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Do carbon offsets work?
Maybe-Megan-McArdle writes:
When you donate money to build a new windfarm, you don't take any of the old, polluting power offline; you increase the supply of power, reducing the price until others are encouraged to buy more carbon-emitting power.
In other words, these carbon offsets shift back the demand curve for dirty power but they also shift out the supply curve for power as a whole. (The persnickety might argue the demand curve doesn't even shift back, but if you have to buy all those offsets you will think twice about your next plane trip.) Competition from wind power forces down the price of the monopolistic dirty power company (electricity?), which means that other people buy more of it. The quantity of dirty power consumed might well go up rather than down.
A better approach for carbon offsets might involve buying up a power plant and taking it off the market, thereby raising price and discouraging consumption.
Or it might be better if that "wind farm" is a failure and a fraud.
Furthermore if you simply buy less of a non-storable good such as electricity, price to other demanders will go back down and social quantity consumed will not change. The boycott matters only if general capacity shrinks over time, and that of course requires a large boycott.
If the dirty power source is from a broadly competitive sector (is there one? gasoline? cars?), the carbon offset is more likely to work. If a non-dirty competitor comes on-line, the dirty power source has no option of lowering price and expanding quantity sold; the price of the dirty power source can't fall below marginal cost. Instead the supply of the dirty power source falls and the offset works.
The bottom line: Unless you can put them under, don't try to compete on price with your local power company.
Posted by Tyler Cowen on February 28, 2007 at 07:13 AM in Economics | Permalink
Comments
Total power consumed will rise as price goes down, but thats obviously not necessarily the case for "dirty" power consumed.
Posted by: josh at Feb 28, 2007 9:08:07 AM
The issue is well-understood in carbon-offset circles; responsible offset funders investigate projects to make sure that the projects (a) actually work; (b) don't merely free up dirty power that will go back on the market; and (c) won't subsidize efforts that would have been undertaken anyway (for any of a variety of reasons). (Sometimes even projects that fail (b) can be worthwhile, if they chance the state of the regulatory debate so that restrictions on dirty power are more politically feasible. But most offset NGOs don't count on that.) The key question for the would-be offset buyer is more of an agency problem: to make sure that the organization you're going through has a good screening process in place. The surge in popularity of offsets, in part a result of An Inconvenient Truth, may have created excess demand for them, so that some intermediaries may be selling low-quality or poorly-screened offsets.
Posted by: James Grimmelmann at Feb 28, 2007 9:29:54 AM
You ignore one more potential benefit. Almost all manufactured goods (and power is certainly a manufacturered goods) show a decrease in real unit costs of production as accumulated industry experience producing the good grows.
One could argue that wind power is not cost competitiove now because coal has been moving down the learning curve for a centurt or more, while wind has been relatively stagnant. Subsidizing wind farms will lower their current unit costs, which will make them more price competitive, which will allow them to steal market share from coal, which will allow them to accumulate experience faster, which will move them down the cost learning curve to the point where they become cost competitive without the subsidy.
Perhaps a bit of a stretch, but not entirely implausible.
Posted by: sd at Feb 28, 2007 9:47:04 AM
Hey, I saw that you had mentioned offsets and I wanted to let you know that there is a new report published this last week on the offsets industry, The Carbon Neutral Myth - Offset Indulgences for your Climate Sins. Free download from www.tni.org
Carbon offsets are the modern day indulgences, sold to an increasingly carbon conscious public to absolve their climate sins. Scratch the surface, however, and a disturbing picture emerges, where creative accountancy and elaborate shell games cover up the impossibility of verifying genuine climate change benefits, and where communities in the South often have little choice as offset projects are inflicted on them.
This report argues that offsets place disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change. Promoting more effective and empowering approaches involves moving away from the marketing gimmicks, celebrity endorsements, technological quick fixes, and the North/South exploitation that the carbon offsets industry embodies.
Posted by: kevin smith at Feb 28, 2007 9:51:42 AM
I'm not sure that I understand how any renewable project could fail to "free up dirty power that will go back on the market" unless part of the project involves buying up an old coal plant and closing it (something that I'm pretty sure the local regulators would forbid you to do). Electricity is a commodity. Can you elaborate, Mr Grimmelmann?
Posted by: Jane Galt at Feb 28, 2007 9:55:26 AM
Can you explain the reasoning more fully? As it stands, this is the worst post I have read on MR.
If the argument is supposed to rest on Micro 101 (upward sloping supply, downward sloping demand, ... ) then it is patently false as josh notes.
If it is relying on a more complicated model (e.g. allowing for power dispatch by auction, capacity investment and mothballing, generators bidding above marginal cost, long vs short term demand elasticity ...) that should be explained.
Posted by: jonm at Feb 28, 2007 10:41:10 AM
If the goal were to reduce and/or eliminate the use of dirty power, we could simply kill all the humans and be done with it.
