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.
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 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]
If you're interested, the full report is available (in pdf) from the US Energy Information Administration website.
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?
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.
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
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.More details. It would be an interesting job!
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.
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.
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.
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?
Two things are particularly notable:
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]
Climate models predict that, if greenhouse gases are driving climate change, there will be a unique fingerprint in the form of a strong warming trend in the tropical troposphere... The Intergovernmental Panel on Climate Change (IPCC) states that this will be an early and strong signal of anthropogenic warming. Climate changes due to solar variability or other natural factors will not yield this pattern: only sustained greenhouse warming will do it. Temperatures in the tropical troposphere are measured every day using weather satellites…It’s an intriguing idea. I suspect its biggest detractors would be energy-intensive industries, who would have no certainty about the level of carbon taxes in the future. McKitrick’s response is that those industries will just have to forecast that as best they can and actually sees this as an advantage:
Suppose each country implements something called the T3 tax, whose U.S. dollar rate is set equal to 20 times the three-year moving average of… estimates of the mean tropical tropospheric temperature anomaly [warming], assessed per tonne of carbon dioxide, updated annually. Based on current data, the tax would be US$4.70 per ton...
This tax rate is low, and would yield very little emissions abatement. Global-warming skeptics and opponents of greenhouse-abatement policy will like that. But would global-warming activists? They should -- because according to them, the tax will climb rapidly in the years ahead.
The IPCC predicts a warming rate in the tropical troposphere of about double that at the surface, implying about 0.2C to 1.2C per decade in the tropical troposphere under greenhouse-forcing scenarios. That implies the tax will climb by $4 to $24 per tonne per decade, a much more aggressive schedule of emission fee increases than most current proposals. At the upper end of warming forecasts, the tax could reach $200 per tonne of CO2 by 2100, forcing major carbon-emission reductions and a global shift to non-carbon energy sources.
Global-warming activists would like this. But so would skeptics, because they believe the models are exaggerating the warming forecasts. After all, [the average tropical troposphere temperature] went up only about 0.08C over the past decade, and has been going down since 2002. Some solar scientists even expect pronounced cooling to begin in a decade. If they are right, the T3 tax will fall below zero within two decades, turning into a subsidy for carbon emissions…
Under the T3 tax, the regulator gets to call everyone's bluff at once, without gambling in advance on who is right. If the tax goes up, it ought to have. If it doesn't go up, it shouldn't have. Either way we get a sensible outcome.
best of all, the T3 tax will encourage private-sector climate forecasting. Firms will need good estimates of future tax rates, which will force them to look deeply, and objectively, into the question of whether existing climate forecasts have an alarmist bias. The financial incentives will lead to independent reassessments of global climate modelling, without regard to what politicians, the IPCC or climatology professors want to hear.
...seeks to fill the gap between traditional academic journals and the general interest press by providing a widely accessible yet scholarly source for the latest thinking on environmental economics and related policy...
We must get this right. If we get this wrong, it will do enormous damage to our economy; to jobs and to the economic wellbeing of ordinary Australians, especially low-income households. The question I pose to the Australian people, quite directly, is this: who do you trust to take the vital decisions about our future?
I announce specifically that Australia will move towards a domestic emissions trading system, that’s a cap and trade system beginning no later than 2012.
Secondly, we will as a nation set a long term aspirational goal for reducing carbon emissions but we need to assess very carefully with detailed economic modelling the impact any target will have on Australia’s economy and Australian families, this target will be set next year 2008.
Thirdly, the scheme will be national in scope and as comprehensive as practicable, designed to take account of global developments and to preserve the ompetitiveness of our trade exposed emissions intensive industries.
Fourthly, Australia should not pay higher energy costs than necessary to achieve emissions reductions, in other words, governments need to let the market sort out the most efficient means of lowering emissions with all low emissions technologies on the table and that of necessity must include nuclear power.
First, credit where credit is due. The PM has now committed his government to introducing a domestic emissions trading scheme by 2012. In effect that’s a commitment to reduce our emissions unilaterally even if it’s not required under the next round of Kyoto after 2012 (or some other international agreement). On the other hand, he has deferred setting a target for reducing emissions until next year, ie, after the election. That’s really half a policy. It’s like announcing that you’ll introduce a goods and services tax but you haven’t worked out what the rate will be. Or you intend to give a huge boost to health spending, but you haven’t worked out how much or where it will be spent. (Trust us).
