Common Tragedies

Thoughts on Environmental Economics

The carbon offset and international development act of 2009

Posted by Rich Sweeney on May 21, 2009

Consider this new policy idea: The United States Government will tax all domestic carbon emissions between now and 2025 at some relatively small amount, let’s say $10/ton CO2. Then each year it will take this entire sum of money and use it to buy international offsets. If it acts through its development agencies or some sort of iterative bidding process, the government could essentially play a monopsony role in this new market, extracting the rents from offset suppliers and refunneling them back into the program.  This would maximize the number of carbon offsets purchased (and therefore tons of CO2 abated) for a given level of domestic carbon taxation. If, on the other hand, there are multiple buyers of offsets (like the EU) or the informational/ bureaucratic deficiencies of the “monopsony-like” arrangement become too costly, the US could simply purchase all offsets at the market clearing price. This would effectively send the rents of the program to the offset suppliers (or some middleman) so that emissions “reductions” would be smaller, but the same amount of money would still be flowing to developing countries.

A tax of $10/ ton would do little to change domestic CO2 consumption, which is around 6 billion tons per year. But it would purchase a lot of international offsets, especially if the government can price discriminate. In EIA’s 2008 analysis of Leiberman-Warner, in 2015, the government purchased over 750 million tons of international offsets at around $21/ton, for a total cost of around $16 billion. Using this point and the origin, we can map a very crude estimate of EIA’s international offsets supply curve. A back of the envelope calculation reveals that the US could purchase over 1.5 billion tons of offsets for $60 billion at the market clearing price, and over 2 billion tons if it can price discriminate. If you believe offsets are real (which is outside the scope of this post), then the US could effectively reduce its carbon footprint by 33% overnight for around $200 per person! Moreover, it would send $60 billion / year in revenue to developing countries, placing them on a cleaner path to development. A 2.3 second Wolfram Alpha search revealed that 2006 US economic aid was around $23 billion.

I’m actually pretty skeptical of international offsets as a compliance mechanism personally but in recent weeks I’ve come to see that Waxman-Markey is really just one big offsets program anyways (as Josh and Danny already pointed out). Congress and the lobbyists involved have become fixated on lowering the carbon price (which EPA now says will be in the $13-17 range for the early part of the program). Yet the only way you get this price without completely gutting the abatement targets is through offsets. The bill allows for up to 2 billion tons of offsets per year, which is more than the total ammount of abatement required under the cap during at least the first decade. Thus, if EIA’s L-W analysis is any indication of what will happen under Waxman-Markey (and I believe it is), the US will continue to chug along during the first decade, with domestic emissions declining by maybe a percent or two. Compliance will come in the form of massive amounts of offsets, which, depending on how its handled, will send large rents overseas at the expense of American taxpayers (as Josh argued yesterday). If this is really what cap-and-trade is going to boil down to anyways, a mandate to purchase international offsets, would it make sense to simply make that an explicit policy? Would this simple policy be more or less easy to sell politically?

Or is this new policy idea so obviously ridiculous/ undesireable that this simple thought experiment makes you question the role of offsets in Waxman-Markey…….

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One Response to “The carbon offset and international development act of 2009”

  1. This is directed at Josh and Rich’s posts.

    Although this argument doesn’t really work if you want a higher carbon price to drive domestic innovation, as part of the post-Kyoto agreement the U.S. is going to be expected to send about $20 billion in taxpayer dollars overseas to support adaptation/low-carbon development in developing countries. If you accept this, and for better or worse you will probably have to if you want there to be an international agreement, then it’s a question of where this money should come from and who should control it. My sense is that it is much more politically feasible and possible to get this money from the cap-and-trade system managed by the U.S. EPA/State Dept, as there is no way this amount of foreign aid will ever be given to the UN/World Bank. If there was a carbon tax the U.S. would still need to take a lot of the money and ship it overseas, but if they didn’t exempt 85% of companies from taxation as is done under W-M, then maybe there would be enough money to protect low-income consumers and provide money for developing countries. I think that’s the real problem.

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