It ain’t easy, being green

Two interesting articles show just how hard it is to be environmentally friendly, especially if you are trying to ameliorate your carbon footprint by offsetting the carbon you produce.

Carbon offsets are a popular form of conscience-salving, practiced by Oscar-winning environmentalists and vote-seeking political parties alike. Yet the economics of carbon offsetting leaves a lot to be desired.

An article on the Economist blog explains that carbon offsets may have exactly the opposite effect from that desired. On the one hand, by alleviating us of our sense of guilt, we may continue to consume and even expand our consumption of (now offset) carbon-intensive fuels. Even if we do consume less, carbon-intensive power stations tend to have low marginal- and high fixed-costs, so if the reduced demand leads to falling revenues, the power supplier need merely lower prices to stimulate more consumption, thus maintaining profits but at the cost of higher output. Meanwhile, the offsets act as subsidies to low-carbon power producers, enabling them to lower their prices, thus sending out a signal to the consumers that energy is cheap, and thus stimulating more consumption. The result, therefore, is that carbon offsets may actually increase energy use.

Furthermore, wind farms (the most common and so far most successful form of renewable energy) and solar power tend to compete not with coal-fired power stations, those dirty smokestacks that provide us with the base-load that we need to ensure all-round supply, but with cleaner power stations (such as gas-fired) that are more easily switched on and off.

In a separate article, Arnold Kling argues – in what is that rare piece, an article on the environment by an American from the liberal right that does not cast doubt upon the actual fact of climate change – that subsidies to green energy are nothing more than “pork”, rewarding good lobbying or financing investment where politicians think it should go.

Kling also condemns “cap and trade” systems as subsidies to energy firms. In this, he is right in practice though not in theory. The European market is carbon has been undermined by the decision to hand out permits to energy producers rather than selling them on the market. By giving away what is a tradable commodity, European governments effectively handed out a licence to print money.

However, all is not lost. What we have here is not proof that nothing can be done – let alone that nothing should be done – about global warming. Rather, we have a good case study in how governments tend to play into the hands of special interests, and another for how empty gestures are no substitute for real solutions.

Cap and trade systems fail because they are missing one simple element; the correct system is cap, auction and trade. Rather than giving away carbon quotas, governments should sell them in an open market – much as they sell bandwidth to telephone and broadcasting companies. Even non-energy producers may buy them, gambling (but not knowing) that they will be able to sell them on at a profit. Thus government both controls emissions and get a return for the nation’s precious asset (its atmosphere) while the power companies get a working market to provide incentives to environmentalism, while not enjoying vast and unwarranted windfalls.

Even better, governments could abandon the whole quota system and impose a uniform carbon tax. This would require those who emit carbon dioxide (and other greenhouse gasses) to pay a pollution charge, which could then be passed on to consumers, thus encouraging energy efficiency. This would provide no subsidies to special interests – even wind-powered ones. They would not be necessary. As the taxes pushed up the price of “dirty” energy, “clean” energy would become economically viable, but the rewards would go not to those energy producers whose lobbyists were most effective, but to whomever was able to produce the cheapest energy after carbon-output was factored into their costs.

So maybe its easy being green after all, as long as we don’t buy piece of mind with a donation to Al Gore.