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ABARE on the costs of climate change

July 29th, 2006

I’ve been reading the latest ABARE report on climate change, kindly sent to me by my colleague Renuka Mahadevan . While there are some problems with the analysis and even more with the way it’s been reported, the central findings are strikingly consistent with estimates I’ve made about the costs of stabilsing global CO2 levels, most recently here

All the evidence, though, is that we can reduce emissions to levels consistent with stabilising global CO2 levels over the next few decades at a cost of around 5 per cent of GDP – a few years worth of economic growth at the most. Quite possibly, as in previous cases, this wll turn out to be an overestimate.

ABARE studies a number of scenarios in which global CO2 levels are stabilised at 575 parts per million in 2100 and reports the estimated reduction in global product at 2050, which ranges from 1.7 per cent to 4.3 per cent, or from a bit under 1 years per capita growth to a bit over 2 years. That is, in the worst-case scenario (which is somewhat problematic in modelling terms, I think), the living standards in 2150 will be those that would have been reached in 2048 under the base projection.

ABARE is not known for lowballing the estimated costs of mitigating climate change, but if you’re going to do a credible modelling exercise, it’s inevitable that numbers of this magnitude will emerge. This simply reflects the fact that carbon-based fuels make up only a modest proportion of the value of total output, and that the demand for carbon (or more precisely C02) emissions is bound to be at least moderately elastic in the long run.

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  1. Stephen L
    July 29th, 2006 at 21:52 | #1

    should that read 2148? Comparing GNP 102 years apart doesn’t seem to make much sense.

  2. July 30th, 2006 at 00:09 | #2

    I’d be very surprised if it would cost that much. In fact I’d be happy to bet it wouldn’t be – though it would be tricky to agree on the methodology by which one would apply the test in the future.

  3. Austin
    July 30th, 2006 at 00:50 | #3

    One point that I don’t understand on this report, is what happens with the carbon tax. It seems that it will be returned to taxpayers evenly. What if the carbon tax went into measures to help abate CO2 emissions? I don’t think this report addresses this issue.

    I hate to bring other issues into it, but it appears that this report finds that nuclear power will cost more if used to try and reduce CO2 emissions. Well at least that is what I read into the summary.

  4. jquiggin
    July 30th, 2006 at 06:48 | #4

    SL, typo fixed, thanks

  5. Terje (say TAY-A)
    July 30th, 2006 at 09:37 | #5

    It seems that it will be returned to taxpayers evenly. What if the carbon tax went into measures to help abate CO2 emissions?

    If the intent is to internalise and externality then it would make sence to spend the proceeds on abatement.

    However I still think that the combination of payroll tax, income tax and GST (which puts a wedge on the goods labour produces versus the goods labout get paid with) need to be reduced.

  6. July 30th, 2006 at 11:55 | #6

    Also you would think that despite the downturn in traditional industries from abatement programs, new renewable industries would rise up and perhaps make the GDP drop even less.

    Wind turbines and solar thermal plants would have to be constructed in sufficient numbers to make it economical to setup factories in Australia. These factories, you would think, would then be able to export their products. Even the most optimistic nuclear power plant estimate is about 5. At this sort of scale the major (expensive) components would almost certainly be imported and the only local input would be steel, sand and cement.

  7. Tom Davies
    July 30th, 2006 at 12:55 | #7

    So the worst-case carbon tax means US$1 per litre of petrol — would that need to be in addition to existing petrol taxes?

  8. Hermit
    July 30th, 2006 at 14:56 | #8

    I’ll read the whole report at leisure but so far I haven’t noticed explicit reference to a number of factors. These include the GDP consequences of reduced oil use in the next decade, followed by natural gas. There must be some long term interaction between agricultural output, water supply and locked-in climate change ie more droughts and floods. Whether there will be sufficient capital for heavily scaled up renewables as well as nukes. How a carbon cost multiplier will affect vulnerable sectors like travel and tourism.

    However there are a couple of assumptions I think can be ruled out. First ‘clean coal’ will never happen on a large scale even with carbon taxes/permits. Second that all big emitters will jointly agree to a tough international abatement scheme. These possibilities could be covered however so I’ll read on.

  9. gordon
    July 31st, 2006 at 12:04 | #9

    I suspect this report needs a long hard look, which I may not have the time to give it. However, there are some points which grab my attention immediately.

    First, a carbon tax is taken as the major policy initiative to achieve greenhouse gas abatement, without much discussion of other policy options. In all scenarios except one, this tax is assumed to be imposed globally, ie. all countries in the world levy it in a consistent way.

    Second, the imposition of a carbon tax is assumed to occur without any change to existing energy taxes and subsidies. At least, I presume that is what is meant by “The projected carbon taxes are imposed at the point of emissions to the atmosphere without adjusting for existing energy related taxes� (p.1). I am at a loss to see how anybody could simply pile another tax on an already complicated set of subsidies, taxes and exemptions without seeing the need to re-examine the whole structure.