Trust on climate change action is a double-edged sword. We need effective action but at a reasonable cost to the community. The Liberal Government enjoys the community’s trust that it will have broadly sensible economic policies, but I don’t think the community trusts it to deal with climate change effectively. It has spent the last 10 years taking only modest action on climate change and at the same time has damaged the cause of effective action by rejecting the Kyoto Protocol, supporting the world’s biggest polluter - the United States - in its stance to take no effective action on climate change, and publicly expressing its scepticism that climate change is even a problem.
We’re starting to get some reasonable modelling on the costs of emission reduction pathways. Strong targets will impose costs on businesses and households, but are entirely consistent with strong economic growth. Indeed, they make relatively little difference to overall projections for growth. Leaders that we can trust will be those that tell us the truth:
I’m working my way through the PM’s task group’s report and in the next couple of weeks, I’m going to outline what it means, where we are in terms of climate change policy in Australia, and some of the things you need to understand to make some sense of it all, including:
Are there any other questions you’d like answered? Let me know: leave a comment or email me at ozelaw [at] yahoo [dot] com.
That mostly sounds pretty good to me but I think the emphasis is clearly on being business-friendly more than being effective (where those two goals conflict).
Will be interesting to delve into some of the detail. Some initial thoughts:
The 'safety valve' fee is potentially worrying
The idea of a cap-and-trade scheme is that the government sets the maximum emissions, issues permits for that level of emissions and then emitters trade the permits. If one emitter can reduce its emissions for less than the market price of the permit, it will do so and sell the excess permits it has. If another emitter wants to expand and that will involve more emissions, it will need to purchase permits. It will then have an incentive to pursue options that involve relatively less emissions so that it doesn't have to buy as many new permits.
If the government stands by ready to charge a 'safety valve' fee to emitters that don't have enough permits, that sets a maximum price on the permits: if it's cheaper just to pay the fee than to buy the permits, you'll just pay the fee, so the permits won't rise above that price.
But that means that the cap on emissions isn't really a cap. If emitters pay the fee rather than buying permits, then the cap will be exceeded. From business's point of view it's a good thing: it means there's a known worst-case-scenario in terms of the costs it will impose. But if it's set too high, the reduction in emissions could be much lower than we anticipate.
The allocation of free permits is controversial
Ideally, you should auction all permits. As Peter Martin says in the Canberra Times:
The best way to distribute permits is to auction them. The firms that need them will pay what they are worth and pass on the costs to consumers in higher electricity prices. The government can use the money it raises from each year’s auction to cut income tax, to cut company tax, or to support the development of low-carbon technologies.
However,
Polluter after polluter that has made a submission to the Prime Minister’s taskforce on emissions trading has said that while it supports the idea of a trading scheme, it wants the price of the permit set low and it wants to be given enough permits - gratis - to cover most of the pollution it already does.As Australia’s most venerable economic modeler and one of the signatories to the economist’s letter Professor Peter Dixon of Monash University told me: “It’s the same as putting a tax on carbon pollution and then instead of doing something useful with the proceeds - like cutting another tax - giving it to the shareholders of the polluting companies”.
It is even better than that for the polluting companies. If they get given for free permits that a would-be competitor would need to buy, they get given a built-in cost advantage. Their would-be competitors might not bother! No wonder they like the idea. (Economists call the idea “grandfathering” and call the result a “barrier to entry”.)
Expect a lot of political argy-bargy over this one.
Other features of the report according to the SMH:
The Canberra Times has a slightly better summary and Peter Martin has a good piece on the economics.
I'll try and put up a summary of the main recommendations shortly after midday...
The Prime Minister’s Task Group on Emissions Trading gives its report to the PM today and is expected to recommend the introduction of a national emissions trading scheme in Australia.
I have been pretty sceptical about the taskgroup, given its membership: of the twelve members, five are from within the government, three are from mining / resources companies, one is from a power company, two are from heavy energy users (aluminium and airline companies). Only one (from National Australia Bank) is not from a heavy greenhouse-gas-emitting company. There are no representatives from outside government or big business and no businesses that would have an interest in a strong trading scheme (eg, insurers, agriculture, tourism, renewable energy).
The group is also repeating work that has been done pretty thoroughly already: the National Emissions Trading Taskforce was established by the Australian states and territories in January 2004. It presented key design propositions for a successful trading scheme later in 2004, issued a background paper and undertook public consultation in 2005, and presented a proposed trading scheme in August last year. As far as I’m aware, the federal government declined to have any involvement in the NETT process. The states and territories have committed to a national state-based scheme by 2010 if the federal government fails to introduce its own national scheme.
And the terms of reference themselves seem to suggest the result:
Australia enjoys major competitive advantages through the possession of large reserves of fossil fuels and uranium. In assessing Australia's further contribution to reducing greenhouse gas emissions, these advantages must be preserved.
