Climate change has not yet reached the level of universal mainstream acceptance just yet, though it seems that widespread acknowledgement of its occurrence is becoming more prevalent. The business sector has recognized the significance of environmental concerns to their overall success and begun to incorporate green business strategies into their overall marketing and development schemes.
Unfortunately, it seems that one of the more popular tactics in displaying one’s green credentials is the purchase and subsequent advertising of investment in renewable energy. This largely takes the form of renewable energy credits, which allow a company to offset their “dirty” energy use by purchasing an equivalent amount of energy from a renewable energy provider, usually a wind farm. In theory, such an approach seems okay, but a critical analysis of this trend indicates a fatal flaw that is exploited for marketing purposes.
As a recent Business Week article highlighted, the problem with renewable energy sources is a simple question of mathematical reality. Let us consider some of the data. If the local wind farm sells their renewable energy for $70 per kilowatt-hour, that is the market value of one kilowatt-hour of wind-produced energy. This is not an unrealistic number when we consider the market price as determined by the local utility company, plus incentives to the wind farm and tax breaks for producing renewable energy. If the market sets the price as such, then this is the amount that companies and individuals should pay in order to replace their own energy use with renewable energy. Often, the price for renewable energy credits is a fraction of the market price, sometimes as low as $2 or $3 per kilowatt-hour.
The problem with this scenario is twofold. First, if I pay $3 per kilowatt hour to replace my energy usage with clean wind energy, and the market price is actually $70 per kilowatt-hour, my $3 investment is not enough to entice the wind farm to produce more energy. That is simply not how the economy works. When renewable energy credits are sold under these terms, the purchaser is actually making a donation to the wind farm, rather than replacing their used energy with cleaner energy. This analysis is counter to the wind farm’s marketing scheme, but the math simply doesn’t support their claim of one-for-one replacement.
A deeper concern with renewable energy credits is that they create an illusion that is very dangerous. At an individual level, it allows people to feel that they are doing their part, and not contributing to the problems of climate change as much as they actually are. This is problematic because it creates an unrealistic notion of our own carbon footprint. One of the biggest concerns in addressing climate change is that most people have no concept of how much their daily lives contribute to this problem. Renewable energy credits make this problem worse, because people are made to believe that $60 per year will somehow account for all the dirty, coal-fueled energy they use. This is simply not true, and it creates a false sense of accountability.
At the corporate level, the problem is that many companies advertise themselves as “eco-friendly”, based primarily on their investment in renewable energy credits. This is an illusion, and it leads consumers to give their money to companies that portray themselves as more ecological than they actually are.
An excellent example of this trend is Whole Foods Market. Whole Foods portrays themselves as an eco-friendly company concerned with the problems of climate change. To give them some credit they do offer an excellent selection of organic, sustainably produced items, including meat, produce, and canned goods. However, they also advertise themselves as being entirely wind-powered, based on their purchase of renewable energy credits. Our analysis has already indicated that this is a flawed claim, but Whole Foods continues to portray themselves as a wind-powered business. Their green image leads consumers to overlook other issues, such as the lack of recyclable containers that are available for take-out purposes. If you are truly a green company, as you claim to be, why are your bulk liquid containers a “5” recyclable item rather than a “1” or “2”? Many communities offer no recycling options for anything other than 1 or 2 recyclables, and all of those 5’s go into the trash.
I will happily grant that renewable energy credits have potential, and could be easily repaired. If companies and individuals would begin paying an amount that is reflective of the true market price of renewable energy, purchasing credits would become a viable option for developing and promoting wind farms and other renewable energy sources. As it currently stands, however, renewable energy credits do more harm than good, and we should be highly suspicious of any company that claims to be “eco-friendly.”
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4 Responses to “The Economics of Sustainability”
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I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.
Matt Hanson
Thanks for the feedback. We’ll try to give you some good stuff. That’s our thing.
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