbon offsets were allocated to projects that would very likely have been built anyway. In addition to wasting scarce resources, the authors estimate that the sale of these offsets to regulated polluters has substantially increased global carbon dioxide emissions.

Key points for decision-makers

  • If carbon offsets are awarded to projects that would have been developed without the Clean Development Mechanism (CDM) subsidy, they do not represent emissions savings. This results in an inefficient allocation of scarce climate change mitigation resources and a net increase in global emissions.
  • The authors propose a new approach to identifying projects that would have been built without a subsidy, and use it to provide systematic evidence on carbon offset misallocation in the CDM.
  • They apply their framework to a new data set of 1,350 wind power projects in India.
  • When the CDM was created, India’s wind power sector was identified as a context where there was huge potential for supporting marginal projects and increasing development beyond baseline projections. Yet, the authors estimate that the CDM has approved at least 28 million tonnes-worth of carbon offsets to projects that would very likely have been built anyway (also known as ‘infra-marginal projects’).
  • Extrapolating this rate of infra-marginal support to the CDM as a whole, the authors calculate that the programme may have increased global carbon dioxide emissions by 6.1 billion tonnes, equivalent to running 20 one-gigawatt coal power plants for their entire 50-year lifespan.
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