Instead of or in addition to the emission permits created by the Waxman-Markey cap-and-trade bill, fuel suppliers could buy "carbon offsets" from people who took action to reduce CO2 emissions. For example, a factory that decided to meet part of its energy needs by installing solar panels could sell offset certificates that would allow the buyer to emit as much CO2 as the solar panels saved. In theory, this would reduce the cost of the solar installation, encouraging its adoption, although it would of course mean that the CO2 "saved" would be emitted somewhere else.
Waxman-Markey permits offsets amounting to more than a third of US emissions in 2008, split between domestic and international projects.
Under the Kyoto Protocol, the similar provision allowing purchase of offsets from exempt countries is called the Clean Development Mechanism (CDM). The ostensible purpose is to encourage these countries to undertake voluntary reductions in emissions.
In practice, it must be expected that virtually all proposed projects that have a small carbon footprint will be depicted as eliminating CO2, thus creating an asset that can be sold to some company in an Annex I country (i.e., in one of the advanced nations that are supposed to reduce their emissions). In those cases where the project was contingent on selling the offset, the transaction will transfer funds from the buyer to the seller, without any reduction at all in overall emissions. If the project would have gone ahead anyway, without the offset, the net effect would be to permit the buyer to increase global emissions.
Third World leaders will be sorely tempted to announce wholly imaginary carbon-intensive projects and then refrain from them, for the specific purpose of conjuring up imaginary emission savings that can be sold as offsets. In practice, the market price for offsets, and hence for carbon credits, will be determined by competition between the perpetrators of such scams. The principal effect will be to transfer funds from consumers in Annex I countries to the Swiss bank accounts of Third World kleptocrats, while reducing the effectiveness of the cap-and-trade program in curbing emissions.
The Global Warming True Believers at the Climate Change Conference in Copenhagen in December, 2009 were well aware that the CDM is vulnerable to abuse. The problem they face is that the obvious profit potential of the CDM is the primary if not the only reason that most Third World leaders pay any attention to climate change. Their countries are exempt from any climate-related obligations under existing or proposed treaties, so the whole subject is essentially irrelevant to them unless it can be used to extract benefits from the Annex I countries. Instead of accepting constraints aimed at reducing corruption of the CDM, they actually demanded more money, as what they called Climate Justice – i.e., reparations from the advanced nations to compensate them for all the damage we have allegedly done to the climate in the past. Unsurprisingly, the Conference then collapsed.
The one nation, one vote rule in the UN General Assembly and in the Intergovernmental Panel on Climate Change means that both these organizations are controlled by the Third World. Their delegates are unlikely to authorize continued expenditures on the subject if the proposed solutions do not offer them lucrative revenue streams. Keeping the money coming is thus crucial to maintaining the international clamor over the need to curb CO2.
I predict that Climate Justice will become the preferred justification for transferring funds (bribes?) to Third World leaders. Reparations would presumably be government expenditures, which means that Global Warming ideologues and their tame politicians could influence the behavior of the recipients. The CDM involves possibly corrupt negotiations between individual companies and officials in exempt countries. The long-term results are unpredictable, but would almost certainly include scandals that weaken popular support.