CNN.com recently reported on a new company called TerrraPass that is offering us the opportunity to turn our gas guzzling cars into zero emission vehicles for less than 11 cents a gallon ("So long to gas guzzler guilt"). This is not the case of some innovative engineering, but economics at work.
Here's how TerraPass does it. Suppose you own a 2005 Jaguar XKR convertible and that your trips back and forth to the golf course amount to 10,000 miles per year. According to the TerraPass web site, this means that you're using about 513 gallons and emitting 10,036 pounds of CO2 every year. Now for the good news. If you pay $49.95 for a Standard TerraPass, the company promises to take your money and pay other folks to reduce their CO2 emissions by an equivalent amount; offsetting all your CO2 emissions -- and they'll send you a bumper sticker to boot!
How do they offset your CO2? Here's an example. TerraPass claims to have recently paid for an anaerobic digester on the Joseph Gallo Farms in California. In other words, the farm captures the fumed generated by the cows, burns the stuff, sells the energy to the electrical grid. Presumably, TerraPass gives them a few dollars to make the whole thing economically viable. The methane from the cows doesn't go up to the atmosphere and the coal at the power plant doesn't get burnt -- a win-win solution.
The first thing that struck me when reading about TerraPass was how cheap it would be to turn my car into a ZEV. To put things in perspective, between the end of February and the beginning of April 2005, the average price of gas went up by 30 cents a gallon. Yet at the TerraPass price, for than only 11 cents we could find ways to offset the emissions of CO2 in the U.S. At first glance, it looks like a pretty good thing and maybe we should require everyone in the nation to buy a TerraPass for their car.
But the first sign that this approach can't be extended too far comes when we compare the TerraPass price to the price of carbon offsets in Europe. In the EU, where nations have signed the Kyoto Protocol, there's a real market for CO2 emissions. Companies are being required to either control their CO2 emissions or pay others to do it for them and the price for a metric ton CO2 credit in the EU ETS market was recently up to 23 Euros -- that's $27/ton. TerraPass is only charging the equivalent of about $12 per ton.
So why are these TerraPass credits so cheap? Well, it comes from a well known economic phenomenon -- the upward sloping supply curve. Compared to Europe, the demand for CO2 reductions in the U.S. is essentially nil. All there is a voluntary market called the Chicago Climate Exchange, where credits are selling for $1.50 per ton meaning that compared to its nearest competitors, the TerraPass price is quite high. But as seen in the EU ETS price, both of these U.S. prices are extremely low relative to what we'd probably find if the nation took serious steps toward reducing its CO2 emissions. TerraPass is able to buy the cheapest possible credits, what we frequently refer to as "low-hanging fruit". Indeed, the fruit they're selling might be so low that it is already sitting on the ground. "Credits" that are being bought and sold by TerraPass might be essentially standard operating procedures if the U.S. accepted a Kyoto obligation.
So where does this leave us with respect to TerraPass? It's a nice idea for those that want to make an environmental point on the bumper of their car, and it's probably cheaper than paying the extra money for a hybrid Toyota Prius. But TerraPass is not a long term or major-impact approach to the nation's CO2 emissions. If serious efforts to address CO2 emissions were actually undertaken, I'm quite sure we'd push up that supply curve pretty fast, and the result would be price at the gas pump that might make March of 2005 look appealing. At those prices, the Prius might look a lot more attractive and that's the kind of incentive that would really make an impact.