Why are carbon offsets so cheap?

Carbon offsets are a deal! You can get to zero emissions for $99 a year through the ECI’s Cooling Creation campaign. That’s only a little over 1% of GDP to offset everyone in the whole country!

Actually, there’s a flaw in that reasoning. It’s called the "scaling-up" problem.

Simply multiplying the published price of current, voluntary carbon offsets by the carbon emissions in the national (or world) economy gives a drastic underestimate of what it would really cost to offset the entire  economy. Here’s why:

When you are quoted a price for a voluntary carbon offset, the company or non-profit or whoever is giving you the cost of whatever the easiest, cheapest way of reducing carbon is. Usually it’s either investment in some high-payoff renewable energy (wind on a mountaintop, solar in New Mexico, e.g.) or in energy efficiency (which is usually just a matter of paying a little extra capital cost in building or renovating). Some offsetters also invest in reforestation, which is very cheap, but a more risky investment, for numerous reasons, so they usually built in a safety factor by planting far more trees.

This carbon offset price represents the marginal cost for the economy to reduce carbon emissions–we rationally start with the easiest, cheapest technologies first. Once those are exhausted (by people like you and me purchasing voluntary offsets), we move on to the next cheapest.  If suddenly EVERYONE in the US were looking to purchase an offset–tomorrow–there simply wouldn’t be sufficient opportunities for offsetting everyone’s emissions at such a low cost.

It’s what you’d call a "scaling-up" problem. You can do a thought experiment–forget about offsetting for the moment. What if you wanted to directly reduce your own emissions (all by yourself)? You’d start by doing the cheapest things first–switch out those light bulbs, install a programmable thermostat, seal the leaky windows and doors. Then you’d add in the more costly and troublesome actions–things which take longer to pay for themselves–like adding insulation to the attic, installing ceiling fans, etc. If you wanted to reduce even more, you’d do more costly things (like blowing in wall insulation, installing zone heating and cooling system to condition the air in only the rooms that are occupied, etc.). And on and on. You can’t expect to reduce all your emissions at the low price of the initial reductions.

At some point in your thought experiment, you’ll decide that it is cheaper, and more economically rational, to pay for emissions reductions elsewhere in the economy than to keep reducing your own personal emissions. That’s what offsets allow you to do. And as cheap offsetting opportunities get used up, and their costs rise, you’ll go back and find more opportunities to reduce your own emissions again, until you reach the break-even point again, and you switch to purchasing offsets.

Either way, if the world is to reduce its carbon emissions by a huge amount, everyone can’t be offsetting–someone has to make the actual reductions that are being paid for. And in the end, it is unlikely that anyone would want to get to carbon neutrality completely through the purchase of offsets–there will always be some reductions that can be made directly more cheaply than paying for indirect reductions.

Offsets are a temporary solution to get us going on these reductions. They help ensure that we aren’t spending money unwisely. You’d be crazy, for example, to install a wind turbine on your house to get to zero emissions on your own–you’re much better off investing in such a solution in a smarter place. But in the end, we’ll all be doing much more than we are right now, in our quest to balance our carbon budget.

Economists estimate that it would cost about 3% of GDP by 2050 to reduce emissions by 80%. It would cost quite a bit more to reduce emissions by 100% in the short run. But still, making investments at that rate would at worst shave of a few tenths of a percent of GDP growth over that time frame.

It’s more expensive than our initial oversimplified calculation, but it’s still cheaper than you might imagine. And it almost certainly will get cheaper over time (gradually) as we learn how to produce energy more efficiently and with non-carbon sources. Whether the learning-by-doing effect (making it cheaper) or the rising-marginal-cost effect (each incremental reduction is more expensive) prevails remains to be seen. What we’re sure about is that making the carbon reductions is cheaper than the alternative of doing nothing, because unmitigated climate impacts will be even more expensive.

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