If we assume instead that neither humans nor their use of energy are going away any time soon, and that both in fact will be increasing, then the goal should be to reduce and/or eliminate the average dirtiness of power. Subsidies to clean power seem like a sure bet to make this happen, even if the net effect is that the cost of both clean and dirty power goes down and thus the amount of both goes up. We'll get more additional clean power than we will additional dirty power.
Posted by: eddie at Feb 28, 2007 1:05:43 PM
Jonm and Josh, read the post carefully, it is correct as stated.
Posted by: Tyler Cowen at Feb 28, 2007 1:29:47 PM
More importantly, the point of carbon offsets is to be able to say "Yes, I use electricity, but unlike most consumers of electricity I'm not increasing the world carbon output when I do so." Carbon offsets work perfectly well for this purpose (to answer Tyler's question).
A one-ton carbon offset ensures that one ton of carbon that would otherwise have been emitted if not for your purchase - *ceteris paribus* - is not emitted. Granted, ceteris is not paribus, and your purchase will also induce others to increase their power consumption and thus their carbon output. But while you may be responsible for providing them with an incentive to increase their carbon output, you are not responsible for their increased carbon output. Incentives or no, their increased carbon output is the result of their own decision to do so.
If one's carbon emissions are a matter for moral approbation or condemnation, then you are to be praised for reducing your carbon output through purchasing carbon offsets, and the others who bought more dirty power because the price went down are to be condemned. Unless they also bought offsets accordingly. And if everyone bought offsets equal to their dirty power purchases, then there would in fact soon be no net carbon emissions at all.
Posted by: eddie at Feb 28, 2007 1:31:55 PM
Does this really need to be this complicated? Oil is a
limited resource and is quite liquid.
If you want other people to use less of it, just buy more
of it, and don't use it.
Posted by: Marco at Feb 28, 2007 1:38:42 PM
Like some other posters, I remain confused. Building a wind farm shifts the supply curve for wind power rightward. This reduces the price of wind power. Dirty power is a close substitute for wind power (indeed, a perfect substitute once the power is generated). Accordingly, the demand curve for dirty power shifts leftward. It is this leftward shift in the demand curve for dirty power that Tyler must be referring to when he says “Competition from wind power forces down the price of the monopolistic dirty power company (electricity?)…”. And it is true that this will cause the price of dirty power to fall, which will increase quantity demanded. But this is a movement ALONG the new demand curve, which can never return the quantity of dirty power demanded back to its original value. Therefore, the offset, by increasing the supply of wind power, decreased the final equilibrium quantity of dirty power bought and sold.
Am I missing something here?
Posted by: NYUEconProf at Feb 28, 2007 1:46:24 PM
A better approach for carbon offsets might involve buying up a power plant and taking it off the market, thereby raising price and discouraging consumption.
That wouldn't be a carbon offset, because there's no way to measure the amount of carbon not emitted due to your actions (contributing to the purchase and closure of a power plant). In this case, you are paying someone (the plant owner) to simultaneously not emit carbon *and* not produce power. That doesn't reduce carbon output, because the plant owner isn't actually responsible for the emissions - the consumers are. And they'll just go elsewhere to get their power and its accompanying carbon, albeit at greater cost. While that greater cost means lower power use and thus lower carbon emissions, *they* get the credit for reduced carbon emissions as a result of their lower energy use. *You* get no credit for reducing carbon emissions just because you made it more expensive for them to buy energy.
A carbon offset requires paying someone to not emit carbon *while still* producing power.
Posted by: eddie at Feb 28, 2007 1:56:59 PM
Kevin Smith beat me to it. I was going to refer to the Acton Institute's Powerblog which says the same thing.
I guess that carbon offsets are based on an accounting balance sheet -- on one side carbon is produced but on the other side the same amount of carbon is reduced so it all zeros out. Nice and neat if it actually happens. But then I haven't spent much time reading about them. I always assumed that the offset was planting more trees or putting Geritol in the Pacific, not producing green power.
Isn't the carbon offset just a form of price discrimination? Doesn't the person buying the indulgence basically end up paying twice as much for the power? Getting in return a warm feeling in his/her heart?
Daniel
Posted by: Daniel at Feb 28, 2007 3:51:10 PM
To some of the commentators, don't confuse industry and single-firm supply curves. Increased competition can force a monopoly into a high-volume, low-price mode.
Posted by: Tyler Cowen at Feb 28, 2007 3:53:13 PM
"Jonm and Josh, read the post carefully, it is correct as stated."
So it is. My bad.
Posted by: josh at Feb 28, 2007 4:26:01 PM
Isn't this just an example of the monopolist facing a competitive fringe textbook model? In that model, isn't it true that although the total amount of energy consumed will rise, the amount of energy produced by the monopolist will actually fall, since the marginal revenue curve for his residual demand will always be below his MR curve without the fringe (i.e. the MR curve derived from the market demand). If so, Tyler's analysis is not correct.
