Marginal Revolution: Do carbon offsets work?

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Do carbon offsets work?

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

I'm with mcq. Who does the accounting and how does anybody really know how much carbon would have been added but for this funding? It seems to me that private forestry should be entitled to huge carbon offsets, but I doubt the exponents of this project would want to reward companies for cutting down trees while planting new ones all the time.

In the area where I live a lot of people have wood and/or coal burning stoves for heat, because natural gas wasn't available when they were built. Most of them now have gas furnaces, but as the price of natural gas goes up because it's now burned in new power plants, guess what these homeowners will burn to compensate. Are we going to send the environmental police around to monitor who's burning wood or coal at home? Did I mention that these homeowners also largely own deer rifles?

Posted by: AST at Feb 28, 2007 6:07:34 PM

Wind farms and photovoltaic cells require heat engine backup to supply power when
the wind is not blowing or the sun is not shining.

Posted by: Peter Bowen at Feb 28, 2007 6:12:32 PM

Dumb question: In a market economy, wouldn't it be more straight-forward and efficient to invest directly in companies that produce "clean power" or related equipment, rather than purchasing these nebulous carbon offsets?

I'm sorry, but carbon offsets seem awfully similar to some of the schemes put out there by Enron... rife with opportunity for fraud and corruption.

Posted by: jt at Feb 28, 2007 6:14:28 PM

"Only the rich should have power".

Harrumph, I thought that was a Republican position. LOL.

But that's the message, if "carbon offsets" grant you immunity from conservation.

Posted by: anil petra at Feb 28, 2007 6:24:56 PM

One problem with windfarms and geothermal and other low/no carbon emission technologies is that you end up producing electricity where production is feasible rather than where electricity is needed. And while electricity is a commodity, simple applications of "the law of one price" don't hold very well because the transportation cost is so high - beyond the obvious right-of-way costs, towers, cables, transformers and the like, a lot of juice is lost in transmission and distribution -- by this estimate, about 7% of US electricity production in 1995 was lost in T&D:

http://climatetechnology.gov/library/2003/tech-options/tech-options-1-3-2.pdf

From a rational economic perspective, carbon offsets have much to do with liberal guilt and little to do with intelligent reduction of emissions.

Posted by: Anarchus at Feb 28, 2007 6:30:58 PM

There is an old saying that goes "If you are going to talk the talk then walk the walk.".

Apparently Rev. Gore and the High Hollywood/New York clergy of Rev. Gores Church of Gaia are not willing to walk the walk. They love their mansions, private jets, SUV's, electronic toys, air conditioned stables, expensive food, drink, flowers etc. flown in from distant parts of the globe way too much to part with them. Of course they want you to give up everything for their religion while they give up nothing and in fact become even bigger energy wasters. They even fret that third world countries are beginning to use too much carbon and think they should remain in the dark ages-probably because they are worried that they wont have enough fuel for their jets and yachts not to mention their mansions. But they are worried that they are beginning to look a tad hypocritical with their "do as I say not as I do" rot. So they, like the decadent and corrupt aristocracy of the middle ages, have come up with their own form of "indulgences" known as "carbon credits". That way they can have their carbon guzzling "sins" washed away in a great big ponzi scheme that also serves to make them richer. I know that many are not aware of the fact that Rev. Gore himself owns one of the largest "carbon offset" sellers. See http://www.ecotality.com/blog/?p=350

Rev. Gore took L. Ron Hubbards advice to heart, "If you want to be filthy rich forever invent a religion". He did, and the same suckers who fell for Scientology have now fallen for the Church of Gaia.

Posted by: Ennis at Feb 28, 2007 6:37:54 PM

Something that I havent' seen mentioned on this thread yet -- demand for electricity varies throughout the day. It peaks in the evening and nadirs in the middle of the night. Power companies cover the swing primarily with carbon-emitting sources (NG and coal), because they're easiest to tweak on short notice and the costs of running them are highly dependent on the cost of the inputs. Wind, nuclear and hydro have mostly fixed costs inputs -- once you have the plant and the people there to run it, you may as well run full-out.

