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Thursday, December 11, 2008

Greenhouse Gas Offsets

OK so the Reality Based Community won't be collective Energy Secretary, but I still have an open discussion with James Wimberley on greenhouse gas offsets.

Roughly, I am ecstatic that some greed heads managed to make a killing by finding a Chinese refrigerator plant which didn't have freon scrubbers (or something).

I think I have a proposal which James will like. IIRC the current system allows increased greenhouse gas emissions in Europe if they are offset by abatement elsewhere (provided that some bureaucrat can be convinced that the events elsewhere wouldn't have occured without a subsidy). I think it would be better to cap European emissions and pay cash for such abatements based on the current price of permission to emit a ton of C02. Note "based." I'd multiply it by a factor less than one to account for inevitable slipping in stuff which would have happened anyway. In actually existing Europe, such a scheme would have to have a fixed budget, so offset entrepreneurs would have to bid against each other and the best projects would be funded (I'd get the money from auctioning the emission permits to European firms of course).

The question is should abatement elsewhere increase the amount of greenhouse gasses Europe chooses to emit ? This depends on how Europe should choose how much to emit. There are two reasons that this is less than unregulated emissions and more than zero 1) the benefits of reduced emissions decline as the reduction gets global emissions out of the disaster zone.
2) the cost of reducing emissions further increases as emissions go to zero (at zero people in Europe would not be allowed to breath, which would really get on my nerves after about 30 seconds).

I think it is clear that the more important convexity is number 2 (the second derivative of cost is much much greater than the absolute value of the second derivative of benefit). It's not like global warming will be stopped cold by the Euro cap and a bunch of abatement elsewhere subsidized from Europe.

The cap should be chosen at the point where the rapidly rising cost of further reductions of emissions reaches the almost constant cost of a bit more global warming.

That means the optimal amount emitted from Europe should not increase mcuh at all if good ways to reduce emissions elsewhere are found.

It's not optimal to offset emissions with extracommunity emissions, it is close to optimal to fix European emissions *and* pay for foreign abatement.

Needless to say, my thoughts have nothing to do with policy in really existing Europe which is way better than US or Chines policy already.

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