A cleaner model

It is sometimes hard to let these things go. Following on from my posts yesterday, I have spent a little time over the last day actually writing down a formal model of the impact of carbon offsets on behaviour and whether they might actually increase emissions. The result is a short note (click here). It is technical, so be warned. It is also preliminary but I don’t think I have made any (major) errors.

The bottom line is this. First, establishing a carbon offset market can increase consumption from dirty sources by those who choose to purchase offsets. But simply, the offsets offset their guilt at a price lower than their guilt. Hence, they feel less guilty about consuming more. So The Economist may have had that one right after all.

But that is not the end of the story. The key issue is what happens to emissions. The paper shows that (a) net emissions fall and (b) they fall even if offsets are used to invest in goods that compete with the dirty ones (e.g., wind competing with coal for electricity generation). My guess is that you would have to get a whole lot more elaborate to obtain a result that offset markets actually increase net emissions and do more harm than good. However, it is true that these effects can be subtle. That is what economic models (fully specified) are designed to work out.

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