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12/02/2007

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Adam Stein

I'm pleased that TerraPass, a company I co-founded, has been featured so prominently on this thoughtful blog. You raise a number of issues that have been widely considered within the carbon offset industry. I thought I might be able to shed some further light.

First, it is a bit surprising that both you and Becker spend so much time on the question of whether carbon offsets are a suitable replacement for a mandatory cap-and-trade system. Becker concludes that cap-and-trade is the "far preferable" direction, and you suggest that offsets are a "poor substitute" for cap and trade. In fact, offsets are not a substitute for cap-and-trade at all. Rather, the voluntary market is a potentially useful complement to a regulated market, acting in the short-term as a sort of policy bridge while the world waits for the U.S. federal government to take meaningful action; and in the long term as a supplementary source of carbon reductions.

What do I mean by policy bridge? The design of carbon markets is quite complex, touching on a number of scientific, technological, political, and economic issues. The carbon market established under the Kyoto Protocol has undergone a number of well-publicized birthing pains, and various U.S. states are now entering into regional agreements that are forcing them to grapple with similar issues. The voluntary offset market provides a useful policy laboratory, both for regulators attempting to craft legislation and for market participants attempting to understand how carbon constraints will affect their business operations.

In the longer term, it is easily conceivable that the voluntary market will have an impact beyond simply the raw number of tons of CO2 reduced. Bear in mind that the most important function of the market is to set a clear price signal for carbon emissions. If voluntary market participants help to raise that price, their actions will ripple through the entire market. This is more than just a theoretical possibility. For example, the RGGI cap-and-trade system in the northeastern U.S. will likely include significant set-asides of allowances for the voluntary market.

Regarding whether the existence of a voluntary market reduces political pressure for mandated reductions: this is a charge that is made frequently, and without real evidence. Awareness of the causes and potential solutions of climate change is still dismally low in the United States, and it is hard to see the disadvantage of programs which draw attention to the problem. In fact, the rise of the voluntary market has coincided with a remarkable surge in support for political solutions to climate change.

Finally, I feel compelled to issue one correction. You claim that "reducing [carbon emissions] to zero would be a disaster because atmospheric carbon dioxide is essential to maintaining a temperate climate." As stated, this is false. Atmospheric carbon dioxide is indeed essential to maintaining a habitable planet, but manmade carbon emissions are not necessary to this balance. The world was quite temperate prior to the Industrial Revolution, before which anthropogenic emissions were effectively zero.

Regards,

Adam Stein
Co-founder, TerraPass

neilehat

Cap and Trade? Wonderful! Where have I heard this before? Oh Yeah! Air Pollution credits and Market Trading of Credits to reduce air pollution. Is that program still around? The only real solution to air pollution is increased efficiency, recycle, conservation, and end of pipe treatment. All very expensive propositions. That's why the developing countries are given a "by" on this and also helps their competitive position in the world"s markets, and not too mention, their massive increases in carbon releases.

Terrapass, these guys aren't in NYC by any chance are they? Sound likes some bridge in some place called Brooklyn, New Yorkers keep trying to sell to tourists.

Andy McKenzie

I enjoyed your discussion on carbon offsets and cap and trade policies, and I agree with Becker's conclusion that they are essentially the same.

But what about a carbon tax? Wouldn't that more effectively affect all parts of the supply chain than a cap-and-trade policy?

Greg Mankiw endorses this carbon tax policy and has created the Pigou Club to showcase its supporters. Members of the club include Tom Friedman, Al Gore, and Paul Krugman.

Wouldn't a carbon tax be the most effective way to deal with this problem? I'd love to hear your thoughts. Thanks.

neilehat

The more I read this the more I become convinced that what we have here is a problem in science trying to be solved by non-scientists using non-scientific means. Perhaps we need to get the Theologians involved as well and we can pray up answer.

ChinaCoalWatcher

There is a much more cost-efficient way to use funds to not only "offset" carbon emissions but prevent their emission entirely - by buying the property rights to the carbon while it is still in the ground.

According to Judge Posner's numbers, TerraPass charges about $9 per ton CO2 (And you've got to wonder how much goes to overhead). But high-rank anthracite coal costs less than $10 per short ton (or only $3 per metric ton CO2 - THREE times less) at the minehead and that's *after* a great deal of capital and labor has been invested in exploration, mine creation and extraction. The mineral rights to coal in undisturbed or semi-explored property, even the cheaply extractable stuff, auction for pennies (even fractions of a penny) per "minable ton".

