The voluntary market for carbon offsets provides a potentially low-cost way for purchasers of offsets to compensate for their emissions of greenhouse gases by paying others to undertake activities that avoid, reduce, or sequester greenhouse gas emissions. However, several factors contribute to challenges in understanding the market. First, while most markets involve tangible goods or services, the carbon market involves a product that represents the absence of something—in this case, an offset equals the absence of one ton of carbon dioxide emissions. Second, ensuring the credibility of carbon offsets poses challenges because of the inherent uncertainty in measuring emissions reductions or sequestration relative to a projected business-as-usual scenario. Any measurement involving projections is inherently uncertain. These challenges are compounded by the fact that project developers produce offsets from a variety of activities—such as sequestration in agricultural soil, and forestry projects, and methane capture—and do not use a single set of commonly accepted quality assurance mechanisms. Third, many transactions do not involve a central trading platform, exchange, or registry system. These factors limit the market’s transparency and pose challenges for market participants, especially consumers.

Additional oversight of the voluntary market could address some of these challenges, but would also impose costs on government oversight bodies and increase costs for market participants. Some options for increased oversight include requiring the use of standard quality assurance mechanisms, mandating the use of a common registry, establishing product disclosure requirements that help consumers evaluate an offset’s quality, establishing best practices, developing a government certification system, providing incentives or developing voluntary programs to encourage participants to take certain actions, and limiting the allowable types of activities that can generate offsets. Consideration of these approaches involves trade-offs among cost, quality assurance, and consumer protection. The Federal Trade Commission’s efforts to update its Green Guides for environmental marketing claims may also enhance the existing oversight framework, which consists primarily of laws affecting contractual agreements and fraud.

The options for enhanced oversight identified above may increase in importance in the context of a compliance market associated with any future policies that place binding limits on greenhouse gas emissions. While allowing carbon offsets for compliance with mandated reductions in emissions can decrease overall compliance costs for regulated entities, challenges with the credibility of offsets could compromise the integrity of a compliance scheme. In addition to the oversight options identified above, the government could consider further steps to address uncertainties with offsets such as limiting the extent of their use for compliance, discounting a percentage of all offsets, and imposing insurance requirements for offset providers and purchasers.