Common Tragedies

Thoughts on Environmental Economics

I drink your MILKSHAKE

Posted by Andrew Stevenson on April 7, 2009

Reading this article I couldn’t help but think of Daniel Day-Lewis’ outstanding performance as the oil tycoon Daniel Plainview in There Will be Blood. There’s this liquid substance under your property, and we’re going to pay you just for the right to drill and take it out for you. You won’t even have to lift a finger! Or, in 2009:

“There’s an odorless, colorless gas that is sucked out of the air by your trees, and somebody’s going to pay you for that.”

I don’t want to be overly cynical (although it does seem to be a theme of this blog), but when most Washingtonians or New Yorkers read about people like Justin Maxson who are using market mechanisms to promote sustainable forestry (and that’s what we’re all about here on CT), the only green they can think of isn’t the kind growing on trees.

Continuing on Danny’s and Josh’s week o’ offsets, I think stories like this (and the issue of offsets in general) really illustrate the difficulty many “environmentalists” still have in using “economics” to achieve their goals. Is it morally wrong to support something that will do a lot of good but that people are only interested in because they can make money? Many climate activist-types I know are seriously angry with the huge amount of offsets in Waxman-Markey. Shouldn’t they be happy because more reductions will be achieved at a lower total cost? Or is that not really the goal here? Do we really want to cause the power companies some pain and make them take clean energy more seriously? But, you say, those costs will just get passed on to the consumer anyway…and on it goes.

Of course, I’m not about to resolve this debate right here, but I do know that it’s a really important one to keep having. Oh, and when you’re finished with all that arguing, there is A LOT OF GREEN to be made for whoever gets forestry right in the U.S. (if the EPA allows domestic forests as an offset category). To the tune of 150 million metric tons…just in Wisconsin.

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4 Responses to “I drink your MILKSHAKE”

  1. Max Epstein said

    As someone who is really opposed to offsets but also doesn’t get activists who want high carbon prices for the sake of sticking it to the man, I’ll try and take a stab at this.

    The issue isn’t with offsets in theory, but in practice because of the many issues with verification. Its no secret that in Europe refrigeration plants sprung up, not to sell a product, but to sell the offset rights to clean up the mess that never would have been created in the first place if not for the opportunity to sell CER’s. But say you left out High Global Warming Potential (HGWP) gases, which would simplify things a bit. You still are stuck with the question of additionality generally. If an owner of some forest in Wisconsin agrees not to sell his land for timber, does the prospective timber company really decide to just scrap its own plans? Or does it just find forests to lumber somewhere else, potentially even from better carbon sinks due to lesser regulation in Latin America/Asia? You may have made the supply of timber land infinitesimally more expensive by eliminating one source, but that is hardly a one-to-one relation with decreasing emissions by the purported amount.

    There’s a reason these offset categories (e.g. agriculture) are not just regulated under the cap in the first place – they’re particularly hard to monitor and verify emissions for. But if its hard to monitor/verify emissions, its even harder to monitor and verify not-emissions, which is what offsets require. Again, if monitoring/verification wasn’t such an issue, they’d just be under the cap, and people who cleared new cropland or failed to flare methane at very small mines would be assessed a permit obligation.

    So do we just abandon the potential for reductions from agriculture? No, but consider a couple simpler and more effective alternatives. First, we could just raise the price we offer to Conservation Reserve Program land, in light of our realization of a new service it offers – carbon abatement. Second, to the extent we want to pursue other sorts of reductions from certain agricultural practices, the government could simply hold a reverse auction, taking bids to supply these services. If we did it that way, the high supply would tend to drive the price down to around Marginal Cost, which would in turn decrease the return on fraudulent participation. Conversely, allowing offsets to trade for higher-priced permits introduces too much profit and thus incentive for fraud – the system is vulnerable enough due to inherent monitoring issues.

  2. [...] simple questions: Is it morally wrong to support something that will do a lot of good but that people are only [...]

  3. Andrew Stevenson said

    Those sounds like promising alternatives Max, but from what I’ve heard there is going to be a push from the Senate to include agriculture offsets in the cap-and-trade system. It looks like an alliance could be forming between the “Rust Belt” and agriculture-state Democrats, essential players for getting a bill passed but they could also have a lot of power to shape the system in less desirable ways.

    I also see your point about the contradiction in allowing offsets from sectors that were not included in the cap for monitoring/verification reasons, although I think you may be overstating the problem of international leakage in the Wisconsin timber industry.

  4. Carlos Ferreira said

    Max,

    I agree with your first paragraph. Raise the price of timber, and you’ll be increasing the opportunity cost of any tree in the Amazon forest. It would work well IF we could get every country (well, at least the carbon big hitters).

    However, why is it that smaller profits equate with increased incentives for Moral Hazard? A rational economic agent will be fraudulent if the expected profit is equal or larger to the penalty*probability of getting caught. If you already have a hefty profit why would you risk in order to get a bit more?

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