Economist Blog on Carbon Credits

Free exchange, the Economists's blog, gives a take on the Al Gore energy usage story. But the interesting part to me is where it makes the obvious point about carbon credits that everyone seems to have missed- energy is a commodity. If one person reduces consumptions, prices fall so that someone else can increase consumption without paying extra for. Unless everyone chooses to reduce consumption, the net effect will be very small.

"The carbon offsets, on the other hand, sound like a very reasonable plan. That is, they did until I began thinking about them.

Most carbon offsets seem to work on one of a few principles: they plant trees, invest in renewable energy sources, or pay someone in a developing country to use some less-polluting technology, like a CFL...

...But surprisingly few make what, to me, seems like a more basic point: energy is a tradable market good. It is not as if there is some fixed demand for energy, so that by using less carbon-emitting energy, you actually decrease the amount of carbon emitted.

This is, of course, ridiculous. When you donate money to build a new windfarm, you don't take any of the old, polluting power offline; you increase the supply of power, reducing the price until others are encouraged to buy more carbon-emitting power. On the margin, it may make some difference, since demand for electricity is not perfectly elastic, but nowhere near the one-for-one equivalence that carbon offsets would seem to suggest. Especially since the worst offenders, big coal-fired plants, are not the ones that renewables will substitute for; solar and wind power are not good replacements for baseload power. Instead, renewables are likely to take relatively clean (and expensive) natural gas plants offline, since those are the ones that provide "extra" power to the system. "