Externalities, Markets and Offsets

When I first read this op-ed in the WSJ last week, I thought "get real". The steady rise in CO2 is clear evidence that markets aren't working.

Then I reminded myself that, if externalities such as the potential impact of CO2 on the globe were reflected appropriately in the prices of things (such as cars and gas, in this case), then I would actually be in strong agreement with the authors! So hopefully Mr. Crandall and Mr. Singer will be leading the charge to get externalities correctly reflected in the market.

(As an aside, I also hope for GM's sake that they don't think that concern for climate change isn't being reflected in the market - they're way behind and I hope they're actually acting that way internally. We need the US auto makers to catch up on this issue.)

This was a good reminder to me of how much contortions we go through as a result of not having the market reflect key externalities as a matter of course. Obviously its hard to do, and also hard to even figure out what the cost of those externalities should be. But to tie it back to last week's post about offsets, its good to remember that personal offsets wouldn't even need to exist if we had the market pricing appropriately. In fact, the market would do a better job than people's current accounting, since the impact of the goods and services we buy would reflect the externalities correctly as well. People would actually be really 'carbon neutral' just by going about their business, as opposed to the partial version that most people and companies practice today where goods and services are ignored.

So one obvious question is, if through some means we get exernalities priced into the market correctly (through a carefully constructed cap and trade or tax system, for exmaple), what happens to all of the infrastucture we're setting up to offer personal offsets? What happens to the projects that are setting themselves up to get a piece of the offset pie?

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