Posted by: dexev at Feb 28, 2007 6:43:06 PM

NYUEconProf:
I hate having to do price-quantity graphs the way you econ profs do them (price on the left and quantity on the bottom) because it flies in the face of my mathematics training that the independent variable goes on the horizontal axis, but I'll try to flop my mental axes and answer your question:

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.

The problem with your analysis is the upward-sloping marginal cost curve. Costs to electric utilties have to be considered on various levels: On the capital level, there is the cost to build the power-generation and distribution facilities. On the next level is the maintenance of those facilities. These two kinds of costs produce an upward-sloping marginal cost of electric generation and distribution capacity. The day-to-day operation level puts a marginal cost on the actual generation of a kilowatt-hour of power that is pretty low. I don't have any hard numbers, but I'd imagine that it's dwarfed by the other cost categories.

The result is that the shift of the demand curve to the left is reflected almost entirely in the equilibrium price dropping, and the quantity prosumed only going down slightly, if at all.

The long-term effects are: Because the utility is making a lower net profit on the lower-priced electricity, it has less incentive to build any new dirty plants (if the effect is large enough, perhaps even to maintain the existing plants) and possibly more incentive to build new clean plants. Because the consumers expect dirty electricity to be cheaper, they may have less incentive to purchase more efficient appliances, causing the long-term demand curves for both dirty and clean electricity to shift back to the right.

Which doesn't reduce the amount of dirty electricity produced, but at least it doesn't increase it.

Posted by: The Monster at Feb 28, 2007 6:47:28 PM

Wind, nuclear and hydro are also the lower cost facilities . . . . . . so you keep your lowest cost facilities running all the time, and occasionally meet peak load demands (either intra-day or seasonal surges) by running high cost facilities for very short periods.

Posted by: Anarchus at Feb 28, 2007 6:51:09 PM

Belated reply to Jane Galt: because I was talking also about subsidizing carbon sequestration, not just renewable power. (Yes, Tyler's post was about power generation, so I should have been clearer that I was tlaking more generally.)

Posted by: James Grimmelmann at Feb 28, 2007 7:53:46 PM

In most States the wind power displaces natural gas generation. Some natural gas is always in storage. In some States the wind power is used partly for pumped storage of water at relatively high elevation. The water can then run downhill during windless times.

As more and more wind power comes on line there will have to be far electricity trading between regional electrical grids. It will be both an engineering and financial challenge.

All this makes me doubt any of the people who claim to 'audit' carbon offsets because there is too much uncertainly to factor in everything.

Posted by: mhw at Feb 28, 2007 7:54:14 PM

I've ran the numbers, the number one solution to reducing carbon dioxide emissions is putting out underground coal fires around the world, and replacing all coal plants with nuclear power plants. Wind and other renewables is not the answer in this century.

Posted by: Dan at Feb 28, 2007 8:09:02 PM

Thanks to Tyler and NYUEconProf for expanding their discussion. Certainly if things like predatory pricing are going on, that makes things much more complicated.

I still doubt that it's at all likely that installing low-marginal cost clean power would cause more dirty power to be consumed ; my impression is that most electricity markets are either sufficiently regulated or sufficiently competitive that you don't have anything approaching a true monopoly.

Posted by: jonm at Feb 28, 2007 8:25:47 PM

Why don't they use these carbon offsets to pay average people like me to put a solar cell on my roof or supplement my purchase of a hybrid? If they did that it would help average people, the economy (in multiple ways like manufacturing of the cells and vehicle) and the environment in a far greater manner then they currently do.

That should be the core of liberalism - but of course that would leave the power in the individual so they would never go for it.

Posted by: LifeTrek at Feb 28, 2007 8:58:07 PM

Some have likened carbon offsets to indulgences, others to the Civil War practice of renting substitutes. I liken it to the sumptuary laws of the late middle ages which limited the rising middle class from dressing like the aristocracy. Which is, of course, exactly what the Gores and the Hollywood mega-millionaires who gave him his award are.