Judge Posner's "1 Million Families" could aggregate the present value of their indefinite expenditures of $300/year, and with their combined $6 billion (at 5% discounting and provided they conspired strategically without the industry realizing what was going on) could essentially cheaply buy themselves a ban on coal in the US when they decide to surprise everyone and permanently retire the resource.

And anyway, putting the stuff beyond use (or until, or if ever, sequestration technology comes online) is the only real way to effectively limit long term CO2 concentrations in the atmosphere. According to BP - all the carbon in "proved reserves" on Earth would perhaps leave us with 600ppm in the atmosphere. As Judge Posner pointed out, any simple analysis shows that it doesn't matter how fast the emissions occur, or who emits, or how much "clean" energy is produced - but only the aggregate amount of fossil fuels burned by everyone between now and the end of the century when there is likely to be significant depletion.

So, only by both banning further exploration AND permanently retiring some existing proved reserves could one hope to effectively reduce the long run CO2 Concentration. But one can do that quite cheaply while at the same time automatically providing all the incentive the energy market needs to invest in innovation.

Not only would there not need to be an expensive, controversial, and legally-intense cap-and-trade system, or emissions targets, but the industry starved for scarce resources will automatically increase the price of unretired carbon-based fuels - thereby reducing consumer demand through price signals and making alternatives cost competitive.

So, see, a MUCH better deal than Terrapass presently offers. For the same price of a mere offset, you could make sure an order of magnitude greater of carbon dioxide never gets emitted by anybody. Or, Mr. Stein, if you are interested in my idea, The ChinaCoalWatcher, a soon-to-be (God willing) attorney, could help you and Terrapass set up a "carbon conservation trust" to use "offset money" to both buy and hold all these mineral-rights in perpetuity - thus greatly expanding your competitiveness in your industry in terms of tons offset per dollar spent.

A student of Economics

Mr. Stein or Mr. Posner, please help me with the math:.

Posner writes: "[If] 10 percent of the U.S. population [paid] TerraPass or other carbon-offset providers to offset an average of 32 tons per family. The effect would be to reduce annual worldwide carbon emissions by 20 hours' worth, or about one-quarter of 1 percent." of total carbon emissions.

So this implies that 100% of U.S. households account for 2.5% of the world total. That seems too small, given the U.S. share of world population and output. What's missing? Does household consumption not count all the CO2 for the goods and services we buy (or equivalently produce]? Is Posner's household exceptionally frugal compared to other Americans?

Robert Ayers

Mr Posner believes that "... carbon
emissions pose a much greater danger to
the environment than other pollutants"
but many thoughtful scientists, like
Bjorn Lomborg, do not.
What should we think about carbon-offsets
if in fact "global warming" is 100% natural?
(I note that the IPCC apparently thinks that
the warming between 1900 and 1930 was natural,
but the similar warming between 1970 and 2000
was not, so natural warming is certainly a
possibility.)

ChinaCoalWatcher

Good spot "A student of Economics"!

Anthropogenic global CO2 emissions are presently somewhere around 30 billion metric tons a year. That makes the hourly rate 3.4 million tons, not "16 million" as Judge Posner states. (It's still about 1000 tons a second, if that helps you to understand the sheer scale of the issue).

I am assuming Judge Posner's 32 tons is close to the average US household emissions - since my own household was around 28 tons according to Terrapass' website. That's only considering the carbon emissions from driving, flying, and home electricity and gas use.

So, if 10 million families (10%) collectively release 300 million tons - that would be 88 hours and 1% of the global total - not "20 hours' worth, or about one-quarter of 1 percent.", and all US households would emit a tenth of the world total.

Speed

Total U.S. greenhouse gas emissions in 2006 were 1.5 percent below the 2005 total—the first annual drop since 2001 and only the third since 1990.
US Department of Energy.
ftp://ftp.eia.doe.gov/pub/oiaf/1605/cdrom/pdf/ggrpt/057306.pdf

Adam Stein

ChinaCoalWatcher -- your proposal is an interesting one, but unfortunately it's based on a confused premise. You're mixing coal up with the act of burning coal. Buying a ton of coal doesn't result in any incremental emissions reduction. There's another ton of coal right behind it waiting to be burned. I could choose to hoard diamonds, lumber, and leather handbags as well (all made of carbon), and I wouldn't reduce the amount of carbon emissions at all. The price of an offset has nothing to do with the price of coal -- rather it is has to do with cost of supplanting coal use with cleaner forms of energy.