    Third, there is no discussion of the costs of doing nothing – the report anticipates further work by the Energy Futures Forum on this issue. Consequently, the reference scenario needs to be understood as optimistic, because the “do nothing� costs are not represented.

    Fourth, carbon capture and storage technology is assumed to work well.

    Fifth, all scenarios including the reference scenario include a 70% across the board reduction in trade barriers by 2025, globally. The likelihood of this seems questionable.

  10. jquiggin
    July 31st, 2006 at 12:24 | #10

    “First ‘clean coal’ will never happen on a large scale even with carbon taxes/permits. ”

    Can you give some evidence on this? The reports I’ve seen suggest it’s technically feasible, quite possibly costs that seem to be competitive with, say, nuclear.

  11. jquiggin
    July 31st, 2006 at 12:26 | #11

    “there is no discussion of the costs of doing nothing”

    I think it is safe to conclude that these exceed the costs of stabilisation, so “doing something” is the best option. I did a bit on this in my submission to the Stern Review.

  12. July 31st, 2006 at 13:32 | #12

    JQ – “Can you give some evidence on this? The reports I’ve seen suggest it’s technically feasible, quite possibly costs that seem to be competitive with, say, nuclear.”

    I calculated that to offset Australian emissions we would need to sequester 14 million tons of CO2 per year. Quite apart from the technology for large scale capture of CO2 from power plants not being at implentation stage there is the cost of retro-fitting carbon capture equipment to existing power station or build new ones using IGCC.

    Adding the cost of piplines and/or transport of the CO2 to the site where the gas is to be sequestered then add the cost of injecting it plus the cost of monitoring the site for leakage and so on.

  13. July 31st, 2006 at 13:43 | #13

    JQ – Actually I was wrong here. Coal produces approx 900 tons of CO2 per GWHr. In 2002 Australia generated 225 000 GW of electricity – 80% of this from coal = 180 GWhrs. This would generate 900 X 180 000 = 162 million tons of CO2 that would have to be sequestered.

    So we would have to put in the infrastructure sufficient to collect, transport and pump 162 million tons of CO2 per year and this is just for Australia!! And it would have to grow at 2% or 3% per year to keep pace with Australia’s electricty demand growth. So if we used 225 000 GWhrs in 2002, in 2037 at 2% growth we would need to be sequestering 324 million tons of CO2 per year.

  14. Hermit
    July 31st, 2006 at 14:29 | #14

    the make or break clean coal projects seem to be FutureGen in the US (with some BHP money), the Vaatenfal project in Berlin and the Monash project in the LaTrobe Valley. I’ve discounted the North Dakota synfuel plant as it already had sunk costs. In my opinion none of these new projects has barely made any progress, yet Monash claims to be able to ‘deliver’ by 2012. They have to demonstrate satisfactory progress on each stage of CO2 capture (several technologies), secure underground storage, acceptable energy penalty (ABARE claims a mere 15%) and financial viability under say EU levels of carbon prices. If this has happened somewhere I must have missed the newsflash. Conversely good news announcements might be premature if not misleading.

    The ABARE report also assumes relentless economic growth that can cope with mild constraints. In stark contrast some commentators predict that the global economy will contract due to lack of transport fuels. My gut feeling is that it will take Armageddon-like conditions before an international carbon tax is adopted. By 2050 climate scientists will want to see domestic CO2 reductions of the order of 200Mt/yr so discussed scenarios of 10Mt cuts seem hopeful.

    This is an incredibly difficult topic with many free variables so full marks to ABARE for making a start.

  15. jquiggin
    July 31st, 2006 at 14:29 | #15

    162 million t sounds like a lot, but Brisbane uses 170 million tonnes of water every year (1 GL = 1 million tonnes), and obviously the mass of carbon burned to generate the electricity must be of the same order of magnitude as the CO2 emitted. (CO2 out should be about five times C in, but the trade-off is much better for hydrocarbons).

    So it’s not clear to me that you’ve demonstrated that it isn’t feasible to deal with a problem like this. I agree that it’s unlikely to be cheap, but it could double the cost of coal-fired electricity and still be competitive with alternatives.

  16. July 31st, 2006 at 15:15 | #16

    JQ – That is probably true however water is a lot different from CO2. Firstly the volume is different. Water is vastly more dense than CO2 even liquid CO2. If you do transport it as liquid then CO2 is not a liquid at STP so the pipes would have to be pressurised or cooled or both. If transported as a gas then this would be 22.4 l/mole X 162 000 000 000g / 44g = 82 472 727 272.72 litres = 82 472 720 M^3. This can probably be done but I think the estimate of double the cost is conservative. In this case the alternatives, even considering storage for renewables, is much cheaper.

    Also the places where the CO2 is to be sequestered are likely to be remote so when they are full the massive infrastructure built to transport all this gas to the reseviour would then be useless.

