Thursday, November 26, 2009

Some quick thoughts on the Oz emissions trading scheme

We have a good idea now of what the so-called Carbon Pollution Reduction Scheme is going to look like, after the Government and Opposition hammered out a deal on Tuesday and it was endorsed (barely) by the Liberal Party in a turbulent day yesterday. It seems that the Government now has the numbers to get the Bill through the Senate, with enough opposition senators willing to support it.

Environmentally, it is modest indeed: it should deliver the Government's committment of a 5% greenhouse gas reduction by 2020. The Government has committed to a 15% reduction by 202 if there is an effective global agreement but, first, that looks unlikely and, second, even if there is, after the way the scheme was been watered down and watered down as it goes through the political process, I really don't have much confidence that the Government could get a scheme up that delivers 15% reductions by 2020. It's also probably worth noting that those 5% reductions won't all happen in Australia - under the scheme as it is, most reductions will be achieved by Australia buying credits from overseas schemes. I don't have a big problem with that - it essentially means Australian money driving additional reductions overseas - but a lot of people feel that when we commit to reducing our emissions, we should actually reduce our own emssions rather than paying others to reduce theirs.

Economically, I've heard it described as a "rent-seeker's paradise" and a massive transfer of wealth from households and small business to big polluters and I think those statements are pretty fair. It contains massive compensation for affected industries, and reasonable compensation for low-income households. Everyone else pays. Surprisingly, it is revenue-negative for government.

The questions is whether it's better than nothing at all. I'm not sure. On the plus side, it will drive some reduction in emissions and, probably more importantly, it establishes the machinery for dealing with the problem - we'll gain experience with an emissions trading scheme that can, in theory, be improved in the future. The Greens are adamant, however, that it will "lock in failure" and I think there's something to this argument. They claim it will actually unleash a lot of investment in coal-fired electricity generation and other polluting industry. I think they may be right: carbon-intensive industries have been worried about carbon policy and the CPRS gives them certainty that the policy environment will be very friendly for them for at least a decade. It also showers them with cash - it seems to me the dirtiest industries will actually profit from the scheme. You also have to wonder about the political likelihood of it being strengthened in the future - I think things would have to be looking pretty grim for the climate to get the political impetus to genuinely fix it up.

It's all pretty disappointing for someone who has high hopes in the ability of market-based policies to deliver good environmental outcomes at low cost and spread fairly over the community. If this is what an emissions trading scheme looks like in practice, the fact that I think a purer scheme could work really well in theory is pretty hollow.

Tuesday, October 20, 2009

Ken Henry on tax reform

If the tax structure from early last century prevailed today, we would have to raise $40 billion from excise and $230 billion from tariffs to meet today's revenue demand. At that rate the excise on a schooner of beer would be around 7 times what it is today. And I shudder to think how much a television set would cost.

That's Treasury head Ken Henry, speaking on lessons from past tax reform experience. Henry is chairing the review of Australia's tax system and he singles out road pricing to address congestion as a perfect candidate for reform:
When vehicles drive on a congested road they impose costs on other drivers. Each driver thinks of their own need to get to their destination, not considering how, by taking up space on the road, they impinge on the ability of other drivers to do so. There is no means for one driver to coordinate with others, to bargain about who should have priority, so that they can all be better off. This results in a predictable 'tragedy of the commons' which is estimated to waste around $9 billion a year in avoidable congestion costs, increasing to around $20 billion by 2020. Such costs will only increase with faster population and economic growth.

Worth a read.

Friday, October 16, 2009

Climate Change Blog Action Day

Apparently today is Blog Action Day for Climate Change and I thought I'd throw it open to my wonderful blog readers.

I find myself alternatively optimistic and despairing on climate change. How bad is it going to be? Are we going to do what it takes to avoid the worst? And what do you think is going to be the most help? People and communities and businesses taking action themselves? National governments agreeing on strong action at Copenhagen and setting up strong domestic laws, like emissions trading? Peak oil or economic crisis reducing emissions automatically? Or technological breakthroughs making it easier than we thought? Or will it take some real environmental crisis to get the impetus?

