Moral hazard in emissions trading

Moral hazard is an interesting concept in economics. It’s the problem that someone protected from risk may behave differently from how they’d behave if they were fully exposed to the risk.

It’s a big issue in finance and insurance. Moral hazard has been blamed in part for the sub-prime mortgage debacle gripping the US and elsewhere. Governments often guarantee banks to protect citizens from losing their savings if banks collapse. But this guarantee to bail out banks can encourage the banks to make riskier loans: if the loans go OK, they make money and if everything goes wrong – well, the government will bail them out to protect the savings of the mums and dads. The government’s guarantee can therefore – perversely – make the financial systems riskier and more unstable.

An environmental example is drought assistance. By helping farmers when they face a drought we may encourage unsustainable farming practices. ‘Should I farm in the drought-prone area? Well, if it rains I’m fine and if it doesn’t, I’ll get drought relief, so why not?’

A proposal in the Garnaut Climate Change Review's latest discussion paper on emissions trading (pdf) is that permits be allowed to be “banked” or “borrowed” from future years. Banking’s not a big issue – if you reduce your emissions more than anticipated, you can “bank” your excess credits and use them in a later year. But “borrowing” is a potential minefield. It allows a company to say “I’ll exceed my allowance this year but it will be OK because I’m planning to reduce my emissions substantially in the next few years so I’ll repay them then”.

What’s the problem? First, we really want to be encouraging emissions reductions now. But that’s pretty easily dealt with – you just charge interest. At a 10% interest / penalty rate on borrowed permits for example, a company could choose to emit 100 tonnes this year and 100 next year or borrow 10 and emit 110 this year but only 89 next year (100 minus the 10 borrowed minus interest of 1 on the 10 borrowed). You could give the same rate of interest as a discount on banked early reductions to encourage those.

The bigger problem is will these borrowed permits ever be repaid? And this is where moral hazard raises its ugly head. Imagine this scenario: coal-fired power plant operators are sure that carbon capture and storage is going to mean they can reduce their emissions massively and cheaply in 20 years. The technology is looking promising. But right now, reducing emissions is hard and expensive. So they borrow from their entitlements 20 – 30 years in the future. They’re sure the investment will pay off when the technology comes on line and they reduce emissions massively and cheaply. And seeing as they’re going to pay an interest or penalty rate for delaying their cuts, everyone will win: the cuts will be delayed but they will be so huge when they arrive that it will more than compensate in the long run.

But, as it turns out, the technology doesn’t deliver. So the power station operators deliver the unfortunate news to the government: "We got it wrong, we can’t afford to make the reductions. And we can’t afford to buy in permits on the open market. You’ve got a few options. You can fund us to buy more permits. Of course, the price of permits will spike, instantly and substantially increasing the costs of any emitting industries, sending some to the wall, increasing energy, food and goods prices to consumers and fuelling inflation, and maybe a small recession. And of course, taxpayers will be paying the debts that we’ve incurred. Or, we can just shut down. Electricity production will slump and energy prices will spike, again increasing the costs to energy users (sending some firms to the wall and hurting households), fuelling inflation, and maybe a small recession. Or you could just issue us with more permits…"

The idea of emissions trading between different companies is that it allows flexibility in who makes the reductions and therefore lowers the overall community costs of achieving reductions – whoever can reduce emissions most cheaply has most incentive to do so. Allowing the trading of emissions between different time periods adds more flexibility (flexibility as to when we make the reductions) and further reduces the total cost to the community. If it works. But we need to be very careful. Because the risk of moral hazard suggests it might not work.

How much should we spend to reward pollution?

New Treasury figures estimate that by next year we'll be spending over $2 billion per year subsidising the use of company cars – nearly twice as much as was previously predicted.

I've talked before about this environmentally destructive tax rort that encourages drivers to drive and drive and drive - the more you drive, the less tax you pay.

Now if car travel is a legitimate business expense, then it's reasonable for allowance to be made for the cost of car travel when assessing tax. But you need to question whether tax breaks are justified for businesses providing personal (private) cars to employees as part of their salary package – cars that they may or may not use for business trips.

The big problem is that it’s hard to work out when a car is needed for business (in which case maybe it’s reasonable for an employee to provide one and for it not to be taxed) and when it’s really just being used for private purposes (in which case it shouldn’t be tax deductible). The Tax Office’s arbitrary solution is to assume that if you drive it far enough, you must have needed it for business – so the further you drive, the less tax you pay. The rate of tax you pay on your car loan repayments ranges from 26% if you drive less than 15,000 km in a year to just 7% if you drive more than 40,000km. This of course encourages driving more, not just for legitimate business, but also to reduce the amount of tax you have to pay, particular if you find yourself near the cusp of one of the tax brackets towards the end of the year.

