[asa] Carbon Offsets for the Elite (or, How the Wealthy Adapt to Warming)

There was an amusing story in the Wall Street Journal this week about Al
Gore's indoor heated pool and the way in which he purchases "offsets" for
his personal carbon emissions:
http://www.opinionjournal.com/best/?id=110009720 According to the story:
"Last August alone, Gore burned through 22,619 kWh--guzzling more than twice
the electricity in one month than an average American family uses in an
entire year." Gore "offsets" this energy usage by purchasing blocks of
"green" power from wind farms and such.

The story also notes that Oscar attendees received as part of their "swag"
100,000 pounds worth of carbon credits from an outfit called TerrPass (
http://www.terrapass.com/) Here's how TerraPass describes itself: "When
you buy a TerraPass, your money funds renewable energy projects such as wind
farms. These projects result in verified reductions in greenhouse gas
pollution. And these reductions counterbalance your own emissions."

As I've said before, I'm not a skeptic of the basic scientific conclusions
about global warming. I am, however, skeptical of emissions trading
schemes, and the above is one reason why. The market dynamics of this
"offset" process mirror some potential problems with a global market --
specifically the differential between the wealthy and poor concerning
elasticity of demand.

Second, the economics of this seem dubious at best. Gore and his fellow
Oscar winners aren't really "offsetting" their carbon energy use. What
these "offsets" are really doing is maintaining the supply of carbon energy
such that the elite's demand can be satisfied. Here, the concept of the
"elasticity" of demand is important. A demand curve usually is not
constant. At different places in the curve, demand responds more or less
sharply to changes in price. Demand is "elastic" if demand is relatively
sensitive to incremental changes in price. Demand is "inelastic" if demand
is relatively insensitive to incremental changes in price.

For most of us, I suspect that demand for energy is not very elastic. A
relatively small fluctuation will cause us to change behavior -- lower
thermostats, not driving as much, etc. For the very wealthy, however,
demand for energy probably is more elastic. They aren't likely to notice a
few thousand dollar increase in cost of electricity for the swimming pool.
At best, then, the "offets" Gore is buying will allow some alternative
energy supplier to offer energy to the more elastic segments of the market
(us regular Joes) at prices competitive with traditional carbon-based
suppliers. But this is highly unlikely, since the "offsets" purchased
aren't anywhere near the amount needed to make up for the higher variable
costs of supplying alternative energy (not to mention the sunk costs of
research and development and building infrastructure). Thus, demand for
traditional energy is not likely to decrease among the more elastic segments
of the market, or if it does, the decrease will be marginal.

Meanwhile, the "offsets" allow the more inelastic segments of the
traditional energy market to feel good about their conspicuous energy
consumption, fueling additional demand. The net is likely to be an overall
increase in traditional energy usuage!

Once the problem is conceived in terms of elasticities of demand, another
solution suggests itself. Where there are differing elasticities of demand
for the same good, a typical efficient response is differential pricing.
Differential pricing means that the more elastic segments of the market are
charged more than the more inelastic segments.
This is one reason why a graduated carbon tax seems to make sense. Instead
of buying "offsets," the price of energy should be graduated based on the
amount used. After a basic level, the price would increase sharply, to the
point where even elastic segments of the market would feel pain for
conspicuous use (either through regulation, taxation, or both). I'll be
this would do more to fuel research into alternative energy sources than an
"offset" market that only allows the wealthy to buy their peace.

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Received on Fri Mar 2 10:09:38 2007