The other day, Paul Krugman wrote about the reduced relevance of formal academic publication given the nature of web distribution and discourse. It just so happens that today marks the completion of a personal story of mine that illustrates how blog discussion can lead to published academic research. However, it also demonstrates Krugman’s main point — that the publication process is way too slow relative to the flow of ideas in the blogosphere — as well as his secondary point — that peer review is still very important.

Let’s begin the story. It starts with this post by Tyler Cowen on 28th February 2007 about carbon offsets:

Let’s consider a power supplier with market power and zero marginal cost. Capacity suffices for ten units but five units are sold at p = 10; selling more would lower profits. Now, using carbon offsets, bribe the fifth buyer to stay out of the market, say by walking to work rather than flying his jetpack. Even better, just shoot him.

The company has two options. It can stick with selling four units and raise price. Or it could drop price a bit and pick up a fifth buyer again. Hard to say what will happen. Alternatively, if buyers stand along a continuum, is there a general proof one way or the other?

Rather than bribing the fifth buyer to walk, invest the “carbon offsets” money in building a nice comfy sidewalk. In principle all buyers could walk on this new path.

It is then easy to see how the power company might lower price and expand to six units or more. Otherwise they might lose all their customers.

A key question is the cost structure of the alternative clean technology. Non-scalable technologies, with little potential for expansion, are the least likely to backfire and least likely to lead to more dirty power. Scalable technologies, such as the sidewalk, are most likely to backfire and make the world dirtier. They require a bigger competitive response on the part of the dirty power supplier. (At least in the short run this is true, in the longer run the scalable technology might eliminate dirty power altogether.)

To which my reaction was: what??? The argument that carbon offsets would lead to more equilibrium production of dirty energy just seemed wrong. But people are wrong on the Internet all of the time. So what really annoyed me was how Cowen ended the post:

This counterintuitive conclusion is one reason why we have economic models.

No, no it isn’t. We have models to have stated assumptions and logical conclusions from those assumptions and the post I had just read was far from that. And so I posted about the ‘wrongness’ of it all. I wrote it quickly but comments in the blog cleared it up but basically, if you have alternative energy capacity, the demand for the dirty energy provider would go down and so dirty energy output would necessarily fall.

But then, a couple of days later, The Economist‘s Free Exchange blog (author unknown) got into the act and started actually trying to draw supply and demand curves to rationalise the counter-intuitive claim. Sadly, the graphs aren’t there but the argument shift to Al Gore and his offsetting plus large electricity consumption. It annoyed me again but this time I didn’t just blog about it but sat down and tried to write down a model more carefully.

Well, it turned out that once you did that some of what was on the Free Exchange blog started to look right. So a couple of days later I elaborated. Basically, people who purchased offsets because they wanted to feel less guilty would end up consuming more electricity. But if they were offsetting and those markets did as promised, net emissions would still fall. So Al Gore could have his cake (a big energy sucking house) and eat it too (with lower net emissions than he might otherwise have). But The Economist wouldn’t give up (they doubled down) and so my rants attempts to provide rational discourse continued.

Now where did all that lead? Frustrated by the blog debate, I decided to write a proper academic paper. That took a little time. In the review process, the reviewers had great suggestions and the work expanded. To follow through on them I had a student, Vivienne Groves, help work on some extensions and she did such a great job she became a co-author on the paper. The paper was accepted and today was published in the Journal of Economics and Management Strategy; almost 5 years after Tyler Cowen’s initial post. And the conclusion: everyone in the blog debate was a little right but also wrong in the blanket conclusions (including myself). Here is the abstract:

Carbon offsets allow consumers to mitigate their guilt associated with their carbon footprint. On the one hand, when offsets are purchased in an industry unrelated to the consumption activity, offsets are complements to consumption and the introduction of an offset market causes consumption to rise. On the other hand, when offsets are purchased in a related industry, consumption and offsets are substitutes and consumption falls. In general, however, net emissions decline. We find two exceptions to this rule. First, when offsets are purchased in an unrelated market, if there is no latent demand for offsets in their absence, the introduction of offsets can potentially cause a rise in net emissions when producers of “dirty” consumption goods have market power. Second, when offsets are purchased to fund green energy, emissions can rise if “dirty” producers can engage in pre-emptive strategic commitments and the price of offsets is chosen endogenously.

The first part restates the blog debate outcome that offsets can cause electricity consumption to rise but the net emissions will decline. So if voluntary offset markets work as intended, they do good. But the second part demonstrates that if you work at it you can find cases where net emissions can rise. I had set out to prove that last conclusion was never possible but in the process of writing a model and doing normal academic stuff, I proved myself wrong.

So it took some time, and if you have read to the end of this lengthy post, even longer, but an initial blog post did lead to a deeper understanding of at least this phenomenon. What this demonstrates, however, is that blogging and the usual academic functions are not substitutes but complements.