The Australian Conservation Foundation puts it this way:

These tax breaks are economically senseless, reward environmentally destructive behaviour and increase taxes that the rest of us have to pay. There are much better uses for $2 billion than to hand it out to affluent corporate executives as an incentive to buy cars and drive them as much as possible to get the maximum tax benefit.

I can't say I disagree. The government has pledged to introduce a carbon trading scheme by 2010, at some cost to businesses and consumers. A sensible precursor is to remove the distortions like this one and the tax break for 4-wheel-drives / SUVs - which impose environmental and economic costs.

Maybe one for the Productivity Commission?

Will fuel efficiency laws save motorists money?

With petrol prices in Australia nudging $1.50 a litre, the clamour to 'do something' is growing and even the Australian Conservation Foundation is jumping on the bandwagon. Its solution: mandatory fuel efficiency standards for new cars sold in Australia:

ACF’s Sustainable Australia program manager Alison Cleary... said the introduction of mandatory fuel standards would reduce emissions and save Australian motorists money.

“With petrol nudging A$1.50 a litre, a fuel efficiency standard of 6.8L/100km would save the average Australian driver around A$1,000 on petrol each year.”

The previous Federal Government had a voluntary agreement with the car industry for vehicles manufactured in Australia to achieve an average fuel efficiency of 6.8L/100km by 2010. But almost no progress has been made towards that target, with only one Australian manufactured car model having an efficiency of less than 10L/100km in 2006. The auto industry failed to meet similar non-binding efficiency targets in 1983, 1987 and 2000.

“Mandatory efficiency standards for new cars are needed to help Australians cope with higher oil prices and ensure we remain competitive in international and domestic markets,” Ms Cleary said.

But is this true? There are some clues from the US, which has had mandatory fuel efficiency standards ("CAFE standards") for some time. And in 2004, the Congressional Budget Office examined the cost of using tighter fuel standards to achieve a 10% reduction in fuel use.

Their findings?

Raising [fuel efficiency] standards would impose costs on both the producers and buyers of passenger vehicles. To comply, producers would need to incorporate technologies to boost the fuel economy of their vehicles, which would increase their cost of production. Consumers would face higher prices for new cars and trucks. But consumers would also see lower operating costs for new vehicles because they would use less gasoline, offsetting some of the sting of the higher purchase prices.

CBO estimates that raising [fuel] standards by ... enough to reduce the amount of gasoline consumed by new vehicles by 10 percent would cost the U.S. economy a total of $3.6 billion per year.

That figure translates to about $230 per new vehicle. Consumers would most likely bear about two-thirds of the costs. Although the average price of a new passenger vehicle would go up by nearly $900, fuel savings would lower the additional costs to consumers to roughly $150 per vehicle, on average. Automakers' lost profits would constitute the remaining $80.

Now Australia is not the US and 2008 is not 2004. The costs to Australia's motorists and manufacturers might be higher or lower than those. But there's no reason to think that tighter standards should automatically save motorists money overall. If saving $1000 a year in petrol is important to motorists, they'll buy more efficient vehicles without the need for mandatory standards. And, indeed, more and more are doing just that. But for many motorists, there are trade offs. Not everyone wants a Prius.

A clue to the trade-offs lies in the ACF's two stats: that the average driver would save about $1000 on petrol a year if the 6.8L / 100 km standard was introduced and that only one Australian-produced car gets better than 10L / 100 km (and presumably not 6.8). To achieve that $1000 saving then, either drivers would be prohibited from buying Australian cars or Australian cars would have to get more efficient, fast. Either way, there's obvious costs to both consumers and local producers.

Now don't get me wrong: there are valid environmental arguments for tighter efficiency standards. And if the net cost to the driver over the life of the car is a couple of hundred dollars, the environmental benefits may well outweight the economic costs. But let's not kid ourselves that tighter environmental regulation is always costless. Far from helping motorists save money and making industry more competitive, the opposite is more likely.

As I've said before, environmentalists need to be making environmental claims strongly and eloquently and taking on the economic arguments too. But we should be careful about overplaying economic arguments. A weak economic argument can distract from a strong environmental one. And from where I'm standing, the economic argument for tighter fuel efficiency standards looks like a weak one.

