Do carbon offsets work?

Maybe-Megan-McArdle writes:

When you donate money to build a new windfarm, you don’t take any of
the old, polluting power offline; you increase the supply of power,
reducing the price until others are encouraged to buy more
carbon-emitting power.

In other words, these carbon offsets shift back the demand curve for dirty power but they also shift out the supply curve for power as a whole.  (The persnickety might argue the demand curve doesn’t even shift back, but if you have to buy all those offsets you will think twice about your next plane trip.)  Competition from wind power forces down the price of the monopolistic dirty power company (electricity?), which means that other people buy more of it.  The quantity of dirty power consumed might well go up rather than down.

A better approach for carbon offsets might involve buying up a power plant and taking it off the market, thereby raising price and discouraging consumption.

Or it might be better if that "wind farm" is a failure and a fraud.

Furthermore if you simply buy less of a non-storable good such as electricity,
price to other demanders will go back down and social quantity consumed will
not change.  The boycott matters only if general
capacity shrinks over time, and that of course requires a large boycott.

If the dirty power source is from a broadly competitive sector (is there one? gasoline? cars?), the carbon offset is more likely to work.  If a non-dirty competitor comes on-line, the dirty power source has no option of lowering price and expanding quantity sold; the price of the dirty power source can’t fall below marginal cost.  Instead the supply of the dirty power source falls and the offset works.   

The bottom line: Unless you can put them under, don’t try to compete on price with your local power company.


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