What do you think? Put in your two cents for Blog Action Day - bloggers, regulars, visitors and lurkers!



Thursday, October 08, 2009

What's the Opposition's climate policy?

I saw Maclolm Turnbull interviewed the other night saying that he supported emissions trading and reminding people that emissions trading was indeed government policy under the previous Howard Liberal government when Turnbull was Environment Minister (it was pretty token and very very late if I remember rightly). He also said that it had been on their "legislative program" to introduce (I guess they ran out of time; 11 years in government only gives you so much time to make new laws). He said the Coalition didn't oppose emissions trading (it was Coalition policy) - what they oppose is Labor's confused and costly scheme.

It all made me think: what is their position? I don't recall them articulating what exactly they don't like about the proposed scheme and what they would do differently. It seems that every public figure and lobby group in Australia has said what they do and don't like about the scheme and how they'd like it changed - except our opposition party.

Can this be right?

Tuesday, October 06, 2009

Emissions trading: Auctioning permits vs giving them away

As I've talked about before (The great permit give-away), one of the big debates in emissions trading is whether to auction most of the permits or give them away free to industry. Under the Australian CPRS it looks like more and more will be given away, to industries that are particularly affected and/or have to compete with overseas industries that do not face carbon costs.

There's a few myths going around about the different results from allocating and giving away permits.

One myth that I hear from the green side is that if you give permits to companies for free, they have no incentive to reduce their emissions.

A myth I hear from the industry side is that if they're given free permits, they won't have to raise their prices to recover the additional costs of permits.

But in theory, you get the same carbon price and the same impact on, for example, electricity prices, whichever allocation method you use.

The reason is trade and opportunity cost. Even if a firm gets permits for free, the permits still have a value. They can be sold. Other firms will need to buy them if they want to expand production and the firm with free permits can choose to sell or use the permits. If it can reduce its emissions more cheaply than the permit price then it has an incentive to reduce its emissions and sell the permits - even if it got the permits for free.

And if a firm gets permits for free, will it pass the savings on to its customers? Well maybe. But its competitors will still have to buy permits at market price. And the firm (and any other firms in the industry) will have to buy more permits if it wants to expand. So, at the margin, firms will need to take the permit price into account. Now the firm with the free permits could undercut its competitors. Its market share would then increase and it would have to buy more permits - at the market price. Or it could just charge the market price for electricity and pocket the difference as pure profit.

That was the experience under the EU's emissions trading scheme, where German electricity generator RWE passed the "cost" of permits onto its customers, even though it had received most of those permits for free. The result was a windfall profit of about $6.4 billion for RWE in the first 3 years of the scheme, and electricity prices that rose by 5% a year.

A new experimental study (PDF) also casts some light on the theory.

Experimental economics is a fairly recent and fascinating field where the predictions of economic theory are put to test in the lab. Testing economic theory in the real world is fraught because it's almost impossible to isolate the parameter you're testing from the thousands of other factors that could be affecting the outcome. What's the effect of the stimulus package on retail spending? No-one really knows because there are so many other factors affecting retail spending: unemployment, interest rates, exchange rates, etc etc. You can't control for them all. In the lab, you can control the environment. (The trade-off is whether you can translate behaviour in the lab to behaviour in real life.)

In this study, participants were randomly assigned roles as high emitting or low emitting firms in a simplified industry. In one treatment, high emitting firms were given free permits, while in the second treatment, permits were auctioned. Trading of permits was then allowed freely in both treatments and firms also then decided on how much they would produce and the prices they would charge for their products, taking into account the need for permits and the decisions of their competitors.

The results are interesting and accord roughly, but not exactly, with the theory:
  • Under free allocation, most permits remain with the high emitters who received them for free, apparently because the high emitters are able to use their market power to keep the permit price high and reduce trade.

  • Firms pass the cost of permits through to their customers under both treatments (even if they got them for free). Surprisingly, product prices are even higher under free allocation (not sure why this is the case).