Andy McKenzie -- Good question. The important policy objective is to put a price on carbon emissions, which could just as well be achieved with a carbon tax as with a cap-and-trade system. There are well-known advantages and disadvantages to each type of policy. A carbon tax is thought by most economists to be more efficient than a cap-and-trade system. A cap-and-trade system, on the other hand, is generally regarded as more politically viable. There is a long list of pros and cons to each type of legislation -- too many for me to cover really well right here. There's a lot of good discussion of this topic at grist.org.

neilehat -- the market for "air pollution credits" -- more properly, sulfur dioxide credits -- is considered a resounding success. That market brought down sulfur emissions more quickly and more cheaply than even its designers hoped, which is why acid rain isn't receiving many headlines these days.

Student -- I'm not sure exactly how Posner derived his numbers. The U.S. is responsible for about 25% of global carbon emissions. Posner's numbers do seem low to me as well, but it's really hard to say without knowing what he included in the calculations. I do know that an additional $300m flowing to renewable energy every year would be a material amount.

a Duoist

As the science of ecology is made by our political Left into another secular religion ('sacrifice, hope, salvation') called environmentalism, one observation about human nature:

The 'true believer' of any ideological movement always moralizes while flicking a whip.

Tollison

Such expenditures are possibly best seen as advertising or reputational outlays by firms and individuals. They realize that their actions will have no (or a negative) impact, but that is beside the point to them.

anon

"There is nothing wrong with emitting carbon dioxide." So can I stop holding my breath now?

Jack

Posner seems to have the good judgment not to trust that investing $282 per year will do much to offset even his carbon footprint and I'm sure, knows that those of more modest means will not find a spot on their priority list for such an investment.

Also, his investment does not offer any lowering of his fossil fuel consumption, that as we approach the peak of the oil production curve which will then fall short of the increasing consumption curve.

It's hard to believe that an investment of $25/mo is likely to do much on any front, but it would pay the interest on $5,000. Perhaps he can find an energy saving project for that amount that would return some of his investment or even return a "profit" which could then be re-invested in further energy saving projects. I guess that for those with two houses, the biggest bang for reducing individual carbon footprint would be that of having someone living in the extra one.

Does anyone here think our pols will ever be brave enough to point out that conserving fossil fuel must play a major role in both CO2 and peak oil? My guess is that conserving will prove to be the cleanest, most readily available "alternative" fuel of the near future, in part because when the largest consumer/waster of fossil fuels goes on a rehab program (as we did in the late 70's) even the cartels will lower their prices.

Raul

"makes emitting carbon dioxide into the atmosphere respectable, whereas it ought to be thought sinful"

Reminds me of an ( Israeli(?) )psychology experiment I read of where they started to fine parents for coming late to pick-up kids after daycare. Amazing economic incentive, right? But as soon as the shame behind coming late was diluted, they observed parents became even more tardy. Absolutely counterproductive!

Prof. Becker's point sounds very similar.

PS. I think I am borrowing from "Freakonomics".......not sure.

neilehat

Adam, SO2 Credits? Actually, it's VOC's (volatile organic compounds) and HAP's (hazardous air pollutants). I should know, I helped Industry develop it's end of the system. From the practical technical standpoint all the program did is transfer pollution from one location to another by allowing business's to buy credits to cover their expansions instead of installing pollution control equipment at the source of the pollution. Although, it did help fossil fuel power plants to defray their costs of installing pollution controls (which was the governments plan in the first place), but at the expense of other locations.

If you don't want to take my view of the issue. Take the time to read Curtis A Moore, of Harvard University's Report, "Marketing Failure: The Experience with Air Pollution Trading in the United States". Perhaps then, you won't speak so glowingly of a Market System.

Martin

@student/low numbers: TerraPass very likely does not include all CO2 emitted by producers of the products Judge Posner buys. For example a bottle of Champagne for $100 may seem to be low in carbon per dollar, but how would one know? The only sensible measure of one's carbon footprint is calculating one's consumption or income and then multiplying by the average carbon/GDP-dollar ratio.
Here is an example: If you buy a full fare economy class ticket for $1000 or a bargain one for $200 on the same plane it might seem that you emit the same carbon. Alas, that is wrong. The $200 ticket is presumably for a seat that may have gone empty otherwise. The $1000 ticket makes the flight profitable. There is little carbon footprint from flying intercontinental every weekend as long as you do it on a really cheap ticket, as then you know you are on an otherwise empty seat. Flying full fare in an empty aircraft on the other hand is really bad. So price is a good signal. That by the way is a strong reason for cap and trade as then price will convey information about all externalities. Presently even if you want to act morally and avoid emitting lots of carbons it is nearly impossible to calculate the carbon emission of a given purchase.

Jan

@Raul

The daycare study was conducted by Uri Gneezy and Aldo Rustichini, was published in the Journal of Legal Studies, and can be found on google by the title, "A fine is a price". But note that Ariel Rubinstein, an otherwise very thoughtful and modest Israeli economists/game theorist, harshly criticized the study, basically claiming that the data was at least worthless.