Posted by: Moneyrunner at Feb 28, 2007 9:03:08 PM

Just one question.

Are carbon offsets tax deductible?

Posted by: Daniel at Feb 28, 2007 9:08:24 PM

people who worry about supplying water to the Western states used to be a pretty conservative bunch: engineers, hydrologists, water lawyers. But the data on the Colorado River and the snowpack melt are pretty damn alarming.

so, unless people are willing to let the City of Phoenix die off (Arizona has very low priority on the Colorado), and to set Las Vegas at zero growth (it's using its full allocation), it may be time to recognize that greenhouse gas emissions are likely affecting climate and ramping down their production is likely a really good idea.

Posted by: Francis at Feb 28, 2007 10:16:05 PM

I believe that you have to think transgenerationally.

At the present time, the installed base of PV generation, wind generation, and biofuels are doubling every two years or so (it varies, and the exact numbers are not necessary for this discussion.) Over 6 years, each of those sources will incrase by a factor of 8, assuming that people continue to work hard and solve technical problems, and if funding for construction can be found. Also, costs of manufacture are declining. Over 18 years, there will be an increase, potentially, of these CO2-free energy sources of about 8*8*8 = 512. That's assuming that funding continues to come in, and "Indulgences" are one of the sources of funding.

Meanwhile, the old, dirty electricity is being used to manufacture the PV cells, wind farms, and biofuels facilities, but 18 or 36 years from now the facility will be worn out, and will have to be replaced. That is when the CO2 savings really start to occur, because it will not be replaced by a copy of itself, but by the technology of 18 or 36 years from now.

The fact that electricity use is growing at 2% per year is important, and increased manufacture of windfarms and PV cells may transiently increase CO2 emissions from electricity generation and use, or may not, depending on how rapidly people and firms shift to energy-conserving appliances. but the supply-demand curve is not relevant to this argument, as it deals only with short-term changes in customer behavior, not with long-term investments. Add to that, many people are motivated by other things than the pure cost-demand calculations (e.g., guilt over CO2 use, a vague sense that pollution is bad or has external costs, etc.)

In short, the "indulgences" help to pay the cost of the transition from the way that we do things now to the way that we'll be doing things 20 and 40 years from now. And if the rich people pay more for the transition than the non-rich, that doesn't matter much. Either through taxes, investments, or indulgences they'll pay more anyway.

Posted by: spider at Feb 28, 2007 10:37:30 PM

Almost all the carbon credits that people like Gore acquire these days are not from replacing existing fossil fuels. They are agricultural based credits. Somebody plants a tree, which grows by absorbing CO2 from the air. He plants a tree farm, records a conservation easement preventing him from cutting the trees down, gets a letter from a forester as to how much carbon the tree farm will absorb, and gets the credits certified by an exchange. He then sells them.

Trading credits from cleaning up energy use will have to await mandatory cap and trade system. A manufacturing plant or a utility will be issued allowances to cover a percentage of his energy use, and he can then sell the allowances if he does not need them. The number of allowances granted will gradually decrease over time.

But without the mandatory cap, there would be nothing to trade. and under a cap and trade system, shutting down a plant is the easiest method of conservation.

Posted by: ted at Feb 28, 2007 11:12:42 PM

Carbon offsets will not be deductible till they are mandated by law.

Posted by: ted at Feb 28, 2007 11:15:31 PM

With five dollars and a pint you can buy some great discount Carbon offsets at the local homeless shelter.

