International Carbon Offsets: The Next Trillion

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:

  1. use offsets to report a greater emissions reduction at the same price as if we only did internal projects
  2. use offsets to report the same emissions as internal projects, but at a lower price
  3. ignore offsets and just do internal projects
  4. 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:

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:

  1. 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.
  2. 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.