    Wind is now competitive with coal in the prime wind sites that we have. Solar thermal is dropping in cost. Neither of these power sources need carbon sequestration only some form of storage either electric cars or fixed batteries and/or flywheels that are already viable. If the storage is electric cars then we help mitigate oil shortages as well. CCS does none of these things.

    Investing the money in renewables and electric transport instead of CCS potentially solves 2 problems all without having to find holes for billions of tons of carbon. To me it is more sensible not to generate the CO2 in the first place.

  17. July 31st, 2006 at 15:38 | #17

    Just thought I would post this one as maybe nuclear power has its own intemittancy problems:


    “The European heatwave has forced nuclear power plants to reduce or halt production. The weather, blamed for deaths and disruption across much of the continent, has caused dramatic rises in the temperature of rivers used to cool the reactors, raising fears of mass deaths for fish and other wildlife.

    Spain shut down the Santa Maria de Garona reactor on the River Ebro, one of the country’s eight nuclear plants which generate a fifth of its national electricity. Reactors in Germany are reported to have cut output, and others in Germany and France have been given special permits to dump hot water into rivers to avoid power failures. France, where nuclear power provides more than three quarters of electricity, has also imported power to prevent shortages.”

    With our water short (Toowoomba) do we really have the resources for nuclear reactors?

  18. July 31st, 2006 at 15:42 | #18

    There is a need to add some informed data to these valuable discussions. Further to our research into CO2 Geosequestration into Coal Seams (supported by the Australian Research Council and six organisations, including Stanwell and Origin Energy), we have recently done a pre-feasibility study on this option for a large 1400MW power station in Queensland. The net total life-cycle cost of CO2 capture, transportation and storage is estimated at A$22/tonne stored (or A$30/tonne avoided), using average Queensland natural gas prices, which are amongst the lowest in the developed countries. Should gas prices increase closer to a world average of about $A5/GJ, then the net cost per avoided tonne can be reduced to zero. This benefit arises from the extra methane recovery from coalbed methane/coal seam gas operations when CO2 is injeted. This extra gas recovery pays for some 42% of the total life-cycle costs at current gas prices of some A$2.50/GJ. See our paper on Proceedings from GHGT8 Conference, Norway, June 2006. There are many CBM projects now underway in Australia (~50).

    Depending on the risk factors associated with the resource and reserve estimates, one could sequester some 1.3 to 5.2 Giga tonnes of CO2 in Australian coal seams, and this estimated range rises by the month. This range is equal to between 137 years and 558 years of CO2 emissions from a 1400MW coal-fired power plant.
    BTW, the technology for CO2 capture (absorption with amine fluids) already exists and is used in many industires and couldd be deployed in the time required for construction. However, it is costly, and its deployment would mean retail electricity prices going up by about 25% (ref CO2CRC). Is the Australian public and especially industry ready to adsorb such an increase? Significant research and engineering efforts are going on to reduce these costs. Part of the reluctance to proceed must surely be that no company wants to implement a technology that in 5 to 10 years will be obsolete, unless there is a level playing field for all in the country (National Electricity Market, etc).

  19. gordon
    July 31st, 2006 at 17:30 | #19

    Ender, though I am as sceptical of carbon capture and storage technology as the next greenie, I doubt if we need to sequester 100% of the CO2 emitted by coal-fired power plants. We need to get CO2 emissions down to a sustainable level, not abolish them altogether.

    The more I think about it, the more I am puzzled by the ABARE assumption of 70% reduction in tariffs. To be precise, the report says “It is assumed that by 2025 all trade barriers in terms of export/output subsidies and import tariffs have been reduced by 70 per cent across the board and across the globe” (p.15). I can’t find any explanation in the report except for this: “This assumption of signiï¬?cant trade liberalisation is made to
    reflect the views of the Energy Futures Forum participants” (p.15).

    Anybody got any ideas about why this assumption was put in for the reference case and all scenarios?

  20. July 31st, 2006 at 20:00 | #20

    gordon – “Ender, though I am as sceptical of carbon capture and storage technology as the next greenie, I doubt if we need to sequester 100% of the CO2 emitted by coal-fired power plants”

    No neither do I however the problem is that CCS along with nuclear is seen as the AGW silver bullet when the reality is pretty far the rosy predictions. I am afraid that CCS and nuclear will prevail and get all the money when the real cheaper and cleaner solution, demand reduction and renewable power, will fall by the wayside.

  21. David Michie
    July 31st, 2006 at 20:18 | #21

    “there is no discussion of the costs of doing nothing�

    I think it is safe to conclude that these exceed the costs of stabilisation, so “doing something� is the best option.

    Has John Howard concluded that? He talks a lot about how ratifying Kyoto will “damage Australia’s economy”, but he never talks about what damage (if any) will be done to our economy by climate change.
    While the rest of the world tries to “do the right thing”, resource-rich Australia will profit from skyrocketing energy prices, which will in turn assure Howard’s political future.
    Tell me I’m wrong … please!

