Monday, May 16, 2011

Post # 44: The Carbon Footprint Of Electricity Production - Time Value of Carbon Offsets

Several days ago I had the pleasure lunching with Gregg Marland, a colleague of mine at ORNL.  Well, actually Gregg recently retired from ORNL and is now with Appalachian State University's Institute for Environment, Energy, and Economics ( ).  Gregg is a long-time protege of the late Dr. Alvin Weinberg and is well know in the climate research and carbon cycle research community.  See for instance, , and ).  He has researched and written extensively on the topic of carbon offsets and the dynamics of carbon offsets.

The idea of carbon offset dynamics probably should have, but really never had crossed my mind until I met with Gregg.  Imagine a carbon management framework in which one can purchase or barter carbon emissions offsets (say from planting a forest as a carbon sink) to counter carbon emissions stemming from an industrial activity (say manufacturing, energy production, etc.).   The issue stems from the fact that the time-dependent nature of the carbon emissions from the industrial activity is not the same as the carbon sink from the forest.  The carbon emissions come in the short-term and continue at a rate and for a period of time dependent upon the nature of the industrial activity.  However, the "off-setting" carbon sink builds through time and, (at least theoretically) could continue indefinitely - long after the industrial activity terminates.  This is, of course, unless the terms of the offset agreement allows the forest owner to harvest or "cash-in" their carbon credits at some point in time.

Anyway, this scenario raises the question, "What is the time-value or "discount rate" of time-dependent carbon offsets?  The question touches upon inter-generational equity issues similar to those I've discussed here before.  It raises the question of appropriate time-frame for the analysis.  How does one determine the appropriate time frame for the analysis?  Is it simply the period of a business agreement?  A human generation?  A human lifetime?  Several lifetimes?  What about the geological timeframe?

And what if there's a tipping point somewhere out there in the future such that the value of carbon offsets prior to the tipping point is very high, but very low after the tipping point occurs?   (I'm thinking here of scenarios such as ice cap melting, burst release of carbon dioxide due to the melting of frozen tundra, ocean turnover, etc.)

And then it struck me that the burning of fossil fuels for energy production is an interesting example of a very-longer term release or "redemption" of carbon credits or offsets.  Obviously, a hugh inventory of carbon was sequestered as the world's coal reserves were formed over geological time.  Now, we're redeeming those carbon credits in in exchange for the energy we derive from burning the fossil fuels from which they derived.

Why does all of this matter?  Because it is issues such as this that impact the dialog about the value of carbon credits (or alternatively, the rate set for carbon "taxes"), and the development of regulatory frameworks in which credits and taxes are utilized as management devices.  These issues, in turn, have the ability to significantly impact the "break-even" economics of various energy generation technologies.

Enough said for now about the topic, but it's one all of us who care about sustainable energy would do well to understand better.

Thanks to Gregg for alerting me to the topic.  I find it very interesting and hope you do as well.

Just thinking....

No comments:

Post a Comment