  • With free allocation of permits, the high emitters walk away with large windfall profits. These disappear with auctioning, with the surplus instead going to the government as auction revenue and to consumers in the form of lower product prices.

This study adds further support to the idea that permits should be overwhelmingly auctioned, not given away. Permit giveaways benefit no-one other than the companies who get the free permits, at the expense of their competitors, consumers and taxpayers.

Goeree, J., C. Holt, K.L. Palmer, W. Shobe and D. Burtraw (2009). "An Experimental Study of Auctions versus Grandfathering to Assign Pollution Permits." RFF Discussion Paper 09-39, Sept 2009.

(HT: Climate Changes)

Wednesday, September 23, 2009

Red sky in the morning...

Strange weather in Australia recently: record high winter temperatures, bushfires in spring, hail the size of cricket balls overnight and we woke this morning to an apocalyptic orange glow in Sydney.

Meanwhile our Prime Minister is at the UN for climate change talks and the domestic question is whether we should have our emissions trading scheme ready to go for Copenhagen or wait for the outcome of the Copenhagen talks and a post-Kyoto international agreement.

In today's Sydney Morning Herald, economics editor Ross Gittins has a go at both parties about their complacent approach to climate change and then turns his gaze to population growth and to economists for ignoring the environment.
Even the economists who brought us the emissions trading scheme don't adequately appreciate the problem we've got. They think all we have to do is switch to low-carbon energy sources (ideally by capturing all the carbon emitted by burning coal) and the economy can go on growing as if nothing had happened.

Being economists, they see us as all living in an economy, with this thing at the side called the environment that occasionally causes problems we need to deal with. As usual, wrong model. In reality, the economy exists within the ecosystem, taking natural resources from it, using them and then ejecting wastes, including sewage, garbage, pollution and greenhouse gases.

Not much to disagree with there, but I haven't seen Gittins talk about ecological economics before or what the alternative model might look like. (At the risk of caricaturing his columns, they seem to be, while interesting, a confusing mix of very staid conventional economics one day: 'if the politicians studied a bit of economics they'd realise that people will act in their self-interest and supply and demand will ensure such and such happens' with blanket rejection of economic ideas the next 'if economists studied human psychology, they'd realise that people don't act in their self-interest and so supply and demand can't be counted on' etc).

But perhaps we can look forward to some ecological economic analysis from Gittins in the future.

Photo: View from our front door this morning, photo credit Catherine Page

Thursday, September 10, 2009

Economics and supermarket checkout lines

I remember reading a nice exposition of the efficient markets hypothesis on Andrew Leigh's blog a while back:
So if we believe shoppers are as rational as traders (why not?), then there should be a parallel efficient supermarkets hypothesis. The efficient supermarkets hypothesis tells us that: (a) the length of the line reflects all available information about its speed (cashier skill, size of preceding trolleys etc), (b) the best way of getting through the supermarket checkout is to pick the closest line and stay in it, and (c) the worst thing you can do at the supermarket is switch lines.

Of course, the number one problem with these things is the assumption that your fellow shoppers are rational in their choice of lines. Well, maths teach Dan Meyer has done the research at his local supermarket and it seems shoppers do not always rationally choose the shortest lines!
The express lane isn't faster. The manager backed me up on this one. You attract more people holding fewer total items, but as the data shows above, when you add one person to the line, you're adding 48 extra seconds to the line length (that's "tender time" added to "other time") without even considering the items in her cart. Meanwhile, an extra item only costs you an extra 2.8 seconds. Therefore, you'd rather add 17 more items to the line than one extra person! I can't believe I'm dropping exclamation points in an essay on grocery shopping but that's how this stuff makes me feel.

So there you go - watch out for the assumptions in your economic models!

Dealing with uncertainties in carbon price

The main difference between a carbon tax (emissions tax) and an emissions trading scheme is this. With a carbon tax, the price of emitting a unit of greenhouse gases is fixed but the total level of emissions is unknown. With an emissions trading scheme, the level of emissions is fixed (capped) but the price is unknown.

