“Why be carbon neutral when you can be carbon optimal?”

So asks Tim Harford in The Undercover Economist, which is a very readable and entertaining introduction to how economists view the world. (I did, however, find it dogmatic and rather preachy in tone.)

Last week I looked at some of the issues around the ethics and effectiveness of carbon offsets; today I’d like to look a bit at the economics.

Harford tells the following tale about carbon offsets:

"How did you travel here today?"

"I'm sorry?"

I'm puzzled. Here I am, going to a panel discussion organized by an environmental
charity, and a very earnest young member of staff is grilling me before I even get past the door of the lecture hall.

"How did you travel here today? We need to know for our carbon offest program."

"What's a carbon offset program?"

"We want all our meetings to be carbon-neutral. We ask everyone who attends to let us know how far they came and on what mode of transportation, and then we work out how much carbon dioxide was emitted and plant trees to offset the emissions."

The Undercover Economist is about to blow his cover.

"I see. In that case, I came here in an anthracite powered steamer from Australia."

"Sorry...how do you spell anthracite?"

"It's just a kind of coal - very dirty, lots of sulfur. OW!"

The Undercover Economist's wife gives him a sharp dig in the ribs.

"Ignore him. We both cycled here."

"Oh."

Apart from being a good example of how irritating an Undercover Economist can be, this true story should, I hope, provide a few questions. Why would an environmental charity organize a carbon neutral meeting? The obvious answer is "so that it can engage in debate without contributing to climate change." And that is true, but misleading.

The Undercover Economist in me was looking at things from the point of view of efficiency. If planting trees is a good way to deal with climate change, why not forget about the meetings and plant as many as possible? (In which case, everybody should say they came by steamship.) If the awareness-raising debate is the important thing, why not forget about the trees and organize extra debates?

In other words, why be "carbon-neutral" when you can be "carbon-optimal,"… Instead of working out whether to improve the environment directly (by planting trees), or indirectly (by promoting discussion), the charity was spending considerable energy keeping itself precisely "neutral"... And it was doing so in a very public way.

A kind view would be that the charity was setting a "good example," if acting nonsensically can ever be a good example. An unkind view would be that it was indulging in moral posturing.

Describing carbon offsetting as “acting nonsensically” and then saying that that’s “a kind view” is pretty harsh. But is it fair?

I don’t think so.

Harford’s point is, on its face, a reasonable one: either you get more emissions reductions per dollar by planting trees or you get more emissions reductions per dollar by holding debates. Work out which is gives more bang for your buck and spend all your money on that.

It’s all so simple in the world of the Undercover Economist isn’t it?

Meanwhile, back in the real world, things aren’t quite so simple: there’s uncertainty and limited information.

I can almost imagine The Undercover Economic Consultancy Inc (not a real company – I hope) advising a homeowner in the tornado belt in the US against taking out tornado insurance: “No, no, it’s not optimal. You see, what you need to do is work out whether a tornado is going to hit your house this year. If not, then paying insurance is just a waste of money. If it is, then the optimal decision is simply not to live there.”

The point, of course, is that no-one knows whether a tornado is going to hit their house. Similarly, the environmental group doesn’t know how many tonnes of greenhouse gases their debates are going to encourage people to save.

Now maybe The Undercover Economic Consultancy Inc could try and work it out. They could survey all the attendees and ask them what changes they’ll make in their lives, then try and calculate the effect of that on their greenhouse emissions. But, as Harford tells us about elsewhere in the book, that would run into problems that economists talk about in terms of stated versus revealed preferences (ie, will people actually do what they say they’re going to do?) They could ask how many are going to lobby their local politicians for change, then they could employ some public choice analysis to work out what political change that will bring and the greenhouse implications of that. Maybe they could study literature on social movements and work out whether small meetings like this could contribute to some kind of overall momentum for change. I suspect you’d get a pretty fuzzy answer and it would cost you a lot more than simply offsetting the emissions.

The point is, no-one knows. And when you don’t know, it is perfectly optimal to hedge your bets. By offsetting the estimate extra carbon emissions that the meeting creates, the environmental group is at least making sure they don’t contribute to the problem, while at the same time I’m sure they’re confident that the debate will have some, albeit unmeasurable, positive impact.

The thing is, far from producing suboptimal decisions, hedging measures like offsetting help us to make better decisions. The decision of whether to buy a house in an area at risk from tornadoes is difficult. Indeed it’s difficult to know what the risk is. But insurance providers can help us decide. Because they assess and pool risks over thousands of households and businesses, they put a monetary figure on the cost of the risk. That helps us make better decisions. Is living here rather than in another town 50 kilometres away worth the extra $2,000 a year I have to pay in tornado insurance? That’s an easier decision to make.

Likewise, carbon offsets are an attempt to internalise the social cost we place on others through our use of carbon. If we’re interested in living our lives by some kind of ethic where we try and minimise our negative impacts on others, then offsets help us do that and they provide the information we need to make better economic decisions. Say I want to travel from Sydney to Tasmania and then drive around the island for a few days. Should I fly and then hire a car when I’m there or should I put my car on the boat and sail? Carbon offsets allow me to put a rough price on the carbon emissions of either of the options and that helps me decide.

I’d like to go further and see a carbon tax. Then some measure of the social cost of emissions would be embedded in the price of everything. If the cost of flights suddenly went up and the cost of boat trips went down, well, that would encourage a shift in the mix of activities we undertake that would be closer to what’s socially optimal.

Doesn’t sound nonsensical to me.