More musings for the new year

Again with the EACs

This post is a little out there, so fair warning that if you are looking for something pithy and well-written, this is probably not my best work. But it’s what’s on my mind and the beautiful part about having a blog is that you can write whatever you want.

Tonight I want to write about markets and externalities. Externalities are basically the side-effects of economic activity that aren’t priced into transactions. They can be positive or negative. An example of a positive externality would be a beekeeper who sells honey, but whose bees also pollinate nearby crops. The farmers get their crops pollinated for free (the externality), while the beekeeper gets to sell honey. An example of a negative externality is pollution. We aren’t paying for the CO2 that our cars emit (the externality), we’re paying for gas so that we can drive across town.

As an undergrad, I was introduced to Mancur Olson’s book The Logic of Collective Action. This book described why voluntary organizations were so hard to sustain. The answer is that public goods (i.e., externalities) were really difficult to get people to pay for without forcing them into it or giving them some sort of side benefit - like NPR giving away tote bags to those who donated money. I thought this was fascinating and I ended up writing an entire Ph.D. dissertation on the topic.

It’s probably pretty safe to assume that nobody is trying to intentionally cause global warming. Basically, CO2 in the atmosphere is an externality, largely the result of burning fossil fuels for entirely justifiable reasons - like keeping warm and making electricity. And when I switch over to an EV to drive around town, the lack of emissions is still mostly an externality. I’m not driving an EV to save the planet, I’m driving because I need to get from point A to point B.

Generally, as a society we want to increase positive externalities and reduce negative externalities. More bees equals more honey and better pollination of our crops; less pollution equals less global warming, sickness, forest fires, etc. The reason we have government policies is that generally speaking it’s hard to tackle externalities at scale with NPR tote bags. Environmental groups have tried this over the years, but results are decidedly mixed and they mostly end up appealing to government for enforcement. The last few years, corporations have tried to create positive externalities by buying clean energy and carbon offsets, the latter type of purchase being an attempt to internalize an externality.

The reason I was thinking about all of this was that we had a conversation at our team offsite last week about how to define an “EAC”. We’ve been putting work into our website and we have a new section where we define what an EAC is. Most of the time we describe it as an “Energy Attribute Certificate” representing a unit of energy (like kWh), but other times we refer to it as an “Environmental Attribute Certificate” representing a unit of carbon emission reductions. This feels a bit like cheating - having it both ways. Does the EAC represent the energy itself or environmental benefits of the energy?

Maybe it’s better to think of an EAC as an “Externality Attribute Certificate” representing the value of the externality associated with a particular action. This externality might come in the form of infrastructure benefits, such as a more stable grid that benefits from demand flexibility, or in the form of environmental benefits, such as reduced carbon emissions. And in that sense, perhaps the EAC is just another form of an NPR tote bag. It’s the credit you get for creating a positive externality.

In the absence of coercion from the government, we have to take voluntary action if we’re going to try to create positive externalities. If you want to prove that your action resulted in a positive externality, you’ll need the EAC to show your impact. And if that’s the case, I think “Externality Attribute Certificate” might just be the right way to think about the acronym.