It follows that choosing one over the other is partly an issue of whether you want certainty in your environmental outcome or certainty in the cost to industry.

The experience of the European emissions trading scheme and now it seems the US Regional Greenhouse Gas Initiative (RGGI, pronounce it 'Reggie' - a trading scheme involving 10 States in north-east USA) has been that the cap on emissions was set too high and too many permits made available, with high volatility in permit prices and permit prices crashing after a while. The governments were too worried about the potential cost to indsutry (which isn't known in a trading scheme, but has to be forecast) and so overallocated permits.

Australia's ETS will actually start out as effectively a carbon tax, because the price of permits will be fixed at $10 a tonne for at least the first year. After that it become a trading scheme, with a fixed emissions cap and an unknown permit price.

Actually, it's more like hybrid scheme in one way, because it's proposed that there will be a ceiling price of $40 a tonne: companies can buy unlimited permits from the government at that price, so the permit price will never rise above $40.

A lesson from the EU and RGGI is that it would make sense to set a floor price too, so everyone knows that the permit price will never fall below, for example, $15 a tonne. That gives some certainty to industry, that investments in emissions-reducing technologies that are profitable at a carbon price of $10 a tonne or more can be made with no carbon price risk. It gives some reassurance to renewable energy and similar industries that they can safely invest. And it means that if reducing emissions turns out to be cheaper than expected, some of the benefit goes to the environment in the form of lower emissions and doesn't all go to indsutry in the form of cheaper permits.

Wednesday, September 09, 2009

Stimulus payments can kill you

Yes, those $900 cheques from Uncle Kevin can kill. That’s the finding of a new study in the Bulletin on Aging and Health:

Many studies find that households increase their consumption after the receipt of expected income payments, a result inconsistent with the life-cycle/permanent income hypothesis. Consumption can increase adverse health events, such as traffic accidents, heart attacks and strokes. In this paper, we examine the short-term mortality consequences of income receipt. We find that mortality increases following the arrival of monthly Social Security payments, regular wage payments for military personnel, the 2001 tax rebates, and Alaska Permanent Fund dividend payments. The increase in short-run mortality is large, potentially eliminating some of the protective benefits of additional income.

Monday, September 07, 2009

Clean Coal on Four Corners

Four Corners tonight is on progress with "clean coal" (also known as carbon capture and storage, CCS): coal-fired power stations that capture the greenhouse gases emitted from burning the coal and store them underground.

The bottom line: coal is a large and growing contributor to greenhouse gas emissions and clean coal technology is a long way from being a commercial reality.

Should be worth watching.

Saturday, September 05, 2009

Nitpick of the day

OK, I'm being a bit trivial but indulge me. Sweeping generalisations and grand rhetorical statements bug me at the best of times, but particularly when they're quite obviously wrong.

Ziggy Switkowski who, as former CEO of Australia's first and biggest telecommunications company, should know better, opens an otherwise interesting Online Opinion piece about the march of technology with this:
Our forebears 100 years ago could not have dreamt of the emergence of television, computers, satellites...
Really? No-one in 1909 could have even dreamt that those things might emerge?

Could our forebears have imagined 100 years ago that advancements in technology would allow you to check big statements like Ziggy's in about a minute?

According to Wikipedia:

The first electromechanical television system was patented in 1884 in Germany. Before that, the concept of electrically-powered transmission of television images in motion, was first sketched in 1878 as the telephonoscope, shortly after the invention of the telephone.

Punch's Almanack for 1879 imagines a 100-inch wall-mounted interactive LCD TVwith surround sound

The first fictional depiction of a satellite being launched into orbit is a short story by Edward Everett Hale, The Brick Moon. The story is serialized in The Atlantic Monthly, starting in 1869. The idea surfaces again in Jules Verne's The Begum's Fortune (1879). In 1903 Konstantin Tsiolkovsky (1857–1935) published The Exploration of Cosmic Space by Means of Reaction Devices, which is the first academic treatise on the use of rocketry to launch spacecraft. He calculated the orbital speed required for a minimal orbit around the Earth at 8 km/s, and that a multi-stage rocket fueled by liquid propellants could be used to achieve this.

