Saturday, May 19, 2007

Carbon Credits and Israeli Daycare

I apologize to my loyal reader for a long absence. But really, Who Has Time For This?

This week KQED's Forum produced an hour on workplace ethics, and toward the end of the show discussed the unusual behavior that can result from mixing ethical and economic incentives. The show discussed the oft-cited study of fines imposed by an Israeli day care center on parents who came late for their children. Surprisingly, the rate and duration of late arrivals increased markedly. The new hypothesis is that without fines, parents felt they were violating a social contract by being late and were reasonably responsible. Once fines were imposed, parents were likely to feel the entire social cost was captured in the "price" of the fine. They now made more purely economic decisions, being late much more frequently.

Are there any lessons to draw from this in the growing market for carbon offsets? Increasingly consumers are buying offsets from services like Terrapass, Carbon Fund and NativeEnergy. But are these offsets appropriately priced, and could this early market have adverse consequences on consumers' overall behavior?

Naturally, the first offsets are the cheapest. But in this ethics-linked market, the first to buy them are likely among the highest emitters of carbon, who could potentially do the most to limit their footprint without dramatic economic harm. Instead, they can buy cheap offsets (much cheaper, anyway than the world's median ton of carbon would cost to offset), and emit worry-free. Could putting a price on these emissions have unintended consequences? Might the small but growing handful of consumers who feel an ethical obligation to cut emissions simply pay the fine rather than change their behavior? Note that most credits do not actually adjust well to usage. Once I've purchased my sticker for the year, there is no further incentive to make the marginal choice to work from home rather than burn three gallons to make the round trip to the office. Ideally, I'd be subsidizing industrial carbon decreases AND shrinking my own footprint.

(I am working out an example of how carbon offsets might affect my pending decision about a new car. I will try to post the results shortly.)

Furthermore, in the day care study, the new proclivity to lateness continued even after the fines were removed. Apparently, parents assumed the cost of lateness had already been revealed. It's great if they aren't charged for it (free daycare!), but it is now an economic, not an ethical issue.

I do not mean to suggest carbon pricing cannot be an important tool in reducing emissions. Indeed, I think it is one of the most critical. But like any early market, structure and incentives are critical to success. Is it possible that while ethical concerns around carbon emissions are on an upswing, we should focus on those as incentives and abandon the pricing mechanisms until we can structure the mandatory cuts that increasingly seem likely?

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