  22. Simonjm
    August 1st, 2006 at 11:07 | #22

    L ooking at this CCS like nuclear unless we want to throw money at bad solutions CCS is not the way to go.

  23. Simonjm
    August 1st, 2006 at 11:09 | #23

    PM how does it stack up to your work?

  24. August 1st, 2006 at 12:43 | #24

    PM – “Depending on the risk factors associated with the resource and reserve estimates, one could sequester some 1.3 to 5.2 Giga tonnes of CO2 in Australian coal seams, and this estimated range rises by the month.”

    One question – how much research is being done on the stablity of the injected CO2? How can we know how long it will be safely sequestered? Also not all coal seams will have the benefit of increased coalbed methane recovery.

    The point that I hope I am getting across is that to my mind spending the money that is going into CCS is the wrong way to go no matter how much coal we have. If we are going to charge consumers, such as myself, more money for electricity why not spend it on a technology that does not emit CO2 in the first place and is sustainable for as long as the sun shines rather than for as long as the coal lasts. Retro fitting our older coal plants, particularly the brown coal ones, with amine CO2 scrubbers will neither be easy or cheap. Surely rooftop solarPVs, Solar thermal, wind, wave etc even with suitable storage will cost the same and is a better long term investment. Particularly in the light of storage in the form of electric transport will also go a long way to mitigating future Peak Oil problems.

    Coal should be and can be reserved as a niche base load generator in gasification plants where CO2 recovery is easier and more efficient. Also coal can be use in coal to liquids plants for the very small amount of transport, in an battery electric car future, that absolutely needs the very long range of a hybrid car.

  25. Hermit
    August 1st, 2006 at 13:31 | #25

    This is a good point; we might have to leave space for some coal burning that the environment can absorb. For example it looks like jet fuel made along biodiesel lines won’t cope with subzero temperatures and we will have to use coal-to-liquids. That’s why I favour cap-and-trade…let users sort out priorities. Mothballing 50% of coal mines might give us centuries of reserves for specialty uses. Not so long ago captains of industry told us we couldn’t do without child labour but we managed.

  26. Terje
    August 1st, 2006 at 14:26 | #26

    If you want to reduce CO2 then I agree that cap and trade is the way to go.

  27. August 1st, 2006 at 14:46 | #27

    Terje – how would the cap and trade work? BTW I am genuinely interested in how such a system would work not being argumentative. Also can a cap and trade work with an increased MRET say to 20%?

  28. August 1st, 2006 at 17:25 | #28

    Yeah, talking about 162 million tons of CO2 is meaningless by itself when you’re already moving at least 40 million tons of fuel to make that CO2. There’s a similar roll-my-eyes case when people talk about how many nuclear plants would have to be built, and I want to ask them how many coal and gas plants do they think have already been built? The numbers are big, but so are our populations and economies. Everything’s big.

    Now, pointing out that CO2 is a lot less dense than fuels, that’s valid. And frankly the idea of trying to stuff CO2 gas somewhere makes me twitchy; I can’t help thinking that’s asking for a nasty vulcanism-fueled surprise for our descendants. Like nuclear waste but without a half-life. Carbonate rocks would be fine, if you can find all the calcium for that.

  29. Hermit
    August 1st, 2006 at 17:28 | #29

    A good critique of geosequestration on the Treehugger website
    The lead article draws on the recent book by Flannery but it is noteworthy that many people seem to have independently come to similar conclusions. Namely that it is a likely dud and therefore a stalling tactic by the coal industry This suggests that ABARE’s political masters (the Coal-ition) have told them to assume it’s a goer and build a case around it.

    Ender I know Wikipedia etc have articles on carbon taxes but I haven’t found a concise article on cap-and-trade. The gist is that countries allocate CO2 emission permits a tad tighter than the bad old days. Unchastened polluters can buy unused permits or earn brownie points by paying for credits such as tree planting in distant lands. Trouble is; are the initial exemptions and free allocations too lax? Who ensures the trees are saved from bushfires? With sufficient political will the total CO2 quota can be reigned in year by year. So far the results are underwhelming for the EU scheme.

  30. Terje
    August 1st, 2006 at 17:34 | #30

    It could be done several ways and take several forms.

    In loose terms I would regard MRET as a form of cap and trade. Although MRET mandates new production rather than a limit on old production, and it dictates the amount of new production that must be non-CO2 dependent. In fact it seems to assume that demand will grow which is an interesting position to take (although probably a safe one).

    Cap and trade is what Kyoto was/is about. Essentially you licence the amount of CO2 that can be emitted. You limit the number of licences that you will grant. As I understand it Kyoto involves a global licencing scheme and other than the skepticism about AGW the global licencing system is probably the biggest source of concern amoungst critics. It entails a big sacrifice of economic sovereignty to an international body. How it would be enforced on recalcitrant nations is also an interesting area for discussion. Given nations history of currency devaluation I think the likelyhood of them accepting significant economic pain due to an international licencing scheme that they signed up to in prior decades poses an interesting question. There could be a lot of pressure to cheat, which may not bring the system down but does pose challenges.