The "castle clock", an astronomical clock invented by Al-Jazari in 1206, is considered to be the earliest programmable analog computer. But it was the fusion of automatic calculation with programmability that produced the first recognizable computers. In 1837, Charles Babbage was the first to conceptualize and design a fully programmable mechanical computer, his analytical engine. From the end of the 19th century onwards, the word computer began to be used to describe a machine that carries out computations.

People have more ambitious dreams than Ziggy gives them credit for.

Thursday, September 03, 2009

The great give-away: Allocating permits under an emissions trading scheme

One of the bigger areas of debate in emissions trading is how to allocate permits. The purists (eg, Garnaut) suggest they should all be auctioned while political realities suggest a large chunk will be given away to compensate the industries that will suffer most under the scheme (Garnaut suggested that you should give cash compensation so it's transparent).

An important thing to keep in mind is that this aspect of the debate doesn't change the total emissions - it's not an environmental debate; it's about fairness and economics. You get the same emissions whether you auction all the permits or give them all away. What changes is who pays and who gets the revenue. Under auctioning, the government gets the revenue and hopefully uses it to reduce other taxes. If you give permits away, the emitting industries get the money.

A new study has examined the economics of auctioning versus freely allocating permits under the US emissions trading scheme, with some possibly surprising results. They point very much to auctioning a vast majority of permits as a better way.

First, the unsurprising result: the more permits that you auction, if you use the revenue to reduce other taxes, the lower the economic cost of the trading scheme.

Second, the possibly surprising result: you only need to give away 15% of permits to completely compensate the industries most affected by the scheme. I think the proportion the government and opposition are debating freely allocating for the Australian scheme are substantially larger than that*, so think about what that means: these industries will actually profit from the introduction of the ETS. The study suggests that giving away 100% of permits leads to a doubling of profits for many industries.

*Our scheme and industries are slightly different so the numbers from the US won't directly translate, but they should be in the same ball park. Does anyone know if anyone's run the numbers here? Maybe in the Treasury modelling...

Wednesday, September 02, 2009

Carbon offsets: Oils ain't oils

If you wanted to offset the carbon emissions of a flight, you can buy carbon offsets from any number of providers. But the price for offsets done in different ways or certified under different standards can vary greatly.

Why? A new paper investigates.

Among the findings, providers located in Europe sell offsets at prices that are approximately 30 percent higher than providers located in either North America or Australasia. And, not surprisingly, offsets that qualify for emission reductions under the Kyoto Protocol, sell at a premium of more than 30 percent.

In theory, a project that avoids the emission of a tonne of greenhouse gas should give the same benefit (and have the same price) as the same as any other project that avoids the emission of a tonne of greenhouse gas. But of course you need to have confidence that this is actually what will happen and I'd guess that this is the difference: you're prepared to pay more if you're more confident that the advertised benefits are really being delivered.

Tuesday, September 01, 2009

Tax cigarettes, aclohol and junk food til no-one buys them?

The National Preventative Health Taskforce has just publicly released its strategy "Australia: The Healthiest Country by 2020".

For probably the first time ever, life expectancy in Australia is getting shorter. Three of the biggest and most preventable killers are tobacco, alcohol and obesity. And high on the list of strategies for discouraging them are "economic policies and taxation systems", which I read (and newspapers are reporting) as "make them more expensive". Not very imaginative, but will it be effective?

For cigarettes, they suggest increasing taxes soon so a pack costs at least $20 and for alcohol, interestingly, creating a 'floor price' - not necessarily increasing the price of all alcohol, but ensuring there's no very cheap stuff. For junk food, they just talk about exploring taxation, incentives, subsidies etc to promote consumption of healthier foods.

Will this help much? Is there a better approach? Has the government reached the extent of what it can reasonably do in terms of banning, taxing, subsidising, promoting, and is the rest up to the community?

Pricing is clearly a factor but it seems to me that changing a culture of smoking and drinking is the big thing - is that something that the government can or should really do?