Who should you vote for in the US Presidential elections?

A site that should be of interest to all US readers (and many others) is glassbooth.org.

A non-partisan site, it aims to give you an insight into how the views of the Presidential contenders align with your own views.

First it asks you to assign points to issues that you're most concerned about, then it asks you a series of questions about those issues. Based on your responses, it tells you which contenders align most closely with your beliefs and - importantly - provides references and links to back up that assessment.

In case you're interested, the winning candidate for me was Bill Richardson (Democrat from New Mexico), followed closely by Barack Obama and Hillary Clinton. On environment and energy issues, Richardson was well in front (seems he's more of a greenie than I am), followed by Clinton.

More about glassbooth and some other handy election resources can be found in this Wired article.

Happy new year!

I hope you've all had (or, better still, are having) a refreshing break and I wish everyone a healthy and happy 2008.

It's a good time to reflect and to look forward to a great year and, in that vein, the Sydney Morning Herald has a great article on eco-friendly New Year's resolutions - most of which are pretty cheap and easy to implement.

Blogroll update

I need to update my list of links: some blogs I link to have ceased to be updated or even to exist and there are new blogs on the scene I haven't yet included.

If you think there are any glaring omissions, please leave a comment. Given Oikos' theme, I try to link to really good blogs about environmental economics, Australian economics or Australian environment - or truly outstanding blogs about the environment or economics more generally.

Bali wrap up

I think this cartoon by Alan Moir pretty much sums it up!

I'll post some more thoughts soon...

Will the US be rewarded for failing to ratify Kyoto?

The Sydney Morning Herald reports today:

Three options in the draft Bali deal will be put to international environment ministers who will meet on Wednesday... and the hope is that a deal will be signed by Friday.

The most favoured option is a two-track process. Under this, countries that have ratified Kyoto - Australia has taken the step towards ratification - would continue separate negotiations on the need for deep cuts by 2020 and 2050, and discuss binding targets.

A second process would look at commitments from developing countries and the US, which would not be binding but include renewable-energy and energy-efficiency targets, and emissions cuts from polluting industries.

Is it really the case that Australia has ratified the Kyoto Protocol just in time to be bound by deep cuts it otherwise wouldn't have been required to make?

New-ish environmental economics blog

While I've been galavanting around Europe with its surprising lack of wireless internet, I've missed the appearance of a new addition to the healthy and growing stable of blogs around the world with an environmental economics focus.


Common Tragedies is a play on the 'tragedy of the commons' concept, the tendency for overexploitation of common resources. The blog chronicles thoughts on environmental and energy economics and policy from a group of research assistants at Resources for the Future, an environmental policy research centre.

An Inconvenient Truth: US doing better on climate change than Europe?

Yesterday's Wall Street Journal reports some suprising figures on US greenhouse emissions:

The Bush Administration announced last week that U.S. emissions of carbon dioxide fell by 1.8% from 2005 to 2006. Output of all greenhouse gases was down 1.5% last year. All this while the American economy grew by 2.9%. It's the first time since 1990, when the U.N. began counting these things, that the U.S. has reduced emissions without also suffering a recession...

The EU hasn't yet released figures for 2006. But from 2000 to 2005, the U.S. outperformed Western Europe. Carbon emissions were up 3.8% in the so-called EU-15 during those years, versus 2.5% in the U.S. Over the same period, there has been virtually no difference between the increase in all greenhouse emissions in the U.S. and EU-15.

The WSJ goes on to make some odd inferences from this:

the reductions were in part due to higher energy prices and favorable weather. But greater use of lower-carbon energy sources, including natural gas, also played a big role. The U.S. reduction also suggests that letting markets work through higher prices will reduce carbon emissions more than the cap and trade mandates favored by environmental lobbies and most Democrats. [emphasis added]

I'm not sure what the WSJ is suggesting here. Markets won't just "work" and magically ascribe higher energy prices due to help save us from climate change. Governments actually need to somehow interfere in those markets to increase the prices of carbon-intensive energy sources. And there are two basic ways: impose a tax on emissions or require permits for emissions, issue a limited amount of permits and allow them to be traded (cap and trade). Either way, you're putting a price on emissions: only after you've place some constraint on the market can you stand back and let the market "work" to find efficient ways to reduce emissions.

But I think these US figures are worth examining for a few reasons:

1. They suggest that emissions can be reduced without much of an impact on economic growth. Economic / Business consultants McKinsey have released a study this week that indicates that the US could reduce emissions substantially with little economic cost.