    Here is an example of one way that you might do a cap and trade domestically. Lets say that today 1 unit of electricity entails “K” units of CO2. You could decide to grant each producer of electricity a licence to emit “0.9 x K” units of CO2 for each unit of electricity they sell. If they then had surplus of licences because they were a green power company they could sell them in the open market. If they had a shortage they would have to buy them in the open market. The following year you might change your licencing rule to “0.85 x K”. Such an approach ensures that the burden of adjustment is undertake first where it is cheapest.

    I am sure somebody else can clarify the details of specific proposals better than me. My recollection is that this type of approach to pollution regulation was pioneered in the USA in relation to sulphur pollution.

  31. Terje
    August 1st, 2006 at 17:42 | #31

    The Solar Tower proposed by Enviromission is supposed to be good for 50,000 houses. If you scale it up to their original solar tower proposal then it should be able to service 200,000 houses. Assuming 8 million homes in Australia would mean that we need 40 such towers plus some more to service industry and government. Lets say 80 towers. Thats a lot but not unachievable.

    Given that Enviromission is now saying that their modelling predicts good control over the time of day supply curve for electricity output (using salt water heat storage ponds) then I have little trouble imagining a future in which the vast bulk of our electricity comes from Solar thermal. I don’t doubt that it is technically achievable. Its the economic and regulatory parameters that will dictate whether it happens.


  32. Terje
    August 1st, 2006 at 17:54 | #32

    Does anybody know much about the coal-drying technology dicussed in the following article? It seens to claims that brown coal can be made a lot more efficient (eg something like 50% more output per unit of coal). This would reduce the cost of brown coal produced electricity (perhaps making the barriers to entry for competing technologies even higher) and also reduce CO2 emmissions.


  33. August 1st, 2006 at 17:57 | #33

    Damien – “Yeah, talking about 162 million tons of CO2 is meaningless by itself when you’re already moving at least 40 million tons of fuel to make that CO2.”

    Yes and no. I was more trying to get a handle on the scale of the problem. Our power industry was not built overnight. The problem with 160 million tons is that by 2010 perhaps we will be sequestering 1 million tons/year so with say 5% growth per year by 2024 the figure will be 4 million tons and so on. The point is that CCS can only build up slowly without some sort of Manhatten program that I do not think that anyone will finance. Also moving a dense room temperature solid that can be loaded into a truck or open conveyer is a lot different to a gas. The CO2 would have to be pressurised to 200bar for injection into oil fields and 600bar for deeper injection. Do you do this at the power plant where the power is available or a the sequestration point?

    Yes the numbers are big however like all things they started small. I share your concerns about the long term sequestration.

  34. August 1st, 2006 at 21:07 | #34

    Terje – the problem I have with cap and trade is that I have an agenda and want more renewables. I guess that is where we differ. You are content to let the market find the best solution and I believe I know the best solution and want to encourage it. (I am talking rhetorically)

    The problem I see is that, as you said, people with other agendas of their own will try to cheat and/or set the bar to high so that nobody really has to do much. I am just not sure that with such a problem as I believe climate change to be that we can just leave it to chance market forces that may not react in the way that reduces CO2 enough to make a difference.

    Perhaps a compromise could be carbon taxes rather than cap and trade. They would perhaps be harder to cheat however I am sure there is a way. This could be combined with a high and increasing MRET – I guess however that you would regard this as too much governmant interference. I also think that we should start pricing electricity on volume used.

    Whats the correct answer?????

  35. Terje
    August 1st, 2006 at 21:53 | #35


    Either way it is government interferance. I don’t see how cap and trade should hinder the development of alternative power sources. If anything it should give the developers a sourse of cheap funds.

    You seem to be saying that your agenda is something other than reducing CO2 emissions as cheaply as possible. It is good that you are clear about this lest we mistake your prefered policy as being driven by a concern about AGW.


  36. wilful
    August 2nd, 2006 at 09:59 | #36

    Tereje, I think the difference may be that you want carbon emissions to be reduced efficiently, while Ender wants them reduced effectively.

  37. wilful
    August 2nd, 2006 at 10:04 | #37

    Apologies for the typo in your name there.

  38. gordon
    August 2nd, 2006 at 13:27 | #38

    A lot of the pro and anti carbon tax and trading limits stuff has been aired under Prof. Quiggin’s post “Nuclear Option” on July 6th.

  39. August 2nd, 2006 at 13:29 | #39

    Terje – “You seem to be saying that your agenda is something other than reducing CO2 emissions as cheaply as possible.”

    Probably correct. I see AGW and Peak Oil as being such large problems that there is no point penny pinching – we need to fix the problems whatever the expense. I think that it is inevitable that some people will not make as much money as they are now. This does not bother me too much.

  40. Terje
    August 2nd, 2006 at 17:31 | #40


    So 20 million deaths per annum is a tolerable cost?