Posted by: RickC at Mar 1, 2007 12:14:21 AM

If you don’t have stored capacity, e.g. hydro to adjust for wind, you have to fluctuate other generation. Wind and nuclear don’t mix because you can’t cycle nuclear units like gas plants to adjust for fluctuating wind. Besides, gas plants are cheap to build. If we build wind in inefficient locations we have to install more back up capacity and burn more gas. You can’t just have wind produce peak power. What do you do at non-peak times when wind is at full force? Dump it into Norway FREE like the Danes do and then let the water run over the dams? The exercise is to figure out how wind changes the supply mix and calculate the costs-benefits of the mix. The EU did a comparison. External Costs-Research results on socio-environmental damages due to electricity and transport - EUROPEAN COMMISSION 2003 http://www.externe.info/externpr.pdf . It’s tough to beat nuclear for base load which is most of the energy demand. So where does that leave wind without storage?

Posted by: Ron M at Mar 1, 2007 12:23:49 AM

The claim made earlier that PV and wind are "CO2 Free" is ludicrous. In fact, except for the desert Soutwest of the US, PV arrays consume nearly as much energy in their manufacture and infrastructure, as they take to produce.
I live in New Jersey a Northern state, and my esteemed legislature has voted to subsidise residents who install PV arrays. But the numbers don't add up. We are too far North, and have too many cloudy days to reach energy breakeven. So the PV owners are producing more CO2 than the coal fired electricity users.
Until alternatives to polycrystalline Silicon PV arrays which are low energy to produce are able to generate more than 12% sunlight to electricity conversion efficiencies, this will be the case.
I have been hearing about "breakthroughs" in this technology for years, but thermodynamics is a bitch, it hasn't happened yet, and may never happen.

Now as to wind farms. Just try to get real world data on a large windfarm's net production of electricity vs. power to produce and maintain. I've tried. They don't give out this data. If it were truly a net energy producer, then wind generated power would cost less than conventional thermal power. The fact that it does not is a pretty good indicator of the massive energy inputs necessary, and the poor net energy status of this supposed power source.

Posted by: j.pickens at Mar 1, 2007 1:22:28 AM

Sorry,
Change:
PV arrays consume nearly as much energy in their manufacture and infrastructure, as they take to produce.

To:
PV arrays consume nearly as much energy in their manufacture and infrastructure, as they produce.

Posted by: j.pickens at Mar 1, 2007 1:25:30 AM

The best and most direct way to offset carbon would be to pay to have the carbon removed from the atmosphere. That is why the Richard Branson prize to come up with the best way to do this is right on target. http://news.bbc.co.uk/1/hi/sci/tech/6345557.stm
You emit extra CO2, you pay to remove it. Simple and without the market distorting affects of the standard carbon offset plans that result in little or no net reduction.

I mean any plan that has brilliant economists like Tyler and NYUEconProf unable to simply demonstrate significant benefit is doomed. Or maybe I "should be" doomed would be more accurate.

Posted by: Johnny at Mar 1, 2007 1:59:36 AM

Apart from the economic and social engineering, it's also extremely likely that planting trees as a carbon offset will make things worse. That's assuming a one-to-one offset. Trees filter dust out of the atmosphere, which decreses its albedo. That's a warming effect, sort of a reverse "nuclear winter". Are the offsetters factoring in considerations like that? Plus, what happens to all that amassed carbon once those trees die? If we have an appreciable increase in termites due to the increase in trees, then we'll have a corresponding increase in termite flatulance. Final net result: people will be offsetting CO2 with methane, which is a much more potent greenhouse gas.

Posted by: Marlon at Mar 1, 2007 7:18:28 AM

I'd like to buy some offsets but Ted Kennedy is blocking the project I want to invest in. He doesn't like how the wind turbines look for some reason.

Posted by: Herb at Mar 1, 2007 8:53:45 AM

If Teddy just put on another 100-200 lbs, he'd block out enough sunlight to offset maybe 10% of my carbon footprint . . . . . . . can I invest in THAT?

http://dojak.net/blogpix/kennedy.jpg

Posted by: Anarchus at Mar 1, 2007 10:29:11 AM

jpickens is partially correct: The claim made earlier that PV and wind are "CO2 Free" is ludicrous. In fact, except for the desert Soutwest of the US, PV arrays consume nearly as much energy in their manufacture and infrastructure, as they take to produce.

