The Continuing Battle Between CO2 Puritans and Pragmatists, Part 2:
Carbon offsets come under increasing scrutiny
16 Aug 2007 in Regulatory Economics, Regulatory Policy
The battle between CO2 Puritans and CO2 Pragmatists continues.
In a post dated July 26, 2006, we discussed the concept of "carbon neutrality." It arose because former Vice President delivered a speech at the Chautauqua Institution in which he said that he and his wife, Tipper, had adopted a "carbon neutral lifestyle."
We did some research and learned that there is no generally accepted definition of "carbon neutrality," but the premise is simple. For every ton of carbon you emit, whether directly by your actions or indirectly by your consumption decisions, you undertake a compensating action or consumption decision that reduces carbon emissions by the same amount. In principle, your ledger of carbon debits would equal your ledger of carbon credits.We analyzed the "carbon offset" market and provided links to nonprofit organizations that sell them. In a post dated August 16, 2006, we asked the question: Is Al Gore really "carbon neutral"? He had come under attack by Hoover Institution research fellow Peter Schweizer who, in a USA Today commentary, accused Gore of hypocrisy for promoting massive reductions in carbon emissions but living a personal lifestyle the emissions from which exceed by over 100-fold that of the average American household. The controversy returned in March 2007 when a self-identified free-market oriented nonprofit organization obtained and published Gore's energy bills.
In August 2006, we defended Gore, at least in part, by noting that there was a vibrant and sometimes heated debate within the environmental community about carbon offsets:
[T]here are two schools of environmentalist thought on this. One camp (call it the "CO2 Puritans") advise people to maximize their personal reductions in CO2 emissions. Another camp (call it the "CO2 Pragmatists") advise people to purchase carbon offsets, which are investments in projects that reduce carbon emissions elsewhere. CO2 Puritans say purchasing offsets is like buying a "right to pollute," whereas CO2 Pragmatists say buying offsets will achieve reduced- and no-carbon technologies more quickly.The evidence indicated to us that Gore was behaving as a CO2 Pragmatist; indeed, he was the subject of more considerable scorn from fellow environmentalists who were avowed (and apparently observant) CO2 Puritans. (It's a fair question whether Gore's advocacy is more Puritan than Pragmatic, and the charge of hypocrisy appears more likely to stick to the extent that he calls on others to be Puritans or expects himself to be exempt from its discipline and sacrifice.)
Today on Page One, Washington Post staff writers David A. Fahrenthold and Steven Mufson take on the carbon offset market in much the same way we did last year. Fahrenthold and Mufson display no skepticism about global climate change as a pressing environmental problem. They raise questions about the validity of carbon offsets sold by various nonprofit groups. The reporters have tumbled to the realization that there are both CO2 Puritans and CO2 Pragmatists. Though they do not adopt our language, their writing displays sympathy for the Puritans' side of the dispute by using the same religious language (emphasized in italics):
Sites such as [Carbonfund.org], offering absolution from the modern nag of climate guilt, have created a $55 million industry that once would have been beyond the greenest of imaginations.But moral appeals to CO2 Puritanism seem to have had little effect, even after a modified form was recently endorsed and promoted by the Academy of Motion Picture Arts and Sciences ("Oscars"). The producers claimed that they found it "easy (and often cost effective) to make simple changes to reduce Oscar's ecological footprint," though none of these changes were actually listed and the carbon reductions achieved were not publicly revealed. Consistent with the criticisms made by CO2 Puritans of other CO2 Pragmatists, the Academy mostly devoted attention to advising others in how to change their lifestyles.
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For individual consumers, an offset can be a tempting alternative to a radical lifestyle makeover. People concerned about climate change could sell their cars and cover their roofs with solar panels. Or, on an offset site, they could become "carbon neutral" with a click.
The debate has now shifted back to analytic questions.
- What are sellers selling, and what are buyers buying?
In our earlies posts, we noted that variability should be expected in the quality of offsets because buyers differ as to what quality they want. The highest quality offset is one for which there is the maximum feasible proof that promised reductions in carbon emissions are actually realized. Like in other markets, higher quality can be expected to more expensive. To the extent that carbon offset sellers compete on price, it is unlikely that they are simultaneously competing on quality.