Against this background the Task Group will be asked to advise on the nature and design of a workable global emissions trading system in which Australia would be able to participate. The Task Group will advise and report on additional steps that might be taken, in Australia, consistent with the goal of establishing such a system.
Nevertheless, the media are tipping that the taskforce will recommend a national trading scheme. If so, it’s remarkable that the government lags behind even the most reactionary businesses with the most to lose from action on climate change. Why does the PM have to wait until even coal miners and electricity generators call for some action on climate change?
Clive Hamilton has an article today suggesting 7 tests for a decent trading system, which I think are pretty sensible. In summary they are:
1. Comprehensive coverage of the main emissions sources.
2. A clear target.
3. No loopholes. (Hamilton reckons there shouldn’t be offsets or credits from actions like planting trees. I disagree, but the challenge is ensuring that offsets are genuine and robust.)
4. Permits should be auctioned, not handed out to existing big polluters for free.
5. It should be able to link in with foreign schemes.
6. Allow the market to work unconstrained.
7. Ensure medium-term economic certainty (ie, fixed emissions caps) but longer-term flexibility to adjust caps if necessary.
We should see the report later today or tomorrow – it will be interesting to see what it says. The PM will apparently respond on Sunday. The opposition has attempted to steal the PM's thunder by issuing its own policies today (including a national emissions trading scheme by 2010 coupled with a mandatory renewable energy target) – they are mostly pretty good but I’m not sure there’s anything new there they haven’t announced before.
Prediction markets have already been used in a variety of contexts with remarkable success. For example, prices of economic derivatives predict economic variables better than professional economists; prices in Iowa political markets are typically more accurate than the polls in forecasting elections; and prediction markets at Hewlett-Packard Labs beat official forecasts of printer sales most of the time.
Prediction markets reflect an old thought that underlies the price system: Information is widely dispersed in society, and it is highly desirable to find a mechanism to collect and aggregate that information. These markets work for several reasons: First, almost anyone can participate. Second, people think hard when they have to back up their predictions with money; buy the right presidential contract and you win, buy the wrong one and you lose. Third, the profit motive encourages people to look for better information.
When individuals make economic decisions based on diverse sources of information, market aggregates – such as prices – will to a greater or lesser extent reflect the pieces of information received. By observing a market aggregate, each person may learn something about the information possessed by others. In some cases, enough information is reflected to induce everyone to agree on a consensus estimate of the relevant uncertainty. This theme has been extensively explored in the literature on rational expectations.Another example: individual punters at a horse race may have particularly good knowledge of one or more of the horses in the race (how fit they are, what sort of conditions they like), the jockeys, the track, etc. When combined, they give odds which represent the betting community’s best estimate of the probabilities of each horse winning, distilled from this dispersed information.
We have three bet periods -10, 15, and 20 years - and two bets for each period - an even-odds bet and a 2:1 bet in David's favor. The even-odds bet centers around a temperature increase rate of 0.15C/decade with a 0.02 void margin on either side (bet voids if temps increase between .13 and .17C/decade). The 2:1 bet centers on 0.1C/decade with a .01 void margin. Even-odds bets are for $1,000 each, and the 2:1 bets increase over time, with me betting $1,000, $2,000 and $3,000, and David betting half that. My exposure is $9,000; his is $6,000.
So I was thinking: What if someone set up some decent markets in future global temperatures? Anyone would then be free to bet on how much climate change they expect in the future. There are already weather markets for short-term weather events, so it shouldn’t be too much of a stretch.
I can think of a number of benefits:
Wouldn’t a government or financial institution be providing an enormously helpful (and potentially profitable) service by setting up such a market?
"You've got this ridiculous situation where the Greens are advocating an 80 per cent cut by 2050, the Labor Party is only slightly less radical at 60 per cent by 2050," Mr Howard told ABC radio.The target is based on the scientific reality (or at least our best current understanding of it) that 60% is the absolute minimum emission reduction required by 2050 in order to stabilise the concentration of carbon dioxide at a level which minimises the risk of severe climate impacts:
"Neither the Greens or the Labor Party has any idea of what that will do to jobs. I think it is crazy and irresponsible of any political party in this country to commit to a target when you don't know the impact of the target."
Although the pursuit of emissions reductions of 60% or more cannot be translated directly into a specific stabilisation target, this emissions target does have its origins in the analysis of different stabilisation pathways, particularly the 550 ppmv stabilisation target which… is roughly the upper limit for atmospheric GHG [greenhouse gas] concentrations that avoid DAI [dangerous adverse impacts]…(CSIRO, pdf here [see pages 17-18], my emphasis).
