The carbon offset provisions in the House Energy and Climate Bill could sap half a trillion dollars out of the U.S. economy between 2012 and 2030 and over $2 trillion between now and 2050, according to Breakthrough Senior Fellow David Douglas.
Cross-posted from David Douglas' Near Walden blog
In my role of Chief Sustainability Officer at Sun, I take part in an annual discussion of whether the company should purchase carbon offsets as part of our GHG reduction plan. Since we can buy carbon offsets at a price which is lower than what it costs us to reduce our GHG directly, we have four different approaches available to us:
- use offsets to report a greater emissions reduction at the same price as if we only did internal projects
- use offsets to report the same emissions as internal projects, but at a lower price
- ignore offsets and just do internal projects
- some mix of offsets and internal projects
So far, each year we have elected to only invest in internal projects. Our rationale is that we can help the company and the environment with that choice -- the company gets more efficient and the we lower our direct GHG emissions. Furthermore we find that this rationale is applicable to each marginal dollar of investment, so that we end up only investing in internal projects as opposed to a mix. This means that the emissions reductions that we report aren't as low as they theoretically could be, but that's a tradeoff that we think makes sense for us, since we keep reducing our own emissions instead of paying others to reduce theirs.
As it thinks about creating a cap and trade system, the US Government faces the same decision: do we allow international offsets in order to keep costs down and/or make the results look better, or do we stick to investing within the country?
With that in mind I was very interested to read the following on page 4 of the summary of the EPA analysis of the Waxman-Markey draft bill:
Offsets have a strong impact on cost containment.
- The capped sector uses all of international offsets allowed in all years of the policy (1.25 billion tCO2e offsetting 1 billion tCO2e of capped sector emissions annually).
- The 1 billion tCO2e annual limit on domestic offsets is never reached due to limited mitigation potential.
- Without international offsets, the allowance price would increase 96 percent.
In order to understand the magnitude of these statements, we need to use a cost of carbon. The graph below is from page 15 of the EPA analysis, and shows the anticipated offset prices for the period covered by the bill. Elsewhere in the presentation it give specific numbers: 2015 - $13 to $17, 2030 - $28 to $36, and 2050 - $74 to $96.
In order to estimate the total cost, I'm going to use a 2012 starting price of between $11 and $15, and do two linear approximations, one from 2012 to 2030, and one from 2030 to 2050. This will produce a result that is a slightly higher than the curve shows, but only by a few percent.
With these approximations and a purchase of 1.25 billion metric tons of international offsets per year, we get the following results:
2012-2030: $438B to $573B
2030-2050: $1.28T to $1.65T
Total (2012-2050): $1.72T to $2.22T
Per household per year (counting 111M US households), this comes out to:
2012-2030: $218 to $236 per household per year
2030-2050: $577 to $743 per household per year
This looks pretty outrageous. This money is going to foreign countries, and the selection of where it goes will be done by the companies who are purchasing offsets (who will be presumably working off of a list of approved offsets). Personally I'm all for making strategic investments in GHG reductions outside of the US, but to put in place a program where this much money over this long of a period flows beyond the US makes no sense, recession or no.
So why is this even part of the design? The answer is in the Sun example, as well as the note from the EPA report. If you want to appear to be reducing your GHG emissions, its cheaper to pay someone outside of the US to do it instead of doing it here. One option would be to commit to lower reductions, but Waxman-Markey has ruled that out as an option. Another is to commit to reductions within the US but at a higher cost (96% according to the EPA analysis), which is politically untenable in today's economy. So instead, Waxman-Markey puts us on a path to spend $2T or so over the next 38 years to improve the GHG efficiency of other countries.
Two related notes:
- Roger Pielke, Jr. reports on the trillion dollar plus reduction in the GDP which is in the EPA analysis. This is also a huge deal.
- Supporters of the bill are citing the EPA analysis with relatively low numbers for the increase in household cost. However, its clear reading through the EPA analysis that they have only examined direct energy costs, and not the increase in costs throughout the economy that consumers will have to bear. Its interesting to note that some people are citing annual impacts per household that are lower than the amounts above which would flow overseas - that tells you that how far below reality these estimates are.
The idea that "it is cheaper to pay someone outside of the US" to reduce emissions may be true from a regulated entity's perspective, but not from the perspective of overall societal benefits, considering economic benefits of local reinvestment and ancillary health and environmental benefits.
Price does not necessarily equate to cost, because allowance auction revenue can be invested in ways that both reduce the regulated industry's costs and subside low-carbon alternatives, maintaining high marginal incentives for decarbonization. But international offsets divert revenue from these purposes, so it is not clear that even the regulated industry would benefit from offsets.
To the extent that offsets do reduce costs, they do so only from the perspective of near-term GHG reduction targets. If those targets are sufficient to achieve climate stabilization, fine; but they aren't. Industrialized countries may need to substantially decarbonize their entire economies by mid-century to avert catastrophic climate change. So offsets do not avoid high-cost emission reductions; they only defer those reductions until later. Offsets are basically a policy of procrastination, which does not necessarily reduce long-term costs. Offsets trade "short-term gain" for "long-term pain".
Finally, climate stabilization will require some form of regulatory action by developing countries, but how will they be encouraged to adopt binding GHG regulations if the developed countries have bought up and monopolized all of the low-cost reductions? For example, if the US and EU buy up all domestic and international reductions costing less than $10/ton to meet their compliance obligations, then other countries that subsequently adopt similar regulations may be limited to compliance options costing over $10/ton. How does that help to encourage international action on climate change?
Posted by: Ken Johnson at April 28, 2009 6:48 PM