  41. August 2nd, 2006 at 17:36 | #41

    Just one minor point WRT nuclear, that’s not significantly different to coal. The trouble isn’t a safety one, it’s an environmental one. To save money, many nuclear power plants use water sucked from rivers for cooling, which is then dumped back in the river somewhat hotter than when it came through. This is done for many coal-fired power stations as well, such as Hazelwood in Victoria (go water skiing in midwinter on 25 Celsius water…).

    In heatwave conditions, the extra heat can be dangerous to fish, so some governments have started imposing maximum temperatures on discharge.

    Any nuclear plants built in Australia will only use once-through cooling if they’re built on the coast. Any inland plants will use either “wet” cooling towers, or possibly “dry” cooling towers which use no water at all. In either case, killing fish will not be an issue (but excessive water consumption might well be a problem, so dry cooling towers might well be adopted in Oz).

  42. August 2nd, 2006 at 17:57 | #42

    Terje – “So 20 million deaths per annum is a tolerable cost?”

    Sorry not following you here????

  43. August 2nd, 2006 at 18:55 | #43

    You said “whatever the cost”. Surely there must be limits to the costs you would be prepared to bear for this. On another thread, James Sinnamon indicated that population would have to drop by about 95% to achieve sustainability. In terms of opportunity costs on human life I would regard this as a high cost. I think you may disagree, but I do not know.
    What costs would you accept or do you truly believe any costs must be met?

  44. August 2nd, 2006 at 20:08 | #44

    Andrew – I guess it depends on how desperate we get. For example if the CBD of Sydney was in danger of being flooded permently do you think that anyone would argue not to save it because of cost if it could be done?

    I do not agree that population has to drop 95%. I think that it is sufficient to achieve zero or negative population growth. Mind you if we do not address it then I am pretty sure that it will be taken out of our hands.

  45. Terje
    August 2nd, 2006 at 21:04 | #45


    It seems that Andrew understood my point well enough.

    There would be a cost above which we would not fight back flood waters that threatened the Sydney CBD. Although obviously the price we would be willing to pay would be high. Let say we agreed that $300 billion was the upper limit on what were willing to pay. Does that mean we would not seek out the cheapest solution? Just because you would be willing to spend a lot does not mean that you should. Likewise if we agreed that CO2 is threatening the planet we may be willing to spend a fortune to save the earth, however it would be silly not to go with the cheapest means.

    Another example. Without food you will die. When you go shopping for food do you care about the price?


  46. August 2nd, 2006 at 21:29 | #46

    Terje – actually I did not get your point why would 20 million people be included in a cost?

    “Likewise if we agreed that CO2 is threatening the planet we may be willing to spend a fortune to save the earth, however it would be silly not to go with the cheapest means.”

    I agree here however we all disagree on the cheapest means and while we are all disagreeing the world is warming up. I mean that we can look and look and look for the cheapest means to do the job however at some time we must decide well this is the most cost-effective method – we will implement this one. Also the cheapest may not be the one that is sustainable for the long term. There is not point putting a cheap band-aid on the problem when we have the capability to fix it forever.

  47. Terje
    August 2nd, 2006 at 22:14 | #47


    The thing about cap and trade is that it does deliver. It cut sulphur pollution in the usa. There does not need to be prior concensus on what method is the best or cheapest. Individual market participants are not forced to take the cheapest solution or any given solution but they are forced to adopt some solution. The pricing mechanism merely means that those that find the cheapest means (by brains or dumb luck) will gain an advantage and others will soon follow their lead. If you think you have the best means then the market will reward you for your foresight.

    MRET works this way in renewables. It does not dictate the technology to be used but merely allows the market to discover the cheapest solution. And it does deliver a solution that meets the parameters dictated in the policy.


  48. August 3rd, 2006 at 13:09 | #48

    Are we guilty of climate porn?.
    Another interesting position from the Institute for Public Policy Research.

  49. Terje
    August 4th, 2006 at 20:11 | #49

    Given that JQ says the science debate is over and its time to discuss the solution it seems odd that this discussion of cap and trade has not gathered more discussion. Perhaps the science is more topical.

  50. Marlowe Johnson
    August 10th, 2006 at 02:11 | #50

    I’m somewhat agnostic about CCS and have always seen it as a medium to long-term strategy. I recently attended a government-sponspored conference (in Canada) and if recall correctly cost estimates ranged from approximately $75-100CAN/t CO2, so it’s clearly not the silver bullet for the coal industry *yet*. My limited understanding is that its a relatively safe option provided that the proper criteria are used for site selection. Others have pointed out that this is not a new technology and has been widely used in the upstream oil and gas industry for enhanced oil recovery (EOR). I’m curious PM how your feasibility study compares and would be interested in links to yours and other studies if available :) .

    I agree with a previous commenter that we often seem to spend an inordinate amount of time looking for the cheapest (i.e., the most economically efficient) solution at the expense of the most effective solution. If I may paraphrase Ender “stop quibbling over the number of angels on the pinhead and get on with it”. I think most reasonable people agree that the science is sufficiently compelling to warrant action, and surely everyone would agree that there are several no-regrets options that should be adopted regardless.

