Al Gore's Carbon Offsets — Or, How the Wealthy Combat Global Warming

There was an amusing story in the Wall Street Journal this week about Al Gore’s indoor heated pool and the way in which he purchases “offsets” for his personal carbon emissions. According to the story: “Last August alone, Gore burned through 22,619 kWh–guzzling more than twice the electricity in one month than an average American family uses in an entire year.” Gore “offsets” this energy usage by purchasing blocks of “green” power from wind farms and such.

The story also notes that Oscar attendees received as part of their “swag” 100,000 pounds worth of carbon credits from an outfit called TerrPass. Here’s how TerraPass describes itself: “When you buy a TerraPass, your money funds renewable energy projects such as wind farms. These projects result in verified reductions in greenhouse gas pollution. And these reductions counterbalance your own emissions.”

As I’ve said before, I’m not a skeptic of the basic scientific conclusions about global warming. I am, however, skeptical of international emissions trading schemes, and the above is one reason why. The market dynamics of this “offset” process mirror some potential problems with a global market — specifically the differential between the wealthy and poor concerning elasticity of demand.

Gore and his fellow Oscar winners aren’t really “offsetting” their carbon energy use. What these “offsets” are really doing is maintaining the supply of carbon energy such that the elite’s demand can be satisfied. Here, the concept of the “elasticity” of demand is important. A demand curve usually is not constant. At different places in the curve, demand responds more or less sharply to changes in price. Demand is “elastic” if demand is relatively sensitive to incremental changes in price. Demand is “inelastic” if demand is relatively insensitive to incremental changes in price.

For most of us, I suspect that demand for energy is relatively elastic. A relatively small fluctuation will cause us to change behavior — lower thermostats, not driving as much, etc. For the very wealthy, however, demand for energy probably is much less elastic. They aren’t likely to notice a few thousand dollar increase in cost of electricity for the swimming pool.
At best, then, the “offets” Gore is buying will allow some alternative energy supplier to offer energy to the more elastic segments of the market (us regular Joes) at prices competitive with traditional carbon-based suppliers. But this is highly unlikely, since the “offsets” purchased aren’t anywhere near the amount needed to make up for the higher variable costs of supplying alternative energy (not to mention the sunk costs of research and development and building infrastructure). Thus, demand for traditional energy is not likely to decrease among the more elastic segments of the market, or if it does, the decrease will be marginal.

Meanwhile, the “offsets” allow the more inelastic segments of the traditional energy market to feel good about their conspicuous energy consumption, fueling additional demand. The net is likely to be an overall increase in traditional energy usuage!

Once the problem is conceived in terms of elasticities of demand, another solution suggests itself. Where there are differing elasticities of demand for the same good, a typical efficient response is differential or “Ramsey” pricing. Differential pricing means that the more elastic segments of the market are charged more than the more inelastic segments.

This is one reason why a graduated carbon tax seems to make sense. Instead of buying “offsets,” the price of energy should be graduated based on the amount used. After a basic level, the price would increase sharply, to the point where even elastic segments of the market would feel pain for conspicuous use (either through regulation, taxation, or both). I’ll be this would do more to fuel research into alternative energy sources than an “offset” market that only allows the wealthy to buy their peace.