Thursday, August 20, 2009

Renewable energy target expected to pass today

Some good news following last week's defeat in the Senate of the Australian emissions trading scheme. The Senate is voting today on the big increase in the mandatory renewable energy target (MRET), and it's expected to pass after the government and opposition reportedly reached a compromise yesterday.
The target - 20% of electricity from renewable sources by 2020 - wasn't in doubt, but there was debate over the assistance to be given to electricity-intensive induestries.

The MRET was originally included as part of the CPRS (emissions trading) legislation, but the government agreed to split it as it was clear that the MRET could be passed and there was no use condemning it to defeat by insisting on it being a joblot with the CPRS.

This is good news. The new target is a big increase from the previous one and this gives some certainty to investors in renewable energy at a time where there's still considerable uncertainty about the timing and form of the emissions trading scheme. (And depending on what happens with the CPRS, it's possible that MRET, not emissions trading, will be the real driver of emissions reductions for Australia over the next decade).

Update: The scheme has indeed now passed. Also, Sam Wylie at Core Econ has a nice summary of the scheme.

Monday, August 17, 2009

Sustainable House Day - 13 September

13 September is Sustainable House Day. Greenies around Australia open their homes and share their stories and tips for making your home greener. Learn and be inspired.

Friday, August 14, 2009

Game theory and Kyoto negotiations

I'm not a huge fan of simple game theory analyses of international climate change negotiations (even though I've been guilty of using them myself) because they tend to model each country as being an individual acting in its own interests, when the political reality is rather more complicated.

For example, simple prisoner's dilemma game theory would predict that no countries would take unilateral action on climate because it's not in their national self-interest - the only action would come in the form of a comprehensive international treaty. But domestic politics - for better or worse - often produces results that don't accord with national self-interest.

Anyway, Peter Wood has taken a neat look at the US position in international climate negotiations through a game theory lens. He incorporates domestic politics and looks at it as a 2-stage game where the need to get agreement in the Senate once negotiators get home will have a big impact on what those negotiators will want to get at Copenhagen. It's common sense really but interesting all the same.

Australia's Kyoto negotiation team prepares for Copenhagen (Dilbert - Scott Adams)

Thursday, August 13, 2009

Wind power: plus ca change

Some common sense observations about wind power's potential in the UK from The Times: it deserves attention as fossil fuels diminish, it has low capital costs, it's plentiful, it's intermittent and there are challenges with power storage, but this is only a problem if it's intended as baseload supply.
In view of our diminishing returns of coal and petroleum, the utilization of wind-power deserves careful attention. The available water power in this country is very limited, and the development of it generally requires so great a capital outlay that the standing charges more than equal the cost of the coal required to produce the same results by means of gas or steam...

Wind-power, on the other hand, is almost unlimited, and the capital outlay for its development compares favourably with that required for gas or steam. The intermittent and varying results obtained from wind-mills, however, confine their usefulness to industries in which the storage of power can be simply effected, and this feature is always met with in some form or other...

It is only when windmills become are used for providing a constant supply of electric current that storage becomes costly and troublesome, and conditions must be favourable to enable wind to compete successfully with other sources of power in this case.

The punchline? It was written 100 years ago - 1909.

Wednesday, August 12, 2009

Making cycling safer: The Idaho Stop Law

One area where I think public policy could really help sustainability in Australian cities is by making cycling an easier transport choice. Sydney strikes me as crying out for measures to encourage cycling. Cycling could really be a big part of the trasport mix here - yes some of the city is hilly but you've got probably 3 million people living within very easy cycling distance of the CBD. But it's just not a cycling friendly city.

One very simple measure I've just heard about is the Idaho Stop Law, in place in Idaho since 1982. Quite simply, cyclists can treat stop signs as give way signs (they must give way but needn't come to a complete stop) and red lights as stop signs (they must stop but can then proceed if nothing's coming).

In the first year it was introduced in Idaho, cycling injuries apparently dropped 14.5%. Michael Giberson at Knowledge Problem suggests part of the reason this law improves safety is that it reflects what many cyclists do anyway and so it aligns the expectations of cyclists and drivers.