    To Terje’s point about cap and trade. I would suggest that while it may the most economically effiecient in theory (i.e., equimarginal principle), it may be that in practice all of the associated transaction costs of setting up such a system (e.g., CDM/JI offices, inventory methods, verification protocols, dispute resolution systems, etc.) may effectively wipe out any efficiency gains so that the costs end-up being similar to a carbon tax setup. I’m sure others have probably argued this point more eloquently than I have :) .

    At the end of the day, however, I would argue that it comes down to politics not economic efficiency, although the latter obviously does influence the former. Much has been written here and elsewhere about the apparent defects in the KP, chief among them being the lack of universal participation. It seems to me that a carbon tax suffers from the same problem and I don’t see any immediate easy solution to this (although Andrew Dessler has written on this for those interested).

    I’m curious if anyone here has any thoughts on how the KP might be used to justify tariffs on goods from non-KP signatories. Maybe I’m being naive, but this seems like a simple way to address the concerns of those who fear economic catastrophe and loss of competitiveness if KP targets are adopted. In other words, put a tariff on all Chinese/Indian/Malaysian, etc. goods proportional to the addionational costs of complying with the KP. This would encourage wider adoption of the policy (whether it is a cap and trade setup like the KP or a carbon tax ). A burning question I have is whether such a tariff could be successfully defended under WTO rules, and is anyone aware of the KP being used/contemplated in such a case?

    p.s. my compliments to JQ and other participants on this blog. The signal to noise ratio here is very good (at least on this thread).

  51. Terje
    August 10th, 2006 at 15:39 | #51

    If we confined a cap and trade system to the electricity market I would think it dead easy to implement and audit.

    For instance for each MWhr that an operator sells they could be granted a licence to emit X tones of carbon (now or in the future). They could use or sell these licences with scope to split sell their allocation. As the years roll forward the number X on new licences would contract until maybe one day it reached zero. It would need to decline at least as fast as the growth in electricity demand in order to ensure a cap in emmissions.

    Granting licences would require no significant new audit capabilities as electricity already needs to be metred. It would entail some electronic book keeping and a means to register transfers of title. The only new audits required would be on actual emissions, which for renewables would be trivial and for the fossil fuel operators it would be a likely audit requirement under any scheme.

    I think you over rate the complexity. It would be far more simple for the regulators than trying to cost and evaluate all the alternate technical solutions up front.

  52. Marlowe Johnson
    August 11th, 2006 at 04:45 | #52

    Hi Terje,

    I agree that a cap and trade system would obviously be much simpler to implement if it was restricted to the electricity sector because there are fewer sources and the sector (in the U.S. at least) already has experience with trading for SO2 and NOx.

    However, if we take that approach then we’re sacrificing any other emission reduction opportunities that could come from other sectors at a cheaper cost. In other words, you seem to be agreeing with Ender’s? point that its better in the short term to go with an effective solution (not necessarily ultimate) rather delaying until the most cost-effective solution is found. If that’s the case I couldn’t agree more. The science is compelling and signicant action is warranted now.

    However, even with this approach there are significant issues that muddy the waters considerably. First and foremost is the fact that not all electricity is created equally, which at the end of the day means that there will be winners and losers. I’ll use Canada as an illustration since it’s what I’m most familiar with, but the general principle applies globally as well. In Canada, it is not clear how the emission reduction target for the electricity sector should be set. Unlike Australia (which I assume is virtually all coal-based), in Canada different provinces use different sources — Alberta, is virtually all coal, Ontario is a mix of coal (for now) and nuclear, with some hydro, and Quebec is virtually all hydro. Given this diversity, how should the target be set? Should it be based on a national average, or a regional average? Or is it better to just go with an emission intensity target for coal plants alone and forget about hydro, nuclear, and natural gas? A national target would clearly benefit Quebec and penalize Alberta, while an exclusive focus on coal plants may not do enough to encourage the development of alternatives. Not saying that I have the anwsers, but these are just some of the considerations that come to mind.

    On that note, I’d love to see a more detailed discussion of the transaction costs of Kyoto, or some variant, and how these would compare to a straight carbon tax regime…

  53. Terje (say TAY-A)
    August 11th, 2006 at 23:49 | #53


    You raise some excellant points. You are right to identify that my outline also includes a form of bias towards “effective” rather than “cost efficient”. I hadn’t noticed this bias but your examples and comments have made it pretty self evident. So thanks for that.

    The other assumption that I have made, that your Canada example reveals, is that most current energy is CO2 producing and that you want a policy to ensure that most new production won’t be. As such the scenerio I outlined entails the old subsidising the new. However if half your energy is already nuclear it may be just the old subsidising the old.

    So the “effective” versus “efficient” question is more signifiant (and in some regards more subtle) than I at first considered. :(

    Something to think about.