Posted by: EconStudent at Feb 28, 2007 4:50:39 PM
Tyler is brilliant, so I know I'm leaving something out. Using a simple monopoly model, my earlier comment still applies. If demand for a monopolist's dirty power shifts leftward (due to a lower price for wind power) the monopolist's marginal revenue curve will shift leftward as well. With an upward sloping marginal cost curve, the new intersection between marginal revenue and marginal cost must lie to the left of the original intersection. So profit-maximizing quantity must fall. Clearly, there is some other factor involved that some of us (including me) are not accounting for. Is there a simple model that gives the higher quantity result?
Posted by: NYUEconProf at Feb 28, 2007 5:18:08 PM
The reason Gore is an unmitigated fraud is because he has the political stature to put nuclear power production back on the table, which is far and away the solution that can actually reduce our carbon emissions the most. Its not even close. 1/3rd of our current emissions are from coal and gas power plants, if we swapped out the impossible legislation from nuclear to coal we could cut our emissions by 1/3rd in a decade.
If the world is really in cataclysmic danger, the minor worries nuclear power provoke are as a sick joke compared to global warming. So when Gore doesnt back nuclear power, its pretty darn obvious he doesnt believe his own BS for a second.
Posted by: Mark Buehner at Feb 28, 2007 5:26:24 PM
Mark Buehner makes part of the point I wanted to make. All this talk of wind farms! We will never, ever have enough wind farms to replace the power generated by the current system of power plants. Carbon-offsets, even if they work (which I do not believe), would never be more than a boutique "cure" for those who can afford it. If widely adopted they would quickly max out the possible replacement "green" energy sources.
Now, if your carbon-offset indulgences were being used to build nuclear plants to replace coal and oil fired plants, then you've got something. Ironic that the people trying to force a carbon-free lifestyle down our throats are the exact same people that killed the nuclear power industry in the United States. Our electrical production would probably be entirely CO2 free by now had they not used their scare tactics and disinformation to halt all new nuke development.
It's old wine in new skins. There's always a new "crisis" on the horizon which somehow never quite appears, and the underlying "cure" for the crisis always involves the same thing: more government control over the population. How many times will the Left pull this rabbit out of their hats before people stop falling for it?
Posted by: Peterike at Feb 28, 2007 5:44:20 PM
A better approach would be to buy the poor new Priuses (Prii?) in exchange for their 1991 Impalas.
Posted by: Randy Pickett at Feb 28, 2007 5:46:12 PM
A one-ton carbon offset ensures that one ton of carbon that would otherwise have been emitted if not for your purchase - *ceteris paribus* - is not emitted.
If only that were true. "Ensure" is a pretty strong word, and one I'm not sure should be so hastily applied to the current carbon offset marketplace.
Posted by: mcg at Feb 28, 2007 5:46:17 PM
Assuming older=dirtier; wouldn't buying and closing the older power plants be the optimal strategy to increase the average cleanliness of power plants? They would presumably be replaced by newer cleaner ones which would lower the average pollution cost of the power.
Posted by: Steve French at Feb 28, 2007 5:48:34 PM
NYUEconProf raises a very good question. Here is one simple model. The wind power enters the market, so the monopolist lowers price (and increases quantity) to put the wind supplier out of business. Keep also in mind that the natural monopoly-esque electricity company may not face upward-sloping marginal cost. Price discrimination is another complication. But the point of NYUEconProf is correct for competitive industries. The prediction is indeterminate when market power is present.
Posted by: Tyler Cowen at Feb 28, 2007 5:52:40 PM
In the real world rather than the bolgospehere, the electricity market is constantly expanding, at the rate of approximately 2% per year. So far not enough wind has been added to the mix at any time to take up this expansion, so utilities must add new generation in addition to wind. In this expanding market, nothing gets replaced so all the posted economic arguments are meaningless.
In addition, To keep prices low utilities generally take the lowest price resource. So any wind power added to the mix will replace gas generation, which is far more expensive than coal.
This is what happens in the real world, I can't explain what happens in the political world of the blog.
Posted by: Ted at Feb 28, 2007 5:54:57 PM
A carbon offset requires paying someone to not emit carbon *while still* producing power.
I'll admit to being confused for the reason stated above (courtesy of Eddie). TC's using a definition of the term "carbon offsets" that is not familiar to me. A carbon offset is a payment from me to you that (1) grants me a license to produce carbon while (2) forbidding you to produce the carbon that I'm producing. If you're not producing carbon anyway, (2) becomes a de facto subsidy to keep not producing carbon. In other words, I drive my car to work and pay you to walk to work, which you like fine because you work a block away. If I'm a coal power plant, I either shut down, clean up, or operate while paying my clean wind farm neighbors for the carbon that I'm expelling but they are not. Based on my distant memories of undergrad econ, this will result in a decrease in the supply of "dirty" power while increasing the supply of clean power, because we are now doing better at factoring in the true cost of dirty power (which previously had been an externality).
Am I missing something here?
(What's being obscured in this debate is whether Gore's carbon offset program is legitimate. It probably isn't; but that doesn't address whether a true carbon offset program is legitimate or not.)
Posted by: von at Feb 28, 2007 6:01:37 PM