Raul

Jan:

Thanks for the citation. I wasn't aware that the study was disputed. Maybe that's motivation for me now to look up the originals and the critique. Nevertheless, the premise it is based on seems indentical to the one invoked in this case.

Geld Lenen

@ Martin

I think your calculation is not that correct internationally seen.

But more wondering if cases like these will be given at my exchange program in the states.

paco

Dear Judge Posner, FYI there is a good analysis of the problems with the Kyoto protocol's cap and trade system in a recent commentary published in the Oct. 25 issue of Nature (449:973-975).

Jack

Martin: I see your point, but don't think I'm in complete agreement.

First, it seems fairly sloppy to correlate income with CO2 footprint as there'd be only the "Well the guy has discretionary income and probably spends some percentage of it burning fossil fuels" assumption to go on.

Then, what's the point of correlation the champagne at CO2 per dollar spent? I'd imagine the only difference between the spendy stuff and "two buck chuck" would be tossing a few marginal grapes on the pricey product.

Your airplane example is interesting:
"Here is an example: If you buy a full fare economy class ticket for $1000 or a bargain one for $200 on the same plane it might seem that you emit the same carbon. Alas, that is wrong. The $200 ticket is presumably for a seat that may have gone empty otherwise. The $1000 ticket makes the flight profitable. There is little carbon footprint from flying intercontinental every weekend as long as you do it on a really cheap ticket, as then you know you are on an otherwise empty seat. Flying full fare in an empty aircraft on the other hand is really bad. So price is a good signal."

........But how do we know which ticket or series of tickets makes the flight profitable? My guess is this is a scheduled airline and the decision to put the route in the schedule is simply that it is, on average, profitable. (Or given airline realities, doesn't lose more than say leaving the plane parked?) Some flights would make their number with one more $1,000 sale, while other days it might be the sale of 5 cheap seats.

I'm sure they'd like to fill the plane with first class, but apparently the demand at that price is lacking? Thus the split pricing that drives us all mad, and it's as much the sale of some number of cheap seats that justifies the flight as the, fewer, first class sales.

It's what happens next that affects carbon output; that is if they fill it up, even with the cheap tickets, that demonstrates that there's perhaps the demand to put another plane on the route. I conclude that the fuel consumed on a flight is split evenly among all of the passengers.

BTW as you point out, the cost of an empty seat is near zero and I used to wonder why airlines didn't offer "rush" seats at the last minute at a lower price to those with flexible schedules instead of flying half full. But these days they seem to be filling, and overfilling them anyway. Costly fuel must be a good incentive that results in lower CO2 per seat.

Craig R

"I think very few Americans are prepared to incur substantial costs to deal with a problem that is so afflicted by uncertainty about its imminence and magnitude as global warming."

This ignores the view of the overwhelming majority of climate scientists, as expressed by the IPCC. They are more than 90% sure that we are driving climate change. As to its imminence, this is also reasonably clear - it wiill be a problem for my children and Judge Posner's grandchildren. As to its magnitude - this is unclear but even at the mininimum level of temperature rise already inevitable due to present levels of CO2 (2 degrees) its going to be severe.

Americans are unlikely to think it is worth while using the terapass because they see that there is a collective action problem. Hopefully, they will see that it is essential that the impress the importance of legislation dealing with climate change on their legislators. This appears to be happening at municipal, state and, now, Federal level - shame about the President.

Diversity

Adam Stein and ChinaCoalWatcher,

I like the useful chutzpah of Adam Stein's business, but he looks way off beam on the benefits of buying up coal reserves.

Adam is right in the short term, of course. Buy up one ton of coal and there is another right behind it queing up to be burnt. But 20 or 30 years is not long term for climate change. If somebody buys up the most mineable coal reserves of the world (climate change is a planetary problem - thinking about it within national boundaries is not much use) and holds these reserves off the market for 20 or 30 years; it is a racing certainty that he will reduce coal consumption and force up the price. If during those 20 or 30 years someone finds a reliable method of large scale carbon dioxide sequestration that is not too expensive (something that is beginning to look like a reasonable bet), then the sucessors of the guy that bought the reserves will be sitting on a very, very, very attractive set of assets.

I suggest that Adam Stein think about it and then go talk to Warren Buffet. It looks to me the sort of business that the Sage of Omaha might want to channel some tens of billions of Berkeley Hathaway funds into, plus perhaps the left over odd billion of his own.

Architects India

Very interesting read. I agree with Craig R and the points he makes are very valid

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