Accounting for Offsets

Anybody who has been a part of a productive business (e.g. so this excludes almost all politicians and academics) will probably have experience with some type of profit improvement program.  Usually you are doing about a hundred things simultaneously to reduce costs.  When costs actually go down, you find yourself scratching you head - what actually made the difference.  Everyone will claim that their program or initiatives saved the company X amount of money, but when you add up all the X's, you get a number four or five times the actual improvement. 

Well, apparently the same dynamic occurs in carbon offsets:

An investigation by the Financial Times
suggests that many carbon offsets are illusory, and that there is
little assurance that purchasing carbon offsets does much of anything
to reduce carbon dioxide emissions. Specifically, the report found:

Widespread instances of people and organisations buying worthless
credits that do not yield any reductions in carbon emissions.

- Industrial companies profiting from doing very little "“ or from
gaining carbon credits on the basis of efficiency gains from which they
have already benefited substantially.

- Brokers providing services of questionable or no value.

- A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

Who in the world would have every predicted this?  Well, it turns out a lot of people did, including me.  For example, I suggested that companies like Terrapass are probably selling their CO2 offsets at least three times:

  1. Their energy projects produce electricity, which they sell to
    consumers.  Since the
    electricity is often expensive, they sell it as "CO2-free"
    electricity.  This is possible in some sates -- for example in Texas,
    where Whole Foods made headlines by buying only CO2-free power.  So the
    carbon offset is in the bundle that they sell to
    electricity customers.  That is sale number one. 
  2. The company most assuredly seeks out and gets
    government subsidies.  These subsidies are based on the power being
    "CO2-free".  This is sale number two, in exchange for subsidies. 
  3. They still have to finance the initial construction of the plant, though.  Regular heartless
    investors require a, you know, return on capital.  So Terrapass
    finances their projects in part by selling these little certificates that you
    saw at the Oscars.  This is a way of financing their plants from people
    to whom they don't have to pay dividends or interest "”just the feel-good
    sense of abatement.  This is the third sale of the carbon credits.

I also suggested that there is an incredible opportunity for outright fraud:

This type of thing is incredibly amenable to fraud.  If you sell more
than 100% of an investment, eventually the day of reckoning will come
when you can't pay everyone their shares (a la the Producers).  But if
people are investing in CO2 abatement -- you can sell the same ton over
and over and no one will ever know.

Finally I argued that many of the abatement numbers make no sense:

Something smells here, and it is not the cow-poop methane.  This 100,000 pound [CO2 Offset] coupon retails for $399.75 (5x79.95) on the TerraPass web site.
First, this rate implies that all 300 million Americans could offset
their CO2 emissions for about $100 billion a year, a ridiculously low
figure that would be great news if true. 

Lets look at solar, something I know because I live in Arizona and have looked at it a few times.  Here is the smallest, cheapest installation
I can find.  It produces 295 CO2-free Kw-hours in a month if you live
in Phoenix, less everywhere else.  That is enough to run one PC 24
hours a day -- and nothing else.  Or, it is enough to run about 10
75-watt light bulbs 12 hours a day -- and nothing else.  In other
words, it is way, way, way short of powering up a star's Beverly Hills
mansion, not to mention their car and private jet.  It would not run
one of the air conditioning units on my house.  And it costs $12,000!
Even with a 20 year life and a 0% discount rate, that still is more
than $399.75 a year.  For TerraPass's offset claim to be correct, they
have to have a technology that is one and probably two orders of
magnitude more efficient than solar in Arizona.

[update:  Al Gore's house 221,000 kwH last year.  Call it 18,400KwH
per month, that would require about 62 of these solar installations for
$744,000.  I don't think $399.75 is really offsetting it]


  1. Phil R:

    It was already pointed out to you earlier that the reason for the absurdly low figure of $100 billion is that you're extrapolating based on current prices which reflect the "low-hanging fruit" of CO2 mitigation possibilities. If you were to actually go out and try to buy that many, you'd of course find the cost much higher than $100 billion. The supply curve isn't flat.

  2. MGW:

    I think the low price offered is really just evidence of what you previously stated, that these companies are selling the same thing multiple times. Realistically, they are already selling their electricity as CO2-free and in theory, the rates they charge should be enough to cover the depreciation on their power generating assets. Therefore, I think the whole TerraPass idea is simply to sell it again for whatever price the market will tolerate. After all, $399 is a lot more tolerable than $700k.

    I think a good business opportunity here (and it may be what these companies are already doing) would be to partner with lumber companies, power companies, and any other industry that does anything you could claim is reducing CO2 and then purchase their "offsets" from them for a very low price (the lumber company would be planting trees and the power company would be trying to be more efficient regardless of what you do) and then resell them to suckers.

  3. dearieme:

    Whoever first dubbed these scams "indulgences" deserves a pat on the back.

  4. Jim Collins:

    I may have said this before but Charles Ponzi would be proud of the Carbon Offset scam.

  5. eddie:

    Since you're just pointing to your previous posts without amplifying or amending your argument, I'll just point to my comments in those posts which explain why your argument is wrong in many substantial and fundamental ways.

    I will add that the Times article points to "many" of the offsets and/or offset resellers being bad, but doesn't say that all of them are bad, and doesn't mention Terrapass as being one of the bad ones. But you say "companies like Terrapass are probably selling their CO2 offsets at least three times" without a shred of evidence that Terrapass is doing any such thing and in spite of direct citations to Terrapass' policy and practice documents showing that in fact they do no such thing.

    There are some crappy parks out there. Would it be reasonable for me to post something on my blog saying "A lot of parks like the ones run by those Lake Havasu guys are probably so crappy they don't even have jetski rentals." ?

    Could it be that, like any other product or service you might want to purchase, there are good providers and bad providers of carbon offsets and that a little bit of research can help you distinguish between the two?

  6. markm:

    It is of course possible to honestly sell one thing in two or more slices. Example, land sold without mineral rights - although I think that's been a bad policy in the long run, since it causes a conflict when the mineral rights owners want to tear up the surface, owned by someone else, in pursuit of what they own.

    A better analogy: Say I run a "soup kitchen" serving meals to the poor, which at a normal restaurant profit margin would cost $3 each. However, my customers can only pay $1 each. (I charge them something so they appreciate that the meals are of value and don't waste them.) The local welfare department chips in another $1. For the rest, I depend on private donations. Rather than just begging for money, I'm offering $100 certificates that say, "I helped feed 100 poor people", so rich liberals can put them on the wall and impress each other. (For conservatives, maybe I'd offer to keep their donations secret from everyone but the IRS. 8-)

    So I'm quite honestly selling the same meal three times, for 1/3 of the market value each time. No problem there - as long as I'm honest.

    The problem is, it's very difficult to ensure I stay honest...