Just a few news items of potential interest:
- From now on, this website will (probably ineffectively) attempt to straddle the coal debate by referring to it as "cleaner coal." Readers are invited to draw their own conclusions about what it is relatively cleaner than -- but it would be hard to argue that it is not a strong potential market opportunity.
a) the authors assume the standard smooth supply curve shifts outward under the assumption that the blended marginal cost curves of new sources of supply mirror existing sources, but in the real world, since solar/ wind/ etc. continue to have higher costs than baseline coal, the marginal cost curve is kinked, differentiated by source, with "cliff" effects as demand grows and higher-cost technologies come online. So, for near-term equilibrium purposes, the marginal cost curve flattens higher up the curve, it doesn't shift out. Yes, that can also end up with a new equilibrium point further down the demand curve (ie: more consumption of electricity), but when the baseline coal load is usually 100% maxed out anyway, such increased consumption comes from the higher cost (ie: cleaner) power supplies. Furthermore, the charts used in the Economist column are misleading, in that they fail to show how inelastic the energy demand curve is in short-term timeframes (most power loads are driven by long-term capital purchases) -- if the charts were drawn more accurately, it would be more obvious that you have to shift the supply curve a lot in order to get a small increase in Q at equilibrium. To put it more plainly: Unless the purchase of a REC leads the buyer to consume more power (less guilt = more lights on?), there's no overall shifting of the demand curve, only supply curve effects felt only in the "clean energy" portion of the curve. Any resulting incremental increase in power consumption comes from the subsidized sources, not the already maxed-out coal baseline plants. Will this increased consumption lead to long-term negative effects of more coal-fired plants being commissioned? ...Maybe, but there are going to be a lot of other long-term effects as well, such as the fact that the REC subsidy helps drive down costs for these emerging clean energy technologies, and accelerating the beneficial effects of the experience curve. At some point, our electricity marginal cost curve may reflect more of a blended mix of low-cost dirty and low-cost clean energy sources, in which case the rebound effect would be much more relevant, but that would be a nice problem to have...
b) Note the passing mention of "unless they are implemented under a cap and trade system" in the Economist column. Why? Such systems are increasingly envisioned in public discourse around climate change. So under a cap and trade system, what would the rebound effect be? Irrelevant. Under such a regime (for purposes of simplicity, let's assume one that caps carbon emissions by the power industry at existing levels), as demand increases, it couldn't come from increased carbon emissions overall.
c) The column's authors also only address carbon offsets where the purchase price is directed toward subsidizing green power production. But in fact, the most cost-efficient offsets right now come from subsidizing energy efficiency investments or other non-supply-related carbon emissions.
d) Finally, as alluded to above, the authors make the specious assumption that buying offsets will lead you to consume more electricity than you would otherwise. In fact, all you're doing when you purchase an offset is imposing an energy tax on yourself, and raising your personal price of power -- and that should decrease your consumption, at least according to the same textbook-level microeconomic theory being deployed by the Economist columnist...
In other words, if you are so inclined, go ahead and purchase your carbon offsets. The Economist article makes some good theoretical points, but as with most economic theory, real world application runs into a lot of complications. In the real world you're subsidizing favorable economic activities, any rebound effect that results in increased carbon emissions is very minor in the near term, and over the long term you're helping to establish a US market for offsets that is already a $3B market across the rest of the world.