Photo credit: Infidelic Flickr stream (creative commons licence)

Tuesday, August 11, 2009

The oppostion's rival carbon plan: greener, cheaper, smarter?

Malcolm Turnbull yesterday released an alternative carbon plan: "greener, cheaper, smarter". Sounds great. And finally some opposition policy on climate change. Well, not quite. The plan is a report by economic consultants 'Frontier Economics' commissioned by the oppostion and independent Senator Nic Xenophon. And it seems that it's largely a rehash of previous submissions that Frontier made both to the Garnaut review and government's green paper, on behalf of electricity generators.

So in terms of opposition policy announcements, this one's a whimper rather than a bang. They could have pretty much randomly selected any submission made to the Garnaut review or green paper and said "Here's a great idea, why doesn't the government negotiate with us and listen to alternative views like this? Not that it's Coalition policy. We haven't decided what we think of this yet".

But it promises really big things: twice the emissions reduction of the government's proposed carbon pollution reduction scheme at less than two-thirds the cost. Wow, the CPRS must have left some whopping great low-hanging fruit unpicked for those numbers to stack up.

Anyway, I spent last night reading it - badly, badly written as it is. There's 3 hours of my life I won't get back. At least some of the graphs were nice.

When people that really understand the economic modelling of emissions trading costs (not me) get to the bottom of this report I expect it to be thoroughly discredited or else I will learn some useful economic lessons - because I could not for the life of me see how the savings can be achieved. Because this scheme is not radically different to the CPRS; it's a minor tweak.

Very briefly, the idea is for special treatment of the electricity sector - because that's the sector affected most intensely by emissions trading. So instead of requiring electricity generators to have credits for all their emissions, they'd only require them for emissions above a 'best practice' baseline. That baseline would be progressively tightened, so rather than an immediate big electricity price rise, you get a gradual rise. As a result you get less revenue from auctioning permits but you also spend less compensating households and businesses for higher electricity prices. You also reduce the incentive for consumers to save electricity, but the report reckons this won't make much difference because consumers can only respond slowly to electricity price rises anyway: people won't go out and buy LED downlights and turn applicances off standby overnight.

All this is fine as far as it goes, but where do the massively higher emissions reductions at a massively lower cost come from? And the report's 86 pages are pretty hazy on this.

It's not because these tweaks makes it cheaper for firms and households to reduce emissions - rather, according to the report, it's "mostly due to a reduction in the economic distortions arising from the Government's revenue churning" when the CPRS means higher electricity prices, compensated for by other measures (eg, lower income tax). If you reduce the impact on electricity prices, much of that compensation isn't needed.

Well colour me sceptical. Nowhere could I see in the report an explanation of how collecting revenue from permits and using that revenue to reduce other taxes and increase welfare payments costs 1.5 times as much as keeping electricity prices low and collecting the revenue from existing sources instead. Why exactly is taxing electricity so wildly inefficient but taxing incomes just fine?

And how does shielding electricity from the full effects of the scheme allow us to double our target? Well, again, the report hints at this without really explaining it. What the report says is that international carbon trading means that the carbon price in Australia is the same regardless of our domestic target. We're a small country - we don't affect the international carbon price. Fair enough.

So, just to pick a round number out of the air, assume we emit a billion tonnes of carbon a year and the government wants to reduce that by 5% (down to 950 million tonnes). Assume also that the international carbon price is $20 a tonne and we can trade internationally.

So the government issues a 950 million permits. Let's say the government gives half of them away to industry and auctions or sells the other half at the international carbon price of $20. Each firm will reduce emissions where that will cost them less than $20 a tonne and will buy permits at $20 for emissions that it would cost them more than $20 a tonne to reduce. The government gets nothing for the half it gives away and gets $9.5 billion from the half it sells / auctions (475 million @ $20). Industry pays $9.5 billion plus the costs of reducing emissions that are cheaper than $20 a tonne to reduce.

