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The social value of an offset

Updated: Aug 13, 2023

One of the major reasons society wants to capture carbon dioxide from the air is that CO2 is both chemically stable and economically worthless, so the accounting is easy. Once the CO2 is captured, it stays as CO2. The fact that CO2 has basically zero economic value (at least at scales that matter to the climate) means that no one is going to capture it without a subsidy. We know we are incentivizing behavior that wouldn't otherwise happen. The outcome of the investment is transparent to the investor.

By contrast, if society pays me to plant plant a tree, the benefits are not transparent! The tree might have economic value to me: it provides shade, or maybe grows nuts. Trees are not stable, and I might cut it down to make way for a garden, or it might burn in a fire. The market value for 'offsets' - a credit for performing a carbon-reducing task such as planting a tree - is somewhat shaky thanks to the possibility that a given project is not purely motivated by carbon reduction, or might be temporary, or might simply accelerate a behavior that would otherwise happen on its own a few years later.

But an imperfect offset is still better than no offset at all! As a society, we should encourage risk taking, such as investing in offsets where we aren't 100% sure of the motives. We should also reward planting trees, even if there is a chance they'll get planted anyway or burn later, because creation of even a partial store of carbon is better than none, and a temporary store of carbon creates value similar to how a temporary delay in emissions might.

To put this another way, we should have a way to estimate how much an offset is worth, within these constraints. If an offset is (like direct air capture) instantaneous and "additional" (not motivated by other benefits) and permanent, than its value is equivalent to the social cost of carbon. If the project is not completely additional, then it should be discounted by the odds the project might have happened on its own. If the project is delayed, or the store of carbon might be temporary, or both, then... well, actually that gets a little complicated. But if we understand climate economics and can do integrals, this seems like a solvable problem.

In fact, we don't have to do the integrals ourselves, because a recent paper in Nature offers a formula for this. (The paper it is paywalled, but a 2021 preprint by the same authors provides roughly the same information.) The equation the authors come up with is below.

This is... less bad than it looks? The first term includes the social cost of carbon (SCC), which increases as time goes forward because climate becomes more likely to run away from us as we emit more (the rate of increase is given as x). But also, the economy grows and technology improves, so mitigation will be cheaper for us in the future, and this improvement in economics happens at the discount rate (r). The equation also considers the time it takes for the project to start to capture carbon (T1), and the length it lasts if it is temporary (v), and the odds that the project will fail entirely or otherwise provide no benefit (φ).

Most importantly, the details of how to crunch the numbers are less important than the notion that the numbers can be crunched. In the Nature paper, the authors make a set of guesses on the values for x and r based on the best estimates of climate science and economics, and calculate that a temporary offset that lasts 50 years might reasonably be worth 30-50% of a permanent offset. Is this right? I'm not sure! Reasonable people might differ. But critically, if people do differ in their beliefs about the value of a particular offset, rather than arguing using words (which can be fuzzy in meaning), they can point to the exact cell in the spreadsheet they think has used the wrong assumption. This is the value of models: The conversation sharpens. Each individual's input can be translated into a number. The numbers can be averaged or weighted to improve the estimate. With every cycle of discussion, the estimate will get better.

The point of this or any other model isn't to calculate the right answer on the first try. It's to create a framework that allows us to both get started, and to get better over time. I don't know if the "social value of an offset" is a formula that will last into the infinite future, but I applaud the authors from getting us on our way.

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