Fahrenthold and Mufson say that "in some cases, customers may be buying good feelings and little else." This may not be evidence of a market failure; many buyers could be fully satisfied with relatively inexpensive, low quality, offsets. There's often a significant consumer willingness to pay for good feelings.
Clean Air Watch president Frank O'Donnell dislikes the carbon offset market because "it's just like the Wild West" and "there are no controls, no standards." We surmise that he would support federal regulation setting minimum quality standards for carbon offsets. Sellers of high quality offsets also are likely to support such regulation because it would reduce competition, especially competition on price. In this regard, the carbon offset business is like any other: Firms that believe they can profit from government regulation, such as by penalizing or eliminating competitors, can be expected to support it. One practical consequence of regulation is that it would reduce consumer demand for carbon offsets.
- Are there significant quality differences among sellers?
- Do carbon offsets actually achieve what buyers reasonably expect?
To respond to this market need, certification agents have arisen to provide the assurances buyers of high quality offsets want. In some cases, however, certification agents are not fully independent of sellers. Still, as long as these potential conflicts of interest are fully disclosed, buyers can discount the value of potentially conflicted certification claims. Failing to disclose conflicts of interest between sellers and certifiers is not necessarily a market failure because buyers are fully capable of asking whether certification is independent. If a seller fails to provide a satisfactory answer, buyers can shop elsewhere. Claiming a level of independence that is untrue is not a market failure, either; it is fraud.
Without the benefit of this background in economic reasoning, Fahrenthold and Mufson notice that measuring (or rather, estimating) the reduction in carbon attributable to an offset can be very difficult. This should not be surprising, as the scientific linkages between various mitigation technolgies [sic] are often difficult to discern. Some carbon offset sellers have promoted their products without persuasive evidence that their product claims are plausibly achieved. Some carbon offset buyers prefer to purchase products whose promised outcomes are psychologically appealing even though the linkage between these outcomes and carbon emission reductions is tenuous. The market for saving endangered species is analogous; consumers are most easily persuaded to invest in programs to protect charismatic megafauna like lions, tigers and bears. Whether these programs are actually effective often is a matter of some dispute.
Though Fahrenthold and Mufson seem to think the problem is new, the difficulty of estimating the benefits of carbon offsets is well known and pervasive. They do not draw the linkage, but these measurement difficulties are just a small precursor of the challenges facing a federal (or international) greenhouse gas cap-and-trade program.
- Do some sellers behave unethically, for example, by promising a product of higher quality than they actually deliver?
Native Energy's Description of its Relationship to Indian Tribes
About Our Relationship
In August, 2005, The Intertribal Council On Utility Policy (COUP) acquired a majority interest in NativeEnergy on behalf of its member tribes, primarily to accomplish two principal strategic goals:
To enable its member tribes to benefit from the retail value of their green tags. In the past, COUP has looked to NativeEnergy as a wholesale purchaser of green tags from the tribes’ projects. As COUP is the majority owner of NativeEnergy, the COUP tribes will now participate in the retail market directly – while continuing to be a wholesale supplier.To reduce cost and risk of participating in the retail market. Entering the retail market through NativeEnergy also gives the tribes a head start in the retail market, leveraging NativeEnergy’s established national presence and loyal customer base to reduce the tribes’ cost and risk of starting new retail businesses. In addition, through NativeEnergy the tribes can now enter the retail market jointly, rather than in competition with each other.
The investment is structured to have COUP retain a significant minority interest in NativeEnergy, and to hold the bulk of its equity interest for distribution to its member tribes that sell green tags to NativeEnergy. Each COUP Tribe will earn a portion of COUP’s equity interest through the pricing terms of the green tags sales to NativeEnergy. NativeEnergy developed this creative deal structure to accommodate the COUP tribes’ currently modest financial resources – no tribe will incur any investment cost unless and until it can do so out of the new revenues it realizes from its successful wind energy development and green tags sales.
