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March 26, 2014 / paulio10

Carbon Offsets Only Get Us Half-Way There

I love the idea of Carbon Offsets – companies that use clean energy instead of carbon-based energy get a special kind of “credit” for the amount used, which they can turn around and sell to the more carbon-dependent companies. It’s kind of like everybody wins: the sellers get some free money, and the buyers look “more green” than they actually are – they’re paying money to offset their carbon usage.

It’s a sort of asshole-tax levied against companies that haven’t gotten with the program – haven’t reduced their carbon emissions as much as other companies. Perhaps they plan to clean up their energy usage in the future, especially if newer government regulations require them to – but for now they are forced to buy Carbon Offsets to make up the difference. By encouraging them to spend more money on their energy usage now, it will be easier for them to spend money on cleaner energy in the future that may cost more than carbon-based energy, thus avoiding paying this special kind of tax every year. By not having to pay that every year, they can stay more competitive in their industry, look better in the eyes of their customers, etc.

Other industries have a similar idea – solar and wind energy produces “green tags”, which is basically the same concept. Green tags can be bought and sold between green-energy-using companies (producers), and carbon-based-energy companies (consumers).

Getting Stuck at 50%

I have been thinking about this a lot, and realized that once we reach a perfect balance of half the companies producing Carbon Offsets, and the other half purchasing them, that is a sort of stable-state; half your companies are still polluting, and you can’t go any further. You can’t reach 100% clean energy this way.

Scenario 1 – one bad company goes good

100 “good” companies produce 1000 units of clean energy total, and generate 1000 carbon offsets they can sell to other companies.

100 “bad” companies only use carbon-based energy, and purchase those 1000 carbon offsets from the good companies so that they themselves look good, too.

What is the incentive for one of the bad companies to switch to clean energy?  Perhaps there is a financial incentive for them – maybe it’s worth it, so they convert.  Now that’s one less company needing to buy carbon offsets, – in fact, they’re generating 1 extra offset from now on.

Now it’s:  1001 offsets generated, 999 needed.

This is known as a surplus – and the principle of supply and demand states that when you increase your surplus, that usually lowers the price, because there’s too many of that thing on the market now.

The side-effect of that price-lowering is that the bad companies don’t have to pay as much for the same offsets, so now they have less incentive to convert to carbon-free energy. The more that other companies convert their energy usage, the more the remainders have even less incentive; less, and less, and less.

Scenario 2 – half the bad companies become good

Now it looks like this:

150 “good” companies produce 1500 units of clean energy and generate 1500 carbon offsets.

50 “bad” companies only use carbon-based energy and purchase 500 carbon offsets.

At this half-way point, there’s 3 carbon offsets available for sale for every 1 demand! The price therefore will roughly drop to 1/3rd of it’s value at this point – so the “bad guys” only have to pay one third what they used to, for their get-out-of-jail-free cards!

The way I see it, it’s kind of like a game of chicken – whoever holds out the longest, pays the least.

Doing it Right

That isn’t the kind of reward system we need. We need a system that progressively punishes the hold-outs, the late-comers to the game, exponentially – until they either convert their energy usage like everyone else, or declare bankruptcy and go under like the outdated dinosaur they’ve become.

One way to implement this is:

* take the total amount of carbon offsets, and the current price per offset, multiply them – that gives you the total monetary value of the entire body of carbon offsets on the market today. Let’s say the total is $1,000,000 worth of offsets.

* The government organization that oversees and enforces the carbon offset laws tells all the consumer companies this:  Each year offsets will cost $1,000,000 total.  If 1000 offsets are sold that year, the cost will be $1000 per offset.  If only 500 are sold, the cost will be $2000 per offset, because $2000 x 500 = $1M.

This way, the cost doesn’t go down, it goes up, when more and more companies convert! If 1500 companies are selling offsets and 500 are purchased, the buyers make 3 X more money, and the sellers lose 3 X more money!  And, when there’s 1 last holdout – that 1 carbon offset they purchase is the only one sold that year  – so, the cost to them is $1,000,000 for that 1 offset!

This system has many beneficial factors over the old system:

1. buyers make more and more money, as the prices go up for the offsets they’re selling.

2. sellers lose more and more money the longer they hold out and try not to convert to carbon-free energy.  At some point they’ll convert, when it becomes too costly not to.

Remember, businesses value money above all else. That is the core of every business. Sure, the owners of businesses may want to do good things in the world, but if their bottom-line is not met, money-wise, they won’t be around very long to do the good work they wish they could do. The purpose behind a company’s internal rules and policies all revolve around money: not wasting it, and making more of it. All companies value money, first. They have to, the way our system works today.

A really good book I read many years ago about the motive behind companies is The Goal: A Process of Ongoing Improvement. I recommend it highly to anyone wanting to learn more about how businesses really operate, how the leaders think about their businesses. The example in the book is about a manufacturing facility, but the basic principles are true for all companies.

If we’re going to move to carbon-free-energy, we need a plan to do it completely, over time – we have to be able to reach 100%. Anything less doesn’t make sense. It’s either the right thing to do, or it’s not. All, or nothing.  It doesn’t have to all happen at once, but it needs to eventually be finished.

It’s time to reach the goal by implementing a plan that actually works.

 

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