Does the Allocation of Carbon Offsets Reduce Global Emissions?

This study examines the effectiveness of carbon offsets in the Clean Development Mechanism (CDM) in reducing global emissions. Researchers analyzed data from over 1,000 wind farms in India, assessing whether the projects funded by CDM subsidies would have been built without this support. Findings reveal that 52% of approved carbon offsets went to "blatantly inframarginal projects"—those likely to have been constructed regardless. This misallocation means the CDM’s support increased global emissions by 28 million tons of CO₂, equivalent to the emissions of running seven coal-fired power plants annually, highlighting a significant unintended impact of the program​​.

Extended Summary

Central Research Question

The central question of this study is whether carbon offsets provided through the Clean Development Mechanism (CDM) achieve their intended purpose of reducing global carbon emissions. Specifically, the research evaluates if carbon offsets under the CDM support projects that create “additional” emission reductions—that is, projects that would not have been realized without subsidies. The researchers investigate the extent of subsidy misallocation in the CDM, especially in the case of wind power projects in India, to determine if these subsidies contribute to actual global emissions reduction or if they inadvertently allow increased emissions elsewhere.

Previous Literature

Prior studies have outlined theoretical challenges in the effectiveness of carbon offset programs. For example, Montero (2000) and Fischer (2005) argue that if offset credits are awarded to projects that would have proceeded without support, the net emissions effect is negligible or potentially negative. This problem, known as “additionality,” is critical in subsidy programs aiming to reduce emissions, as misallocated funds represent a waste of resources and can indirectly increase emissions.

Empirical research on offset programs is limited, partly due to the difficulty in establishing a credible counterfactual. However, notable exceptions include analyses of the CDM’s impact on specific industrial sectors, such as refrigerant gas byproducts, where projects designed to destroy certain greenhouse gases (e.g., HFC-23) paradoxically led to increased production of these gases. These examples highlight the potential for offset programs to produce unintended consequences, particularly when regulatory mechanisms fail to filter out inframarginal projects that do not contribute to genuine emissions reductions​​.

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Data

The authors compiled a new dataset of 1,346 wind farms in India, of which 476 were registered for carbon offset credits under the CDM. This data set includes detailed project information such as location, capacity, proximity to electrical grids, and expected wind output. Additionally, data from the European Centre for Medium-Range Weather Forecasts were used to estimate wind conditions at project sites, which significantly impact power generation. Data on subsidy allocations and project registrations were sourced from the United Nations Environment Program’s CDM Pipeline and other related databases. This information allows for a granular analysis of the projects’ economic feasibility and potential profitability in the absence of CDM support​.

Methods

The researchers developed a novel methodology to identify what they term “Blatantly Inframarginal Projects” (BLIMPs). These are projects that, based on observable characteristics, would likely have been built without the CDM subsidies. The approach involves comparing the capacity, wind conditions, and distance to grid connections of subsidized and unsubsidized wind farms within the same region and timeframe.

For a subsidized project to qualify as a BLIMP, it must strictly dominate an unsubsidized project in terms of profitability-related characteristics, such as larger size, higher wind speeds, and closer proximity to the grid. This comparison enables the researchers to estimate the minimum extent of subsidy misallocation, as BLIMPs are likely only a subset of inframarginal projects. To further validate this classification, they performed robustness checks, including sensitivity analyses and comparisons of project characteristics across variables that might influence profitability​​.

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Findings/Size Effects

The study’s findings indicate significant misallocation within the CDM, with 52% of the approved offsets in Indian wind projects awarded to BLIMPs—projects that would have likely been built even without the CDM’s financial incentives. The resulting increase in global emissions from this misallocation is substantial: approximately 28 million tons of CO₂, comparable to operating seven coal-fired power plants for a year. This scale of impact is troubling given the program’s intention to reduce emissions rather than enable further carbon releases.

Moreover, the researchers conducted hypothetical lottery simulations to evaluate how a randomized subsidy allocation might perform in terms of offset effectiveness. They found that in nearly 67% of simulated cases, a random lottery would have resulted in fewer BLIMPs being subsidized than the CDM’s actual selection process. This result suggests that the current CDM allocation mechanism may be systematically biased toward funding projects that do not contribute to genuine emissions reductions, exacerbating global emissions rather than reducing them​.

Conclusion

This study provides empirical evidence that the CDM, as the world’s largest carbon offset program, has significant flaws in its allocation of offsets, particularly for wind power projects in India. The authors argue that the high prevalence of BLIMPs within the CDM indicates an institutional failure to filter out non-additional projects effectively. This misallocation of resources not only undermines the environmental efficacy of the CDM but also imposes substantial external costs by supporting projects that do not offset the emissions they allow elsewhere.

In light of these findings, the researchers call for a careful reconsideration of carbon offset program designs, especially as the global community moves toward expanding such programs under the Paris Agreement. Effective future programs must incorporate stricter screening methods for additionality and address the structural biases that currently favor inframarginal projects. Such changes are essential for ensuring that carbon offset mechanisms genuinely contribute to net reductions in global emissions​.

Full Citation

Calel, Raphael, Colmer, Jonathan, Dechezleprêtre, Antoine, & Glachant, Matthieu. (2021). "Do Carbon Offsets Offset Carbon?" CEP Discussion Papers (No. 1808). Centre for Economic Performance, London School of Economics and Political Science.

You can access the full article on the publisher's website at LSE Research Online​

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