Trouble in the Carbon Offset Market:
Double-counting and other econ 101 errors
4 Sep 2007 in Regulatory Economics
We've posted several times on "carbon neutrality" -- how
it's defined, how environmentalists are split
between CO2
Puritans and Pragmatists, and further ramifications of their
conflict centering on the nascent market carbon offsets (see here
and here).
Supporters say buying offsets is an effective and justifiable
way to compensate for CO2 emissions. Opponents liken carbon offsets to
the indulgences sold by the pre-Reformation Roman Catholic Church.
Los Angeles Times staff writer Alan
Zarembo examines two specific aspects of the controversy:
- Do offsets purchase new reductions in greenhouse gas emissions, or do they merely transfer wealth from buyer to seller>
- Do sellers claim credit for more than the amount of greenhouse gas reductions they actually achieve?
In the market for carbon offsets, buyers and
sellers share the responsibility to make sure that the transactions in
which they engage match appropriate expectations. But not all
buyers want the same thing -- some care only about the warm glow they
obtain from doing good, whereas others want to be sure they
actually reduce their "carbon footprints." Consequently, the supply
side of the market is rich with variation in the quality of offsets
sold. A market failure only arises if buyers receive a product whose
quality is below their reasonable expectations. That could happen if
sellers commit fraud (for which both civil and criminal penalties
already apply), or if buyers fail to exercise due diligence (by
performing a reason able amount of product quality research). If
Congress were to ever enact an emissions permit program, then these
problems would have to be addressed on a much larger scale, probably by
an Executive branch agency through a complex series of regulatory
actions.
Zarembo illustrates both problems anecdotally. To explain that
the reductions in greenhouse gas emissions promised by sellers
may not actually materialize:
The producers said that every ounce of carbon emitted during production -- from jet travel, electricity for filming and gasoline for cars and trucks -- was counterbalanced by reducing emissions somewhere else in the world. It only made sense that a film about the perils of global warming wouldn't contribute to the problem.
Co-producer Lesley Chilcott used an online calculator to estimate that shooting the film used 41.4 tons of carbon dioxide and paid a middleman, a company called Native Energy, $12 a ton, or $496.80, to broker a deal to cut greenhouse gases elsewhere. The film's distributors later made a similar payment to neutralize carbon dioxide from the marketing of the movie.
It was a ridiculously good deal with one problem: So far, it has not led to any additional emissions reductions.
According to Zarembo, what Chilcott purchased through Native Energy wasa small sliver of a Pennsylvania methane digester that cost $750,000 ($631,000 of which came from state and federal grants)and a smaller slice ofthree Alaskan windmills thatcost $3.1 million ($2.8 million from federal grants). Combined, these projects were said to reduce 37,000 tons of CO2 equivalent.But Native Energy, which contributed 9% of the cost of the methane digester and 1% of the cost of the windmills, claimed (and presumably sold offsets for) 100% of the carbon reductions. Assuming proportionality, the proper amounts were 2,707 tons from the methane digester and 90 tons from the windmills.
Economists who perform benefit-cost analysis call this "double-counting." It's an elementary error. In a properly conducted benefit-cost analysis, every cost and every benefit are counted exactly once. Advocates are susceptible to the temptation tocountsome of the costs less than once and count some of the benefits more often. Conversely, opponents are prone to make the opposite errors. That's why independent analysis of benefits and costs is generally more reliable than work performed b y advocates or opponents. In the case of carbon offsets, reputable sellers seek independent measurements and estimates-- not just audits of their own calculations, and certainly not audits performed by like-minded souls.
Zarembo also notes another problem with the carbon offsets Native Energy sold to Lesley Chilcott: none of the projects she "helped fund" were actually new. Each was an investment that proceeded independent of Native Energy's contribution.That means Chilcott's purchase of carbon offsets from Native Energy actually yieldednothing at all, except for a $496.80 wealth transfer to Native Energy. The company paid about $2.50 per ton to the Pennsylvania farmers who built the methane digester, and $4 per ton to the Alaskans. That'sa weighted average of $2.55 per ton, or 21% of the amountChilcott paid. Native Energy retained the remaining 79%.
Zarembo says Native Energy approached both the Pennsylvania and Alaska projects knowing that they would be undertaken without their involvement. That means Native Energy knew that the actual reduction in greenhouse gas emissions achieved bytheir investment was zero.
The Federal Trade Commission's guidelines on environmental claims says, in part:
Native Energy's carbon offsets appear to violate both of these provisions.