2. They suggest higher energy prices (and by inference a carbon tax) can be quite effective.


3. They might give us clues as to what sort of action could be effective. What was different about 2006 to previous years? Why did the use of natural gas for electricity generation increase?

If you're interested, the full report is available (in pdf) from the US Energy Information Administration website.

Bali high - or ballyhoo?

Now that Australia has ratified the Kyoto Protocol, I'd expect that Kyoto-related debate and discussion in Australia would focus on:

1. Can we meet our emissions targets in the first commitment period (2008 - 2012)?
   
2. What happens after 2012? What will the new Kyoto Protocol or alternative post-Kyoto agreement look like?

For the first issue, the die is really cast: there's not much we can change now in terms of domestic policy that will pay big dividends within the next 5 years.

The Bali conference will kick off international discussions on the second issue - probably one of the most important things to get right in the coming century.

What do you think should be the essential ingredients of Kyoto Protocol Mark II?

Australia's political climate change

Australia has today ratified the Kyoto Protocol.

Cat and I are back home after a great trip, to a new federal government and some important developments on climate change.

Climate change was a prominent issue in the election campaign. My impression is that, while policy differences between the parties on this issue had narrowed since the former Liberal government announced earlier this year that it would establish a carbon trading scheme, the Liberals' regular climate skeptic rhetoric over the past decade (which only really changed this year) resulted in the distinct feeling that they were not genuine about climate change action.

A new government was sworn in this morning and its first official act was to ratify the Kyoto Protocol. This will enable Australia to participate properly in international negotiations on climate change for the first time in many years. It also leaves the United States exposed as the only wealthy country that has failed to ratify Kyoto. Whether this will have an impact on domestic politics in the US, particularly with a presidential election in the coming year, will soon be seen.

In Australia, the new government has set a long-term target of a 60% reduction in emissions by 2050, with a national emissions trading scheme to be implemented by 2010 to work towards that target.

The Bali climate change conference kicked off today, with new Prime Minister Kevin Rudd, Environment Minister Peter Garrett and Minister for Climate Change and Water Penny Wong, to lead the Australian delegation.  The first commitment period under the Kyoto Protocol begins next year and runs until the end of 2012.  The signatories to the Kyoto Protocol have committed to achieving certain (fairly modest) emissions targets on average over this 5 year period. The big task for the international community over the next couple of years, starting in Bali, is to negotiate what happens after 2012.  It will be positive for Australia now to be more engaged in this process.

What happened to Oikos?

Apologies to my loyal and very attractive readers for a lack of posts here lately. I'm acting in a new position at work which I'm loving but it's been a learning curve and a lot of work! Free time has largely been devoted to my thesis (first chapter now 4 weeks overdue - woops!) and - more importantly - planning a big overseas trip!

Cat and I set off for a very exciting 9 weeks in Europe via San Francisco and the Phillipines in only a few days.

So posts over the next couple of months will be sporadic and more about highlighting happenings of interest in environmental / economic policy than sharing many of my own thoughts.

I hope to return refreshed and renewed and ready to blog in earnest in late November!

David

Can markets predict global warming?

It's been a little quiet at Oikos lately, as work has been particularly busy. I've also started researching for my thesis on whether prediction markets could effectively predict climate change and its impacts - something I've previously talked about. Could a well-functioning market in future temperatures or sea level rises be set up, and how might its predictions compare with the consensus forecasts from the Intergovernmental Panel on Climate Change (IPCC)?


According to an article today on MSN, companies are starting to look at precisely such markets:

Farmers have for generations used futures contracts on commodities such as corn and grain to provide insurance against poor weather and crops. But now financial exchanges are developing products that provide companies and investors with a way to hedge Mother Nature herself.

As hurricanes and variable weather make a more noticeable dent on businesses' bottom lines, financial institutions are stepping up to give individuals greater protection against the perceived risks associated with weather changes. Seen as an outgrowth of the traditional futures markets, these new weather-related contracts may help curb the financial disruption caused by climate change...

"There is great acceptance that companies need to manage weather risk," said Felix Carabello, the director of alternative investment products at the Chicago Merc. A more variable climate equals more uncertainty about profits, he said. "You can't predict the weather, but with some of these contracts you can dampen the volatility in earnings due to erratic weather," Carabello said, adding that reinsurance and energy companies have been big early adopters, while hedge funds and banks are increasingly exploring hurricane- and other weather-related risks...

