Offsets are no free lunch

As the California legislature reconvenes after its summer break, lawmakers will have their best opportunity in almost ten years to reform the state’s influential cap and trade program.¹1Since 2012, California has limited the allowable quantity of emissions across the electricity, industrial, and transportation fuels sectors, requiring polluters to purchase either state-issued allowances or eligible carbon offsets for every ton of CO₂ they emit. While not without its problems,²2K Tigue (2022) Why do environmental justice advocates oppose carbon markets? Look at California, they say Inside Climate News ^,33D Cullenward & D Victor (2020) Making Climate Policy Work the program has generated roughly $31 billion in revenue for the state, funding everything from high speed rail to rebates on consumers’ electricity bills.⁴4CARB (2025) Annual Report to the Legislature on California Climate Investments Using Cap‑and‑Trade Auction Proceeds: Greenhouse Gas Reduction Fund Now, cap and trade is up for renewal and unless lawmakers take action, it will expire in 2030. While that might sound far away, uncertainty about the program’s future has already taken a toll on program revenue.⁵5C von Kaenel (2025) The greenhouse cap and fade Politico The pending renewal has embroiled Sacramento in a debate about what a reauthorization should look like, and thrown a spotlight on one of the program’s longtime liabilities: its use of carbon offsets.

The California Air Resources Board (CARB), the agency that administers the program, currently allows emitters to use offsets to meet up to four percent of their compliance obligation (this will increase to six percent in 2026).⁶6G Petek (2025) Assessing California’s climate policies: cap and trade reauthorization, Legislative Analyst’s Office Environmental justice groups have long criticized offsets for the pollution burdens they place on fenceline communities; disadvantaged groups living next to emitting facilities hardly benefit from emissions reductions that take place somewhere else. Supporters of offsets counter that they offer a more efficient means of delivering emissions reductions. There is a problem with that claim, however: California’s offsets do not actually deliver much in the way of emissions reductions. Multiple studies have shown that a significant fraction of the offsets that regulated entities have purchased to date do not represent real climate benefits. Moreover, offsets are a liability for another reason that Californians may not be aware of — they deprive the state of a startling amount of revenue.

Now, lawmakers have an opportunity to close the offsets loophole. In this commentary, we explain why it is important to do so. First, we explain just how much money the state gives up by allowing polluters to use offsets. Second, we explain why offsets have hurt the climate and Californians alike. Finally, we show that the state can support a wide range of worthy causes by recouping its foregone offset revenue.

Polluters spend a lot of money on carbon offsets

If lawmakers reauthorize the cap and trade program without any policy revisions — a so-called “clean” reauthorization — carbon offsets could deprive Californians of as much as $923 million per year between now and 2045 (that’s roughly $18.5 billion dollars across the full period). That’s according to modeling by Resources for the Future (RFF), a nonprofit research organization.⁷7D Burtraw & N Roy (2025) Offset reform could drive investments in nature-based climate solutions Resources for the Future Their model accounts for both the supply and demand of emissions allowances within California’s cap and trade program, which lets them quantify program-wide revenue with and without the inclusion of carbon offsets. Taking the difference between these two scenarios provides an estimate of the amount of revenue the state stands to lose by continuing to allow the use of offsets.

Considering multiple allowance demand scenarios, RFF concludes that allowing emitters to offset up to six percent of their emissions could deprive the state of between $245.5 million and $923 million annually, relative to eliminating the offset program altogether. In both the high and low demand scenarios, this works out to a roughly five percent reduction in total program revenue.⁸8We calculate this percentage using offset revenue figures from Burtraw and Roy (2025) and cap and trade revenue figures from Petek (2025)

These offsets do not represent real climate benefits

So, what do Californians receive in exchange for leaving so much money on the table? Not much.

In one instance, the Massachusetts Audubon Society sold roughly $6 million worth of offset credits into the cap and trade program, claiming that the proceeds were necessary for it to refrain from cutting down its bird preserves. However, it is likely that the organization didn’t actually intend to harvest its forests; on the contrary, it had preserved them for decades.⁹9L Song & J Temple (2021) A nonprofit promised to preserve wildlife. Then it made millions claiming it could cut down trees ProPublica In another, the CEO of a large timber company explained that his company sold millions of dollars of credits for saving trees that it could not legally harvest in the first place. He later acknowledged, “Society probably didn’t need to pay us for that.”¹⁰10B Elgin (2022) This timber company sold millions of dollars of useless carbon offsets Bloomberg Finally, a non-trivial fraction of offset dollars has literally gone up in smoke. Emitters have spent hundreds of millions of dollars on projects in arid, fire-prone forests across the American West that will inevitably burn. To date, at least 10 projects — representing a total of 13.6 million credits and potentially tens of millions of dollars — have burned.¹¹11G Badgley (2024) Increasingly active wildfire seasons threaten the sustainability of forest-backed carbon offset programs Global Change Biology

These anecdotes add color to a growing body of academic literature that shows that offsets are, quite simply, a raw deal for Californians. At least two studies found no evidence that projects actually change how they manage their forests after enrolling in California’s offsets program.¹²12S Coffield et al. (2022) Using remote sensing to quantify the additional climate benefits of California forest offset projects Global Change Biology ^,1313J Stapp et al. (2023) Little evidence of management change in California’s forest offset program Nature Communications Earth & Environment Instead, the evidence suggests that California’s citizens may be sacrificing money for climate benefits that only exist on paper. In one striking illustration, our own research has shown that at least 30 percent of California’s forest credits result from statistical artifacts, rather than real changes in management practices.¹⁴14G Badgley et al. (2021) Systematic over-crediting in California's forest carbon offsets program Global Change Biology

