Thursday, March 01, 2007

A tale of two markets A tale of two markets A tale of two markets takes up where Tyler Cowen left off as to the economic problems with carbon offsets. I think the big difference is that they are slightly better at getting their point across than Cowen was.

But it is fairly simple. Assume for a minute that Al Gore had been paying to have trees planted in Africa to generate the Carbon Offsets that he used to justify his proligate expenditure of energy at his mansion in Tennesee. The result is that the demand for energy in Tennesee will be increasing, providing price signals to producers to build more capacity. Similarly, the demand for forests in Uganda will also be increasing, pushing the price up and giving a price signal to dispossess more people from their land to do this.

Notice a couple of things here. First, there is no real pressure to increase capacity of clean energy in Tenn. Rather, the entire demand curve for energy has moved up and out. And secondly, the two sides of the Carbon Offset are worlds apart and of such different type that they only interact through the Carbon Offsets. And, of course, given the economics involved, that, for example, it is far cheaper and easier to plant trees in Uganda than in the U.S., this is going to be accentuated.

Buying renewable non-carbon based energy in the U.S. to offset increased local usage has some surface appeal as being better than planting trees in Africa, but for much of this country, the heavy energy users are geographically separated from where you can economically build non-carbon based energy production. Thus, NYC uses a lot of power, but you can't put up solar panels nor wind turbines there. Rather, they have to be quite a ways away, even assumming decent technology, which we don't have yet. Probably the most economical location for either would be the intermountain west, where you have huge open spaces, a lot of wind, and few clouds.

But the transportation costs of electricity are quite high (and at present might even add to global warming due to the frictional loss of electricity transmitted over distances). The result is, of course, that you can't just exchange power usage in a high power usage area for non-carbon based renewable energy production a thousand miles away on a one-to-one basis.

Of course, the Carbon Offsetters are doing even worse economically, even if they do try to replace energy use reduction with energy use at home because again the economics are that a reduction in energy use in South Africa (through providing the poor with Compact Flourescent bulbs) is a world apart from Tennesee. And the price signals in the later still say build more dirty power plants locally.

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