HedgeStreet, a regulated online exchange, also trades hurricane futures and is looking into more potential products that would allow individuals to play global warming... Russell Andersson, HedgeStreet's vice president of instrument origination and a co-founder of the exchange, said other weather-related contracts in the future could be tied to rising ocean levels. "The risk has to be able to be measured in an index for a derivative product to become a candidate," Andersson said. An example would be precipitation or temperature.

It's a topic I'll be discussing more as my research progresses...

Related posts:

Should carbon taxes be linked to global temperatures?

Could long-term weather markets help us understand the risks of climate change?

More on weather markets and climate change

Australian Conservation Foundation looking for Economic Adviser

An illustration of how economics is becoming increasingly important in environmental debates, ACF is advertising for an economist to fill the apparently newly-created position of Economic Adviser.

According to ACF:

ACF’s advocacy to protect the environment increasingly involves economic analysis, and ACF has set a long-term strategic priority to transform Australia’s economy into one that is ecologically sustainable. As a crucial component of this goal, ACF is developing a programme of work to promote alternative economic tools that incorporate environmental values, and challenging mainstream notions of every-expanding growth in consumption of natural resources.

The position of economic adviser is being newly created to assist ACF to develop this area of work rapidly, and to ensure that Australia begins the shift to economic institutions and instruments that fully recognise, account for and protect the environment.

More details. It would be an interesting job!

Kenneth Arrow and Thomas Schelling on Climate Change

The latest issue of The Economists' Voice is out, with two articles on the economics of climate change by Nobel Prize-winning economists.

The first is an excellent primer on climate change by Kenneth Arrow: Global Climate Change: A Challenge to Policy. I'd really recommend reading it as a backgrounder to the issue:

Two factors deserve emphasis, factors that differentiate global climate change from other environmental problems. First, emissions of CO2 and other trace gases are almost irreversible; more precisely, their residence time in the atmosphere is measured in centuries. Most environmental insults are mitigated promptly or in fairly short order when the source is cleaned up, as with water pollution, acid rain, or sulfur dioxide emissions. Here, reducing emissions today is very valuable to humanity in the distant future.

Second, the scale of the externality is truly global; greenhouse gases travel around the world in a few days. This means that the nation-state and its subsidiaries, the
typical loci for internalization of externalities, are limited in their remedial ability.

The detail in the article is on the issue of discounting future costs, which is central to the findings in the Stern Report on The Economics of Climate Change that susbstantial immediate action on climate change is likely to be much cheaper over the long-term than inaction. Discounting is something I need to cover in a future Oikos 101 column, but for now I'll just observe that Stern has been criticised for using a zero rate of pure social time preference - which is consistent with the idea of inter-generational equity but inconsistent with observations by economists of how people actually behave.

Arrow conducts a sensitivity analysis, plugging different social time preference rates into Stern's figures, and finds that using a higher social time preference rate doesn't change the fundamental finding of the Stern Report, that action will cost less than inaction.

Thomas Schelling discusses what uncertainty surrounding climate change implies for policy responses and makes some sensible observations in Climate Change: The Uncertainties, the Certainties, and What They Imply About Action:

In some public discourse, and in sentiments emanating from the Bush Administration, it appears to be accepted that uncertainty regarding global warming is a legitimate basis for postponement of any action until more is known. The action to be postponed is usually identified as “costly.” (Little attention is paid to actions that have been identified as of little or no serious cost.) It is interesting that this idea that costly actions are unwarranted if the dangers are uncertain is almost unique to climate. In other areas of policy, such as terrorism, nuclear proliferation, inflation, or vaccination, some “insurance” principle seems to prevail: if there is a sufficient likelihood of sufficient damage we take some measured anticipatory action.

At the opposite extreme is the notion, often called the “precautionary principle” now popular in the European Union, that until something is guaranteed safe it must be indefinitely postponed despite substantial expected benefits. Genetically modified foods and feedstuffs are current targets. (One critic has expressed it as, “never do anything for the first time.”) In this country the principle says that until a drug has proven absolutely safe it must be deferred indefinitely.

Neither of the two extreme principles—do nothing until we are absolutely sure it’s safe; do nothing until we are absolutely sure the alternative is dangerous—makes
economic sense, or any other kind. Weigh the costs, the benefits, and the probabilities as best all three are known, and don’t be obsessed with either extreme tail of the distribution.

Exposing the hidden costs of pollution

An article in today’s Sydney Morning Herald, which questions whether the Australian states could undermine national action on climate change, illustrates just why a broad-based national emissions trading scheme would be effective.