Current generations of PV cells produce in total about twice as much energy as is consumed in their manufacture. For some applications, such as home A/C and heating (with heat pumps) little infrastructure is required. I hinted that rapid conversion to solar (PV and otherwise), wind, and biomass could result in transient CO2 increases. Windfarms generate about 20 times as much energy as is used in their manufacture. For biomass, the ratio is 1.4 for corn ethanol, 10 for cellulosic ethanol, 35 for small experimental installations growing algae. The transition to an economy with far less CO2 emission than we have now will take, as I indicated, 20-40 years of continuous effort and investment, but all the progress to date supports the idea that it will occur, and is occurring.

The rates of improvement that I cited are approximations. Some sources are doubling in less than a year, and some are doubling in about 2-3 years. As I wrote, the costs of manufacture are declining in all fields, due to improvements in design and in process engineering.

For references see recent, i.e. 2007, issues of the AAAS journal Science and the MIT magazine Technology Review. If you google "clean edge act" you can get to the Senate site for the "PACE" act, and an August 2006 review of the progress due to the passage of the 2005 energy bill.

It's pretty pointless to debate this without recent information, and without disaggregating the energy market. Sure solar will play a more prominent role in California, Texas, and Mississippi than in New Jersey and Upstate New York. That hardly implies that it will always be negligible.

Posted by: spider at Mar 1, 2007 3:18:05 PM

"The best and most direct way to offset carbon would be to pay to have the carbon removed from the atmosphere. That is why the Richard Branson prize to come up with the best way to do this is right on target."

Doesn't this effort just scream "unintended consequences"??? Carbon is SUPPOSED to be in the atmosphere. C02 is necessary for life on this planet. Sure, we are putting more into the atmosphere than perhaps we should, and reducing emissions is a almost certainly a worthwhile goal. Call me over-cautious, but this Branson scheme sounds crazy.

Posted by: jt at Mar 1, 2007 4:46:04 PM

In answer to the question on deductibibility, carbon offsets can be tax deductible if purchased from a 501c3, at least to my knowledge. A good example is carbonfund.org, easily the lowest cost provider even on a pre-tax basis.

Posted by: Dan Akst at Mar 1, 2007 5:41:49 PM

Isn't it naive and simplistic to restrict carbon offsets to energy itself? Doesn't almost any product or service require energy for its production?? Seems to me that wearing socks with holes in them for a while, instead of buying new ones, would reduce carbon emissions. Spending less money (not more for offsets) cuts energy use -- and the cost of providing products and services obviates the need for complicated computations.

Posted by: Libertarian at Mar 2, 2007 2:12:12 PM

Libertarian: true, reducing consumption of all kinds will reduce energy use and thus carbon emissions. But as I pointed out in my comment at Feb 28, 2007 1:05:43 PM, the goal can't simply be to eliminate carbon emissions. The goal should be to reduce carbon emissions while still increasing consumption (i.e. human prosperity). So when you do eventually get around to buying new socks, you'll want those socks to have been made with energy from clean sources. Subsidizing clean sources is a great way to get that, and voluntary subsidies in the form of consumer-purchased carbon offsets is a great way to subsidize them.

Posted by: eddie at Mar 3, 2007 10:40:25 AM

The opening statement is quite wrong. In an auction market (or administered dispatch), power generators bid their MC. For wind that's essentially zero. For coal, is the cost of coal times the plant efficiency; so to for gas and oil units. If the clearing prices is greater than MC, the plant runs and the owner picks up some change. If prices are high, a lot of change. If lower than MC, the plant doesn't run. So at the margin, wind farm capacity, bidding zero, forces some fossil units to shut down when they would otherwise be running. And the system operator knows exactly what units are at the margin at every point in time. So we kown exactly which units would have been running absent wind, and how much carbon fuel they would have burned.

Posted by: Bruce Stram at May 9, 2007 5:55:37 AM

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