In theory, carbon offsets are a useful feature of a cap and trade program. They increase the quantity of emissions reduction opportunities beyond the entities that the program covers, leading to potential gains in economic efficiency. Furthermore, emitters often purchase offsets at steep discounts relative to the allowances that the state offers at auction, so they reduce the cost to emitters of complying with the program. This, in turn, shores up their political buy-in. According to this story, offsets are a win-win for policymakers and polluters.³3D Cullenward & D Victor (2020) Making Climate Policy Work

The problem, however, is that there is overwhelming evidence that CARB’s carbon offset program does not achieve the emissions reductions that the legislature requires of it.¹⁵15D Cullenward & D Burtraw (2025) Carbon offsets 2024 Annual Report of the Independent Emissions Market Advisory Committee edited by M Fowlie et al. Since the majority of offset projects are outside of the state, this means that Californians give up investments in their own communities without getting much in return.¹⁶16B Haya & S Lezak (2025) California sends millions of dollars out of state for carbon offsets of dubious quality Goldman School of Public Policy There is reason to believe that this failure is not simply an implementation flaw, but rather a design feature of California’s program. One can readily explain the gulf between theory and practice by observing the program’s financial incentive structure and its history of systematically weakening environmental standards. These characteristics make the program well-suited to providing emitters with what they want: lower compliance costs and the appearance of environmental benefits. However, they are not conducive to delivering real emissions reductions.

California has better things to spend its money on

The dismal consequences of offsets for fenceline communities, the climate, and public revenue mean that California should eliminate them from the cap and trade program. Policymakers could use this money to address a variety of needs, including firefighting, energy affordability, climate mitigation, or replacing funds lost to federal spending cuts. At $245 million per year, even the lower bound of RFF’s modelling would mean a significant infusion of revenue to spend on worthy causes.

Proceeds from the auction of allowances either benefit utility ratepayers or flow into California’s Greenhouse Gas Reduction Fund (GGRF).⁶6G Petek (2025) Assessing California’s climate policies: cap and trade reauthorization, Legislative Analyst’s Office ^,1717G Bang et al. (2017) California's cap-and-trade system: diffusion and lessons Global Environmental Politics Legislators can appropriate GGRF funds for essentially any purpose, as if they were normal tax receipts.⁶6G Petek (2025) Assessing California’s climate policies: cap and trade reauthorization, Legislative Analyst’s Office In theory, it makes sense to use the relatively modest revenues from the cap and trade program for three purposes: first, building political support for cap and trade itself, for example, by compensating consumers for higher prices; second, funding transformative investments in decarbonization,¹⁸18S Davis et al. (2018) Net-zero emissions energy systems Science and third; financing cost-effective climate mitigation projects.¹⁹19For a discussion of these three types of spending, see Cullenward and Victor (2020), at 70-86.

Unsurprisingly, cap and trade revenue is the subject of political wrangling,²⁰20A Laza (2025) Should California’s climate budget pay for high speed rail and firefighters? Newsom’s new plan triggers fiery debate CalMatters and often serves special interests, rather than the goal of affordable, effective climate mitigation.³3D Cullenward & D Victor (2020) Making Climate Policy Work Reauthorization is a good opportunity to improve the quality of this spending.⁶6G Petek (2025) Assessing California’s climate policies: cap and trade reauthorization, Legislative Analyst’s Office With that said, because offsets deprive the state of money while offering hardly anything in return, spending the foregone revenue in any way that benefits the public would be an improvement on the status quo. Lawmakers could finance the construction of fuel breaks in the Sierras, increase firefighting capacity,²¹21Press Release (2025) Senate leader McGuire, large bipartisan coalition of senators champion new legislation: the fight for firefighters act Office of Senator Mike McGuire or develop any number of policies to channel money directly to Californians struggling amidst the affordability crisis. Even if the legislature were simply to spend the money on conservation, removing forest management from the offset market context would be a significant policy improvement. The offsetting framework involves substantial transaction costs — developers, registries, and a host of other intermediaries consume large sums of money that the state could use to directly improve forest management.²²22D Cullenward et al. (2023) Carbon offsets are incompatible with the Paris Agreement One Earth ^,2323C Brunner et al. (2024) Durability of carbon dioxide removal is critical for Paris climate goals Nature Communications Earth & Environment When the aim is simply to improve forest management to enhance CO₂ uptake, many of these transaction costs disappear.

Offsets are not a necessary part of the cap and trade program, from either a policy design or a legal perspective.¹⁵15D Cullenward & D Burtraw (2025) Carbon offsets 2024 Annual Report of the Independent Emissions Market Advisory Committee edited by M Fowlie et al. They have always been a political compromise between polluters and the state government. But this compromise comes at a cost. There is no hard evidence that offsets lead to emissions reductions and they deprive the state of valuable revenue. Furthermore, they significantly exacerbate the negative distributional consequences that already flow from the cap and trade program.²2K Tigue (2022) Why do environmental justice advocates oppose carbon markets? Look at California, they say Inside Climate News Offsets are, quite simply, a bad deal for California. Eliminating them would unlock hundreds of millions of dollars in annual revenue. As the federal government abandons climate funding across the board, ending the offset program would be a welcome signal that states are still capable of making good decisions for the atmosphere and their citizens.