Going green

April 22nd, 2007

This website is now proudly carbon neutral.

Green Web Hosting! This site hosted by DreamHost.


I have to admit that I’ve got some real concerns about the way the current carbon offset thing is going, especially the recent trend towards carbon neutral everything. It’s starting to appear absolutely everywhere – a friend of mine recently had a carbon neutral wedding, and even got featured in the paper for it.

The market is still pretty new, and there’s a lot of dodgy dealers out there – people selling things that don’t have any interaction with carbon emitting industries. So you have to be fairly careful with what you buy right now.

But, leaving that problem aside, does this work? Let’s look at an extreme case, to help inform us in the analysis (this is inspired by some analysis from Tyler Cowen). So suppose that everyone in a town does this.

Company A provides electricity to the town, charging a price that maximises their profit (they are, after all, a monopoly). The plant was well planned, so sells all 100 units it can produce.

Then, all of a sudden, An Inconvenient Truth starts playing at the local cinema, and a wave of green enthusiasm strikes. Everyone in town then buys carbon credits from Company B. Company B is obtaining these credits from the emissions market (for the sake of argument, let’s say it’s purchasing them from an aluminum producer that’s shutting down).

From the individuals perspective they’re now paying more for every unit of electriciy, as they’ve internalised the carbon production externality. As a result, at the prevailing price they’ll start to consume less electricity. Let’s say they start consuming 80 units. To use slightly more technical economics jargon, their demand curve shifts left.

This isn’t good news for Company A. They’re capital intensive (as all electricity production is), and the sudden excess capacity means that part of their plant is no longer making the return they once expected. Now they could shut down part of the plant, and reduce emissions, but this would result in a substantial loss in the value of their capital. Alternatively, they could lower their price a bit and try to encourage the consumers in town to expand consumption to 100 units again.

Now, the world is certainly better off – the aluminum plant shut down, so emissions are less. But the town is still consuming the same amount of power as before!

But compare this to the world where Company A has to pay for the carbon it emits. Now, the outcome in the short run will be the same, in terms of price and quantity. But because the cost of carbon is internal to the company, they’ll have a much greater incentive to invest in more carbon efficient means of producing electricity. In the world where everyone buys offsets, the incentive to invest in cleaner technology is much less, as there wouldn’t be a direct reduction in cost, just a potential increase in demand.

Overall, I think that the carbon neutral thing is good. As consumers adjust to a price that better reflects the true costs of production, it’ll be easier to introduce changes in policy that better encourage emission reductions. But they aren’t a good way to do this forever, because the direct emitters of carbon need to be facing the price, or the system just isn’t going to induce the kinds of changes in behavior that are needed.

So we certainly shouldn’t mistake it for a solution to the carbon problems the world is facing. So I worry that ‘easy answers’ like carbon neutral websites, weddings or cars will just make people too complacent, and make it that much harder to push for the kinds of more fundamental changes that might prove needed.

(As a footnote, I should point out that I’m not paying a penny to make this site carbon neutral, my ISP has done it as part of my overall hosting without raising my price at all. Pretty close to a free lunch…)