Common Tragedies

Thoughts on Environmental Economics


Posted by Daniel Hall on April 4, 2008

Reader Alisdair takes a swipe at cap-and-trade systems by comparing emissions permits to indulgences. How original! Unfortunately for him the analogy is as spurious as it is cliché — carbon emissions impose widespread costs on society; at the margin the price of eliminating some of those emissions is less than the burdens they impose; so we as a society decide that we should get rid of those emissions and make ourselves better off. This does not bear any resemblance, as far as I can tell, to a medieval system for funding the church by hoodwinking the clueless.

The analogy does start to have at least some applicability, however, when applied to voluntary carbon offsets, a point I was reminded of today when reading this:

While carbon offset programs sound like a good deal for the environment, their impact is not as straightforward as it seems. In fact, such programs may not do as much good as people think.

The motivation behind voluntary purchases of carbon offsets can be compared to making charitable contributions, says economist Matthew Kotchen at the University of California at Santa Barbara. People must receive some private benefit — such as feeling a “warm glow” or gaining social approval — from providing a public good. Otherwise, why would they bother to take measures to forestall climate change, knowing that others can benefit from their efforts without lifting a finger?

Unlike donations, however, the purchase of carbon offsets is an effort to clean up one’s own actions. That could lead to more carbon-intensive activities if offsetting makes people feel less guilty about global warming. For instance, those who would otherwise buy a Prius may go for a Hummer instead if they can offset the latter’s carbon dioxide emissions. Or a household may consume more electricity if they know that they can easily make up for the environmental impact by buying more carbon offsets.

If people voluntarily purchase carbon offsets, that must mean the offsets are “cheaper” than the guilt they feel over their carbon footprint, notes University of Melbourne economist Joshua Gans. The lower the price of the offset, the more easily they assuage their guilt. If a consumer’s electricity use is no longer constrained by guilt, then he might end up consuming more electricity.

Note the large difference between a mandatory cap-and-trade system — where actors are compelled to comply by pecuniary threat — and voluntary offsets, where individuals are unconstrained and motivated primarily by guilt (or something like it).

This doesn’t mean that voluntary actions can’t at least provide some benefit, just that we shouldn’t rely on them to supply the socially optimal outcome:

In a recent paper, however, Gans finds that it’s unlikely that carbon offset programs would do more harm than good. He argues that the ability of green power to pressure utilities into lowering prices depends on the volume of offsets for building that green power capacity. The price effect would be small if only a few people subsidize a wind farm. But if a large number of people purchase offsets, then a huge amount of green power would be available. This is more likely to displace dirty electricity than to provoke more of it.

Net emissions of carbon dioxide will likely fall as a result of carbon offsets, but Gans suggests that the reduction is probably not as large as offset purchasers think. “They’re not wiping them out entirely,” Gans says.

The article’s final recommendation is definitely one that all researchers can get behind:

The compulsion to free-ride is just too strong. “I think that [carbon offsets programs] can have a meaningful contribution, but they’re not to be thought of as a solution [to climate change],” Kotchen says. How much they are contributing to the environment isn’t clear, he notes. The complexity of behavioral and industry responses means that more research is needed. (emphasis added)

Right on.

H/T: John Whitehead.

One Response to “Indulgences?”

  1. […] to curb emissions. Backers say its promise is as a first step. At issue in the debate over the legitimacy of carbon credits is whether the whole concept of using markets attack greenhouse-gas emissions will […]

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