Are carbon offsets a Ponzi scheme?

5 min readSep 26, 2020


Carbon offsets are a beautiful idea. When you can’t reduce your own carbon footprint, you can buy a carbon offset and pay someone else to reduce theirs. Your plane seat may come with a tonne of CO2 attached, but if someone else reduces their emission by a tonne, the net effect on the planet is zero.

Early offsetting projects were plagued with carbon cowboys, but more recently glossy, professional bodies have been set up to certify offsets, giving them a sheen of reliability. Let’s look at one, billed the ‘world’s largest voluntary GHG program’, and see how reliable it really is.

Verra’s VCS Program

By using the carbon markets, entities can neutralize, or offset, their emissions by retiring carbon credits generated by projects that are reducing GHG emissions elsewhere. Of course, it is critical to ensure, or verify, that the emission reductions generated by these projects are actually occurring. This is the work of the VCS Program – to ensure the credibility of emission reduction projects.

Well, that certainly sounds good. Rummaging around a little more on their website, I found out a bit more how projects are set up. It works like this:

  1. I own some rainforest.
  2. I go to Verra and say, look at this lovely rainforest… I’d love to keep it like this, but I just can’t afford to.
  3. Verra ask me to promise that I won’t cut it down.
  4. I pinky promise with a cherry on top.
  5. Verra give me a lump sum.
  6. Verra keep an eye on me for the next century or so.

Wait, what?

This is insane. Verra are giving out upfront lump sums in return for a commitment that lasts into the indefinite future. That’s like giving your landlord 50 years of rent upfront and expecting him to keep the place in good condition! If you want someone to keep doing something, you keep paying them. Monthly rent for my landlord; yearly cash for keeping a rainforest in good condition.

Yes, the carbon offset is sold for a lump sum, but that doesn’t mean that Verra have to pay it all out; a little-known financial instrument called the interest rate allows you to turn a lump sum into a perpetual stream of payments. If the rainforest disappears at some point, the stream of payments stops, or is redirected to a better offsetting project.

The ProPublica investigation

As you might expect, this scheme fails in the real world. An excellent investigation by ProPublica found that many of the projects had not reported to Verra in years, and satellite imagery showed that about half of the supposedly forested land actually had some… forest.

Verra’s response to this is that they hold 10% of the credits in a ‘buffer’, to account for the fact that some projects fail. In other words, out of every 100 carbon offsets that they could sell on, they only sell 90. Verra’s CEO tells ProPublica:

If the buffer pool were zero and people were still issuing credits and projects were falling apart, then I’d have a problem. But we don’t. And the reality is the buffer pool has plenty of credits in it right now, and it covers reversals like this. That the system as a whole, works.

A Ponzi scheme

This doesn’t fix things. In fact, it makes them worse, by hiding the underlying problem and letting it snowball. Here’s why...

The central issue here is that there’s a mismatch between what’s being provided (a lump sum up front) and what’s being asked (keeping the forest intact forever). In the absence of ongoing incentives, most of these schemes will eventually fail. Even if whoever got the money is completely honest, there’s no guarantee that whoever inherits the land from them will even know about the commitment. And, say, Brazil doesn’t exactly have strong property rights.

“Hang on,” Verra might say, “we have our buffer and we haven’t had more than 10% of credits be invalidated yet…”.

No, you haven’t. And that’s because your buffer is growing over time as you have more and more firms buy carbon offsets. Suppose you have 10 projects in your first year, and 3 of them go bust. That’s a 30% failure rate, which is a problem… but suppose you have the good fortune to add 20 new projects in your second year. Then you only have 3 out of 30 projects which are bust, which is 10%. Phew! Everything is fine. Of course, more of these projects will go bust in the second year. But if you add enough projects in the third year, the percentage rate stays low.

At heart this is a Ponzi scheme, an investment scheme where old investors are paid out of the money new investors put in. In this case, the fresh offsets paid for by new investors (which have not had time to fail) lower the overall failure rate, keeping old investors happy. Ponzi schemes fail when they run out of new investors, and there’s no new money to pay back old investors with. Similarly, Verra’s scheme will run into problems unless it sells more and more offsets; at that point, the failure rate will tick up and up until it goes over 10%.

Can the new projects really be coming in fast enough to keep the success rate over 90%, so that the 10% buffer absorbs the failures? They can if, as ProPublica found, you don’t check on your projects for a decade or more. Verra’s CEO tells ProPublica that this is because

some projects may not necessarily be having bad things happening on the ground,” but are struggling to pay for the consultants handling the updates

Imagine that.

To my mind, the most damning part is this:

[ProPublica’s Lisa Song] asked the CEO how the company could guarantee that the credits it continues to sell are actually helping to preserve trees if it might go as long as two decades without checking.

Antonioli said, “Anybody who is interested in buying such credits would want to do their due diligence and check to see what’s happening on the ground.”

Wait, hang on? Isn’t the whole point of the scheme that Verra is doing the checking for us?




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