Now, suggests Frontier, assume we double the target for reducing emissions from 5% to 10%. So instead of issuing 950 million permits, the government issues only 900 million. But the international carbon price stays the same, since Australia's decisions don't affect it. Now, each firm will still reduce emissions where that will cost them less than $20 a tonne and will buy permits at $20 for emissions that it would cost them more than $20 a tonne to reduce. So the cost to each firm is still the same. But now since the Australian government has issues fewer permits, it gets less revenue and indsutry buys them instead, at the same price, from overseas. The government now gives half away and sells the other half for $9 billion. Industry pays $9 billion to the government, $500 million for overseas permits and still pays the same to reduce emissions.

In effect, Australia's decision to lower its target is just the decision of a small supplier on a world market to supply less of a commodity - the world price doesn't change, the supplier just makes less money and other suppliers make more.

All this is fine, but the result is that the government gets $500 million less in revenue and that money instead goes overseas. That's $500 million less that the government has to cushion the financial impact of the CPRS on households and businesses. Frontier's report accepts that but says it doesn't matter: "This effectively represents a transfer from the Government to international markets, though in practice the magnitude of this transfer will be relatively small (see discussion later)". Unfortunately, there's no discussion later that I could find and I don't see why this should be small at all. In fact the transfer represents the total of any shift in the target multiplied by the carbon price. In other words, the government pays 100% of the cost of meeting any additional target by buying foreign permits.

Frontier does not explain the following, and to me it just doesn't seem explainable: Why does a reduction in emissions of 5%, spread over a range of industries, sectors, government and households, and with each of these groups making adjustments to the way they do things that reduce the costs they face, impose a huge burden on the economy - while reductions of a further 5% paid for completely by government buying permit, impose costs of a "relatively small" magnitude. It just doesn't make sense.

Now maybe I've missed something here but I've read the report and I'm still very unsure of how Frontier's proposed tweaks to the CPRS save money or allow for increased targets.

For the opposition to present this as an alternative to the CPRS strikes me as another big non-contribution by the opposition toe the climate debate.

Elsewhere: Joshua Gans (and more from Joshua), Peter Wood, Harry Clarke, Robert Merkel, Ben Eltham.

Monday, August 10, 2009

Idle thoughts

An article in the August issue of Energy Policy suggests that people idling their cars (leaving the motor running when stopped) accounts for a surprising and mostly unnecessary 1.6% of US greenhouse gas emissions.

Drivers who were surveyed on average thought that a car could be idle for almost 4 minutes before it was better to turn the engine off (in fact, it's more like 10 seconds).

There are lots of resources out there on how to reduce your fuel consumption (in the US they call it 'hypermiling') - and turning your engine off when stopped for a while has to be one of the easiest.

The NRMA reckons that if you're stopped in traffic for any length of time you should turn the key to the 'accessory' position (not completely off) and shift automatic transmission to park or neutral. This way, when the traffic starts moving again, the engine starts straight away. Vehicles fitted with this feature as standard typically reduce fuel consumption in urban areas by up to 15% (see its PDF petrol saving tips).

Sunday, August 09, 2009

What I've been up to...

Hi all,

Well Oikos is back. Welcome readers old and new!

Oikos is a blog I started in November 2005, while enrolled in a Masters in environmental economics and not long after moving from an environment NGO to a government environmental agency.

The blog's focus is at the intersection of the environment and economics. Both ecology and economics derive from the Greek oikos, meaning household.

I'll mostly be looking at environmental policy on Oikos for now, with environmental economics, environmental markets and climate change a major focus. I'll also talk a bit about related topics I'm interested in (eg, prediction markets and behavioural economics).

2009's been a busy year so far. Work has certainly had an environmental markets focus, with involvement in establishing a market for biodiversity offsets. I've finished my last coursework subject at uni (evaluating impacts of policies using econometric and experimental methods) and my thesis (relating to carbon trading and prediction markets) while kind of stalled right now, is almost finished. And I've been busy organising my wedding too (the big day's next Jan)!

Anyway, I feel it's time to get Oikos back up and running and continue the environmental policy debate. Please join me!