Is all CO2 Equal? - Part 6, Are Offsets the Right Investment?

So we've been looking at Dell's Plant a Tree for Me program (last post is here), and see that a) it is doing most of its good far out in the future, versus now, when it is needed, and b) can't scale to the size of Dell's business at the current price of carbon offsets.

This leads to the obvious question: instead of planting trees, why not do something that scales and that will offset the carbon this year? I've looked at this question a lot over the last few months, and my conclusion is that there is no scalable, timely way to take CO2 out of the atmosphere for $3.95/ton (current price on the Chicago Climate Exchange). Here's some possible things that might meet the criteria: invest in home wind or solar power, purchase green power through the grid, upgrade to a more energy efficient appliance or car, or pay your share of an investment in a CO2 scrubber for a coal plant. Any data I've seen for these suggests that they would cost a lot more than $4 per ton of CO2.

My timing of writing this today couldn't have been better, as the NY Times wrote about offsets, and elicited a response from Terrapass. The Terrapass argument is that we are "Making the perfect the enemy of the good". There are aspects of this I agree with; as I said in the very first topic on this, planting trees is a good thing to do, and I don't want to discourage it. But Adam's missing the point. The problem is that 'the good' is marketing itself as perfect. Buy these offsets and you'll be "carbon neutral"! Wow! What could be better than that!

So the issue isn't that the offsets are used as an excuse to cover up bad behavior, its that they may act as a disincentive against other investments which could potentially have more immediate and lasting effect. I'm not claiming that every other investment would have a larger impact than offsets for a given amount of money. But right now offsets are cheap and are claiming to be the end-all solution, so no one is having the debate. Just like Adam wants someone to measure consumer attitudes, I want someone to study these offsets as one of a number of environmentally impactful investment options. For example, is it better for me to use $100 to plant trees, or invest in solar energy for my house? This analysis will require some kind of net present value of CO2, which is missing from today's discussion.

So to make this concrete, I've come up with an Eco Challenge Question. Take a look at it, and let me know what you think! I'd be interested in input on the parameters of the question, as well as an analysis of the answer.


This is absolutely right. Carbon 'offsets' are not equal and shouldn't be sold as commodities in they way they are. And it's really up to buyers to engage a bit more with the underlying projects they are funding, rather than viewing offsets as products in their own right. Re: your question, given the information it seems clear that Proposal 2 (buy green electricity) is the best, because it has the biggest overall impact and does not depreciate like servers or solar panels.

Posted by Dan on March 15, 2007 at 01:44 AM EDT #

Sorry - to address your question about the parameters of your challenge - I suspect that the science isn't accurate enough to come up with a carbon discount rate. There is also an extra factor in this NPV calculation - although the future benefit may be bigger than the near-term one in terms of annual emissions saved, if we choose the future investment we will continue to pollute in the meantime (these are revenue investments, I assume). So if we could devise a discount rate, it would no doubt be very high indeed!

Posted by Dan on March 15, 2007 at 02:00 AM EDT #

The problem is that 'the good' is marketing itself as perfect. Buy these offsets and you'll be "carbon neutral"! Wow! What could be better than that!

This is entirely false. TerraPass, and other responsible marketers always show that carbon offsets are just one tool in the fight against climate change. If you come looking for salvation at TerraPass, you will be sorely dissapointed. In fact, you'll even get a weekly conservation tip in email.

To read more about how TerraPass members have changed their behaviors, just read the comments to the post that Dave linked to. As for the actual strategies let me correct some items.
  • TerraPass engages in no forestry projects. All our projects help establish green capital investments for clean american energy.
  • TerraPass does not front load reductions. Every purchase is matched in the same year with acheived verified reductions. We have 10 years to stabilize this problem, why would you front load the limited monies you have?
  • One third of TerraPass' portfolio is green power with the same mark of quality (and financial instrument) that half a million Americans buy green power with (Green-e).
  • A firm's decision is distinct from that of a consumer. Even if CAPM has flaws, the firm's capital budgeting function (in theory unlimited) is quite different from the problems everyday folks face when looking at a $40K solar system that will power 10% of their home's energy needs.

    As for the problem, I would approach it on a pure $/MT with a perhaps 50% discount rate on carbon purchases in the future. Apply the firm's discount rate, and all NPV positive investments should pass. You'll have to pay special attention to solar subsidies depending on the state (as well as be careful that the utility doesn't take credit for those reductions as they are funded by part of the rate base).

    For environmental impact I'd also look at what actually triggered long term capital energy investments. The essential challenge of climate change is growing energy needs -- some $22 trillion will be invested to meet those needs. The question is how much of it can we green? Paying subsidies for green power, or even deploying your own local power resources, or helping someone else do a green project instead of a business as usual project is both an efficient use of capital and the right long term path for the economy.

  • Posted by Tom Arnold on March 15, 2007 at 06:04 AM EDT #

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