  54. Marlowe Johnson
    August 12th, 2006 at 05:41 | #54

    I’m still hoping Prof. Quiggin or others will weigh in on whether or not a KP/WTO clash is possible, and if so how would one go about determining the appropriate level of tariff to place on a particular good? Also, would it be better to limit to limit tariffs to energy-intensive products (e.g. steel) or could a variable tariff be placed on all goods from non-Annex B countries?

    The reason I’m interested in this question is that I think that if tariffs are defensible from an international trade perspective, then the question about universal participation in any international GHG mitigation framework becomes moot to a certain extent — you either pay the tariffs on your goods, or you can pay to reduce your CO2 emissions and/or buy credits in a KP-type setup, or pay a carbon tax in that kind of setup.

    Given the U.S. behaviour on other trade issues (e.g. steel, softwood lumber, etc.) they clearly aren’t afraid of using tariffs to defend their interests regardless of the rulings of the WTO, which is my roundabout way of saying that I’m not convinced by arguments which claim that the U.S. won’t sign onto the KP because of fears that it’s economic competitiveness would damaged vis-a-vis countries that didn’t have to make any emission reductions.

  55. Terje
    August 12th, 2006 at 08:39 | #55

    I think the usa and many countries would prefer an internal carbon emissions market over an international one. The later transfers funds out of the nation whilst the former transfers it within the nation.

  56. Marlowe Johnson
    August 12th, 2006 at 11:48 | #56

    The question of internal vs international market raises the same issues I mentioned before; namely, that a market restricted to internal players sacrifices the potential for cheaper emission reduction opportunities elsewhere. In this case the motivation is based on balance of trade considerations and not on the problems associated with ensuring the robustness of the trading regime (i.e., credit trading vs carbon tax). Is it better to reduce at 20$/tonne internally by switching from coal to natural gas (assuming parts and labour are obtained domestically), or is it better to buy Russian credits at $10/tonne? I’d suggest that it all depends on what criteria one uses to define ‘better’.

    I absolutely agree that the question of wealth transfer is a critical one, which IMO is why so many countries are, at the end of the day, against any kind of international wealth transfer. This is why CDM projects and Russian hot air, in particular, receive so much opposition. But at the end of the day there has to be some kind of reckoning, no matter what the details of the system are, so that people/companies/nations internalize the costs of that wealth generation. The most equitable approach IMO in the long run is to assign emission permits on a per capita basis — after all what gives me the right to emit more than anyone else? But the reality is that we aren’t starting with a blank slate, so historical emissions have to be used in the short-term in the allocation process; otherwise the political feasibility of the whole thing is close to zero IMO.

    I also agree that it is probably more acceptable politically for any revenues from a carbon tax to remain within a country. I’d suggest that the it only needs to be international in its application, but not necessarily in terms of its collection and redistribution (e.g., collected by the UNEP or Global Environmental Facility) — the amount of money involved and the potential for waste are simply to large…

  57. Terje
    August 13th, 2006 at 00:11 | #57

    Looking at who might be winners and who might be losers under an international trading regime such as Kyoto probably goes a fair way towards explaining how the politics has played out to date. Nations like Australia that nave zero nuclear at present probable have a vested interest in some alternate approach besides Kyoto.

  58. Brian Bahnisch
    August 23rd, 2006 at 12:29 | #58

    I understand that the world produces 50 cubic kilometres of CO2 every day. It sounds like a big pile to me.

    In Australia I think we should convert to hot rocks ASAP in Australia and use coal for the production of plstics, fertiliser etc.

  59. Ian Gould
    August 24th, 2006 at 20:54 | #59

    Ender: “Coal produces approx 900 tons of CO2 per GWHr. In 2002 Australia generated 225 000 GW of electricity – 80% of this from coal = 180 GWhrs. This would generate 900 X 180 000 = 162 million tons of CO2 that would have to be sequestered.

    So we would have to put in the infrastructure sufficient to collect, transport and pump 162 million tons of CO2 per year and this is just for Australia!! And it would have to grow at 2% or 3% per year to keep pace with Australia’s electricty demand growth. So if we used 225 000 GWhrs in 2002, in 2037 at 2% growth we would need to be sequestering 324 million tons of CO2 per year.”

    Don’t forget the additional energy required to construct the sequestration infrastructure and to capture, transport and store the CO2.

  60. August 28th, 2006 at 16:10 | #60
  61. August 28th, 2006 at 16:16 | #61

    Oh yeah, here are two posts I wrote that expose Howard’s distortion of the ABARE report on climate change:

    Howard spins ABARE’s report on carbon taxes
    Howard attacks Labor’s ‘hidden’ plan for a carbon tax

  62. August 28th, 2006 at 17:41 | #62

    Ian – completely agree. CCS is just the Claytons emission reduction scheme. You know the one – one that everyone knows will not work but will promote anyway because it makes us look green. Right up there with ‘green’ nuclear power.

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