Environment groups said the Opposition Leader, Kevin Rudd, needed to explain how he would curb rising greenhouse gas emissions at a time when Queensland and NSW were dramatically boosting coal exports and several states were approving big road and power projects that would increase climate change pollution…

The NSW Treasurer [Michael Costa] favours building a new coal-fired power plant to meet the state's energy needs, in contrast to other proposals for more gas-fired generation or energy efficiency and demand management.

New coal-fired power stations would make it difficult for a federal Labor government to reach its target of cutting emissions by 60 per cent by 2050, said the Australian Conservation Foundation campaigner Tony Mohr.

"The really interesting question to ask Kevin Rudd would be if Costa approves a new coal-fired power plant, what will he do about it?" Mr Mohr said. "How is he going to deal with the parochialism of the states?

The power of an emissions trading scheme or carbon tax is that it imposes the same price on greenhouse pollution from any source in any state, so questions like these become irrelevant. Both major parties have now committed to a national emissions trading scheme.

With a trading scheme, the federal government sets a cap on total emissions from all sources and issues permits for that amount. Emitting without a permit is prohibited so total emissions don’t exceed the cap. If you don’t have enough permits for the pollution you wish to create, you need to buy them from someone else. They can only sell them if they’ve taken action to reduce their emissions so that they have surplus permits.

Under an emissions trading scheme, if NSW wants to approve a coal-fired power station, so what? For the station to be allowed to operate, the operator will need to buy enough permits to cover its emissions. It can buy them only if someone else reduces their emissions and so has surplus permits. The total level of emissions is therefore unchanged.

It will no longer be up to the NSW Government to decide whether a new coal-fired power plant, more gas-fired generation or energy efficiency and demand management is the best way to meet the state's energy needs: all those methods will compete side by side on the basis of bang for your cost-of-pollution-adjusted buck.

So what is a parochial state government that wants to encourage coal-fired power production to do? Well it can offer breaks from state taxes and planning restrictions, but that’s not a good look. Importantly, it can’t exempt power stations from emissions trading, because it’s a scheme administered by the federal government. If it really wants to encourage the power station, it will have to agree to buy the permits for it. (Scarily, they’ve already started doing this).

And this is one thing I love about a national emissions trading scheme: it puts a price on pollution for everyone to see. State governments place costs on their citizens every time they exempt a large development from laws that apply to everyone else, but those costs are hidden. Voters don’t notice the cost of a government exemption, but you can bet they’ll notice when their taxes are used to buy permits for a large and profitable energy company.

When we put a price on polluting, we bring hidden costs into the open.

Live Earth concert this Saturday

Only 4 sleeps to go until the Live Earth concerts around the world - in New York, London, Johannesburg, Rio de Janeiro, Shanghai, Tokyo, Sydney and Hamburg on 7/7/07 - this Saturday!

By the way, I have a couple of spare tickets to the Sydney concert, so email me at ozelaw [at] yahoo [dot] com [dot] au if you missed out.

Check out the Sydney concert website for lots of good material about the concert and the cause.

Cheap ways to reduce greenhouse emissions

An interesting article in The Economist last month took a look at the cost of various options for reducing greenhouse emissions (summarised in the graph above).

Two things are particularly notable:

• There are a number of options that have a negative cost. In other words, not only would they reduce emissions, they’d also save us money. The biggest one is insulation and low-energy lighting is also up there.
  
• The solutions we hear a lot about – such as wind, solar and carbon capture – are among the most expensive options.

So why are we not voluntarily making decisions that would not only reduce emissions but also save us money?

The Economist identifies a couple of possible reasons, the most compelling to my mind is that the people who make the choices are not the people who pay the costs of those decisions. For example, property developers have to pay for insulation but they won’t get the benefits of lower electricity bills, so their incentive is to go cheap on insulation. If the property is to be rented out, it’s not even the buyer who pay those bills – it’s a tenant.

How to solve this? In theory, awareness of the issue should be enough: if tenants and buyers of new houses (or other buildings) are aware that good insulation can save them substantial amounts of money, they should demand it and be prepared to pay more for it – in the same way they’d be prepared to pay more for a good bathroom or kitchen.

So why isn't this happening? And seeing as it doesn’t seem to be happening, is there a role for government in mandating it in building standards or requiring developers and sellers to at lease provide understandable information (eg, energy efficiency ratings)?

[HT: RSMG Blog]

Coming soon to an Australian high school near you?

Click picture to enlarge.

More nuclear fun at Ethan Persoff's site.