Multiple Emission Offsets

 From my new book, The ABCs of Global Warming: What Everyone Should Know About the Science, the Dangers, and the Solutions: 

Multiple Emission Offsets

Multiple emission offsets can reduce emissions more quickly by letting businesses get out of paying the price for one ton of their own emissions if they reduce emissions somewhere in the world by, say, two tons or five tons. 

Multiple emission offsets are economically feasible, since the costs of offsets are well below the costs that are charged by plans that put a price on emissions. For example: 

● Under California’s cap-and-trade plan, it costs businesses $17.45 to emit one ton of carbon dioxide equivalent.167 

● Under the European Union’s emission trading system, it costs over $25 to emit one ton of carbon dioxide from larger factories and power plants.168 

● A recent German law begins by charging 10 Euros (about $11) to emit one ton of carbon dioxide from transportation and heating, with the price increasing to 35 Euros by 2025.169  

By contrast, the average price in the private market for carbon offsets is $3.30 per ton,170 though prices vary. 

A government program to let business avoid paying fees would have to set standards for projects that qualify as offsets171 and presumably would have stricter standards than some of these private programs, so let’s assume that offsets would initially cost $5 per ton. And let’s assume that, to give businesses an incentive to use offsets, they should cost about 80% to 90% as much as paying the fee for emissions. California could require businesses to buy offsets that reduce emissions by 3 tons to avoid paying for 1 ton of emissions, the EU could require 4.5 tons of offsets, and Germany could begin with 2 tons and work its way up to 6 tons of offsets to avoid paying the fee for 1 ton of carbon dioxide emissions. 

This sort of program could jump-start global emission reductions, as businesses rush to pay for the cheapest emission reductions all over the world in order to avoid paying fees. They would still have a strong incentive to reduce their own emissions, since the offsets would cost almost as much as the fee, but they would also be reducing global emissions dramatically by paying for offsets. 

It is not possible to offset all emissions. If it were, we could shift to net-zero emissions immediately, but there are obviously not enough offsets available to balance all of the world’s emissions. Initially, we might let businesses offset, say, 10% of their emissions by reducing emissions anywhere in the world. 

Over time, allowing offsets would have two opposite  economic effects: 

● Cheaper opportunities to offset emissions would be used up, driving up the price of offsets. For example, one cheap source of offsets involves sealing landfills and burning the methane that escapes, so the landfill emits carbon dioxide rather than methane. But there are only so many landfills in the world, and if a major economy let business use offsets, it would not be long before methane emissions were eliminated from all these landfills. 

● Businesses would invest in developing emission-negative technologies, potentially driving down the price of offsets. Currently there is no economic incentive to develop these technologies, but once the emission reduction can be sold to businesses to use as offsets, we would expect many start-ups to begin developing these technologies and reducing their costs. 

Because these two effects are opposite and because we cannot predict what technologies will be developed, we do not know whether offsets would become more or less available over time and whether their cost go up or go down.

As years go by and the price of offsets changes, governments would have to vary the multiple so businesses always have to buy offsets that cost 80% or 90% of the fees they are avoiding. As the availability of offsets changes, governments would also have to change the percent of their emissions that businesses can offset. 

In the longer run, as the fee for emissions goes way up and emissions go way down, we will have to set the multiple at a level that avoids hardship and severe economic dislocation. For example, we would not want to set the price for emissions from nitrogen fertilizer so high that we drive up the price of food to the point where we cause hunger, so we would set the multiple for these emissions so offsets cost less than the full 80% or 90% of the emissions fee.