Despite the precedence for the use of 550 ppmv as benchmark for estimating GHG emission reductions necessary to avoid DAI, it is clear from the range of proposed thresholds… that even this threshold is considered too high by some experts. Carbon dioxide and CO2e concentration thresholds well below 550 ppmv frequently have been recommended…
…the goal of Annex I [developed country] emissions reductions of 60% by 2050 may be considered a minimum estimate of the effort needed to achieve stabilisation to avoid DAI.
Fresh from defending himself against allegations of a conflict of interest [over his dual roles as Australia’s Chief Scientist and chief technologist for mining company Rio Tinto], the Chief Scientist, Robin Batterham, said Australia must halve its greenhouse gas emissions by 2050.Of course, it's not true that we have no idea of the economic impact of these proposed targets (more on that tomorrow). But the more important point is this: any target has costs and benefits. The costs are obvious and are what the government has focussed on: higher energy prices and resulting lower profits and job losses in fossil fuel industries. The benefits are more dispersed: jobs and earnings in renewable energy, indirect benefits of policies to reduce energy waste (better energy efficiency, more economically efficient transport, and reduced air pollution), credibility in the global debate on climate change and, the biggie, reduced risk and severity of adverse climate change.
Talk of such a target by the Federal Government's most senior scientific authority is in stark contrast to the recently released white paper on energy policy which broadly supported Australia's continuing use of fossil fuels, a major source of man-made greenhouse gases.
Dr Batterham said he supported the Federal Government's decision not to ratify the Kyoto protocol on climate change because the reductions it set were not high enough.
"I'm talking about enormous reductions - 80 per cent by the end of the century," Dr Batterham said. "Fifty per cent by 2050, I think, is realistic."
[Alesina] and Ichino argue governments could get away with reducing the female tax rate by a lot, and increasing the male rate by only a little, without affecting the budget bottom line, because taxpaying women would storm into the labour force but taxpaying men would be reluctant to retire. Governments would reduce the amount of tax-driven distortion in the economy per unit of revenue.
Men would spend a little more time with their kids. Women would improve their bargaining power within the home.What an interesting idea. What do you think?
It would help overcome all kinds of gender discrimination in the workplace, as women would be prepared to work for lower pre-tax wages (because they would still receive more after-tax pay). It would help compensate women for bearing the brunt of maternity and child-rearing.
"From an employer point of view it would then become cheaper to hire women, therefore favouring women employment and their promotion to higher paid jobs," they say.
It stands to reason that if governments, or their pals in business, don't fix things up, lawyers will enter the void and sue the pants off anyone they can get their hands on. We see it all the time with litigation against cigarette manufacturers, the miners and purveyors of asbestos, and the pushers of fatty foodstuffs ("cheeseburger litigation")...
So it's only a matter of time before a global warming litigation industry builds up a decent head of steam. One would think the scientific evidence is sufficiently in to meet a civil standard of proof.
Litigation, if it's good for resolving any disputes, is good for resolving simple disputes between two parties. Climate change is a big, global, complicated problem, where everyone in the world is a potential plaintiff (we'll all be affected to some extent by climate change) and everyone is a potential defendant (we all contribute to it). Attributing blame and working out damages is fraught to say the least.
In my view, climate change litigation will not do much to prompt good policy. And I think there's a danger if sympathetic judges overreach and these cases are successful.
Take the California vs car-makers case, for example. California argues that it will incur costs due to global warming contributed to by people driving cars made by car-makers. I don't doubt that's true. But should car-makers compensate the Californian government for that?
I'm sure the Californian government itself has undertaken a lot of action and made a lot of decisions over the last century that has contributed to global warming. Should the government of Tuvalu, low-lying Pacific island that's greatly affected by climate change, sue the US for the industry support it has provided to car manufacturers in the past? Should it sue the State of California for not banning cars as soon as global warming hit everyone's radar? Would California then seek a contribution from Brazil or Indonesia or Australia for allowing forests to be felled?
This is a problem that requires global co-operative solutions and I don't think legal blame games are going to help.
Climate change cases have been a good way to get climate change on the agenda, because the media seems to love a good legal stoush: where big global dramas get played out in the microcosm of a courtroom, reduced to some bite sized legal arguments and decided neatly by a judge. (If you ever actually read these cases though, they tend to come down to something arid like whether section 35ZZ requires a consideration of all "relevant" factors or only all "pertinent" factors and whether there's a difference between "pertinent" and "relevant". The big issues of principle are notably absent). Anyway, there's no doubt that climate change is on the agenda now - I'm not sure what more these cases will achieve.
Still, I'll be watching with interest...
