Carbon offsets make for strange bedfellows 6

I sometimes joke that the one environmental topic that unites the far right and far left is a distate for carbon offsets. This, I should stress, is a joke -- overly broad, unfairly general, etc., etc.* But it is the case that the topic of carbon offsets occasionally makes for strange bedfellows.

The fake controversy over Al Gore's carbon footprint is a case in point. TerraPass recently had the pleasure of being featured on Glenn Beck's CNN program (Glenn Beck of Al Gore = Hitler fame).** We were declared a crock by Sean Hannity, and we were denounced by none other than Rush Limbaugh.

More serious-minded conservatives have also weighed in with economic analyses supposedly showing that offsets don't work. Certain corners of the blogosphere have a bit of a fetish for drawing little supply and demand curves to support various arguments about electricity consumption and carbon emissions.

I find these arguments genuinely fascinating. They raise very real and important questions. Do subsidies for renewable energy create perverse incentives to consume more electricity? Do new wind farms and PV installations really supplant coal-based energy, or just increase the total amount of energy available for use? Unfortunately, blog-based analyses tend to be a bit lightweight. Electricity is an enormously complex topic, both on the supply and demand side, and it deserves more than the Econ 101 treatment. Let's dig into the TCS Daily article a bit further.

The economic case against offsets (or, more precisely, RECs) hinges on a few arguments:

Argument 1 (the supply side): RECs may stimulate the production of more "good" energy, but they don't actually bring about the removal of any "bad" energy, so no net carbon is reduced.

In the overly cute phrasing of the article, "Subsidizing 'good' energy in order to justify using 'bad' energy is like eating salad in order to justify eating dessert. It is an exercise in self-deception." The economic rationale is that coal plants have high fixed costs and low variable costs, and therefore have no incentive to reduce energy production just because some new wind farm comes online.

Viewed narrowly, there is some validity to this argument. Coal is a base-load power source, which means coal plants generate power steadily and can't be turned on or off very quickly. Wind, on the other hand, is an intermittent power source, which means it can't be considered a rock-solid reliable replacement for base-load coal. The net effect is that, today at least, wind energy can't be a kilowatt for kilowatt stand-in for coal.

When viewed more broadly, though, the issue becomes quite a bit more complicated -- and more favorable to RECs. For starters, wind is intermittent, but it isn't that intermittent. It frequently is possible to reduce base-load power production due to the contribution from wind farms. In Oklahoma in January, the wind don't stop.

Further, voluntary REC purchases have been responsible for bringing a serious amount of aggregate renewable production capacity online. About 2,300 megawatts of capacity, according to the NREL. This a drop in the bucket compared to total U.S. energy consumption, but it's still a lot of energy, and it stretches credulity to suggest that 2,300 megawatts can't move the needle at all on coal consumption.

Which leads to the next point. Critical economic analyses tend to posit a scenario in which new capacity is brought online in the face of static demand. In this make-believe world, coal plants face a stark choice of continuing to crank out dirty power or else going idle.

Reality is quite a bit different. Remember those blackouts in LA last summer? Remember TXU? Demand for electricity is surging. New capacity is coming online all the time. (And nuclear power plants are going offline, exacerbating the situation.) The question is not whether existing coal plants will go idle, but instead whether new capacity will come from renewables or from coal. RECs help tilt the balance toward renewables.

Worldwide, $20 trillion is going to be invested in new capacity over the next thirty years. Again, the question is whether that capacity will come from renewables or from coal. The Kyoto CDM, imperfect though it may be, has almost 800 renewable projects in the pipeline.

The picture becomes even more appealing in the long-term, when technological improvements, such as energy storage, make wind a viable base-load power source.

So back to the argument at hand. The problem with the quick and dirty economic analysis of electricity supply and demand is that it focuses narrowly on the short-term. Frankly, it's always going to be difficult to trace an individual REC to a specific lump of coal that goes unburned, because the reductions are indirect. REC markets work in aggregate, and they work over time. 2,300 megawatts of renewables brought online from RECs is a real achievement, though, and we need more directed subsidies for renewables, not fewer.

Argument 2 (the demand side): because RECs are a subsidy to energy production, they lower the price of energy. When price drops, demand goes up, and we all just end up consuming more anyway.

This argument has always felt intuitively and obviously wrong to me, but in fairness the academic research hasn't been definitive one way or the other.

You can imagine two models of consumer behavior. The first is that as energy gets cheaper, we compensate by consuming more of it. According to the extreme version of this argument, compact fluorescent light bulbs are a waste of time, because people will just use the savings to buy a bigger refrigerator. More fuel-efficient cars are a waste of time, because people will just use the gas savings to drive longer distances.

The second model of consumer behavior posits that there really is no such thing as demand for energy. Rather, there is demand for the things that energy provides, and this demand isn't nearly as elastic as some would suggest. People want to light their houses. They want to get to the store. Only fairly massive changes in energy prices -- either up or down -- will meaningfully affect their behavior.

Studies exist to support both views, and there's no special reason to think that people will behave perfectly consistently in all situations. I know people who blast the A/C in the summer because they don't have to pay their own electricity bills. On the other hand, I know no one who screws in higher wattage light bulbs when electricity rates drop.

But given the fact that electricity demand is growing regardless; and given the fact that subsidies from RECs only serve to make renewables cost-competitive with coal, not cheaper than coal; it is difficult to imagine that RECs are providing a meaningful stimulus to demand.

So where does this leave us? When I dug into this topic, I didn't suppose I would come up with any definitive answers, because such answers probably don't yet exist. There's a good PhD thesis in here somewhere. But economic arguments against Al Gore's green power purchases do strike me as facile, because they focus exclusively on extremely short-term microeconomic effects, and ignore the longer time scales over which energy investment decisions are made.

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* Really, it's a joke! I am in no way suggesting an ideological counterpoint between Sean Hannity and George Monbiot. You like jokes, right?

** To be fair, Glenn was perfectly cordial to us, and he probably can distinguish between Al Gore and Hitler. The key is to look for the mustache.

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