Home > Economic policy, Environment > CEDA lunch on emissions trading

CEDA lunch on emissions trading

May 10th, 2007

Yesterday, I spoke at a CEDA (Committee for the Economic Development of Australia) lunch on the topic “What would life be like with an emissions trading system for Australia”. Shorter Quiggin: Much as it is now. Slightly longer version: For the average household, it will be a bit like the GST, with some initial disruption and relative price changes, becoming effectively invisible as carbon costs are factored into prices throughout the economy. Other speakers were Paul Simshauser from Babcock and Brown (owners of electricity generators and other infrastructure) and Stuart Dix from e3 International, a firm with a lot of experience in emissions trading markets.

The audience was similarly made up of likely buyers of emissions credits (Stanwell and other electricity generators), sellers (geothermal and other carbon-free sources) and intermediaries (accounting companies, consulting engineers and so on). They are looking at decisions on the billion-dollar scale over the next few years

A couple of points of interest:

* In addition to the usual free lunch and bottle of wine, speakers were rewarded with 17 trees worth of carbon credits, roughly a year’s worth of CO2 from driving for the average motorist.

* The delusionist idea that the whole thing is a hoax dreamed up by scientists looking for research grants/the UN seeking world domination/the Illuminati didn’t get a mention, even in refutation. Unlike the rightwing commentariat and some senior political figures, serious businesses have concluded that the main game now is how emissions trading should work, not whether we should have it.

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  1. jstrocch
    May 10th, 2007 at 19:52 | #1

    I predict Howard will cave to the Greenies and introduce a carbon emmissions trading scheme as a headline policy this coming election. The catch will be that it will be “pragmatic” with an emphasis on mitigating economic costs as well as ecologic bads.

    But I also think that he will lose the election not because people dislike his policies so much. They are just sick of his manipulative politics.

    Eventually Machiavellianism bites back.

  2. observa
    May 10th, 2007 at 22:04 | #2

    “serious businesses have concluded that the main game now is how emissions trading should work, not whether we should have it.”
    Serious businesses have worked out that it’s time to get their snouts in the trough of emissions handouts. Of course existing big emitters will be asked how much they need and will be more than happy to tell the public servants just like they did with Kyoto.

  3. May 10th, 2007 at 22:07 | #3

    The ALS recently had a discussion on the advantages of a carbon tax over a carbon trading regime.

    http://alsblog.wordpress.com/2007/05/06/gw-carbon-tax-v-trading/

  4. swio
    May 11th, 2007 at 00:47 | #4

    “Serious businesses have worked out that it’s time to get their snouts in the trough of emissions handouts.”

    Agree completely. They have worked out that carbon is going to be costed one way or another and know the sooner they get involved in deciding how its that happens the better it will be for them.

    If and when an effective carbon emmissions trading scheme comes about I have no doubt that carbon permits that in the long run will be worth enormous amounts of money will be practically given away to the businesses far sighted enough to get involved now.

  5. May 11th, 2007 at 04:13 | #5

    Is carbon trading a better option than a carbon tax? I thought a carbon tax would be simpler and cheaper to administer and therefore the better option.

  6. observa
    May 11th, 2007 at 12:26 | #6

    “I thought a carbon tax would be simpler and cheaper to administer and therefore the better option.”
    In principle they’re exactly the same. ie they will both produce a price rise high enough to suppress demand as well as call forth alternative supply. However with carbon taxing the taxer is politically obvious and hence all the Pledgers(those sixty percenters)favour giving away the right to tax to big business. You’re right that they couldn’t possibly administer a totally comprehensive cap and trade for Australia, hence the ugly compromise. The beauty of giving away this sovereign right to tax to big business are largely twofold- big unions are no good without big biz and big biz can continually take the blame for the painful price hikes, albeit this is offset by the ever rising price of their initial free emission rights. Think of it just like handing out Murray Darling water rights in the past. You get to kick the rice and cotton growers regularly nowadays, but they don’t mind as their water rights spiral ever upwards in value beyond the easy reach of today’s taxpayers.

  7. wilful
    May 11th, 2007 at 12:29 | #7

    Sorry if I’ve missed it (I think I must have), but I haven’t seen Prof Quiggin’s views vis a vis the relative merits of a tax or a trading system. Could I be pointed towards those posts?

    I see that John Humphreys (ta for the link Terje) says: Some economists (Warwick McKibbon, John Quiggin, Joshua Gans) have argued that carbon trading is better than a carbon tax. The supposed benefits of trading include the fixed level of carbon emmissions (therefore fixed environmental impact), the subsidy to some energy businesses and the difficulty in removing a carbon trading system because of intrenched special interest groups.

    Is this accurate?

  8. observa
    May 11th, 2007 at 14:21 | #8

    ‘..and the difficulty in removing a carbon trading system because of intrenched special interest groups.’

    “Is this accurate?”

    Well with respect to the entrencheing of special interest groups, we’ll all get to experience that first hand,(just like entrenched water rights now), if we find out 10 years down the trading track, that Earth is continually warming at the same rate as sister Mars is now AND for the same reasons. There’s a 10% chance of that according to the IPCC, or perhaps a 20% chance depending who sits on it and writes up the results. You know how those computer model printouts are?

  9. May 11th, 2007 at 14:59 | #9

    ProfQ, do you know if the proposed national emissions trading scheme will include the transportation sector? My understanding is that the boffins in Treasury would like transport to be included, but I can’t see a politician (of any flavour) having the courage to do so.

  10. Ken Miles
    May 11th, 2007 at 15:34 | #10

    There’s a 10% chance of that according to the IPCC

    Errr… no there isn’t. Read the summary for policymakers.

    The global sceptics use of Mars as an example of a planet which is warming is amusing. We don’t have Mars temperature data, but rather the change in Mars reflectivity has been determined and from this (by use of a climate model) a change in temperature has been inferred.

    So, for sceptics to argue that Mars has been warming, they have to assume that (a) climate models work and (b) that the cause of Mars temperature change is local to Mars.

  11. May 11th, 2007 at 15:44 | #11

    Another question about emissions trading: Will fossil fuel exports be included somehow?

    An emissions trading scheme should have the effect of reducing the amount of coal burnt domestically, allowing more coal to be exported and burnt overseas. In other words, Australian emissions will be reduced but not global emissions, and its all the same atmosphere.

    It seems to me that unless coal exports are curtailed or taxed in some way, an emissions trading scheme will achieve precisely nothing in terms of reducing global emissions.

  12. jquiggin
    May 11th, 2007 at 16:10 | #12

    The general idea is that emissions should be taxed where the fuel is burnt. Obviously, it’s crucial that developing countries come in on the deal. Equally obviously that won’t home until the developed countries that have welshed on the Kyoto agreement to move first (US and us) make good on their word.

    I’ll do a larger post on taxes, trading, transport and so on when I get some free time.

  13. May 11th, 2007 at 16:30 | #13

    ProfQ wrote:
    The general idea is that emissions should be taxed where the fuel is burnt

    Nice idea, but its unlikely to happen in developing countries for many years. Most of our coal is exported to Japan, Korea and Taiwan. Do any of these countries have an emissions market that could be linked to ours?

    I agree that we should go ahead with an emissions trading scheme regardless (if only to encourage other countries to follow suit) but I don’t see how it can be effective if the surplus coal is simply exported and burnt overseas.

  14. swio
    May 11th, 2007 at 17:59 | #14

    “The general idea is that emissions should be taxed where the fuel is burnt.”

    Why not just add a tax onto any fossil fuel when it comes out of the ground? A look at the fossil fuel industry shows there a far fewer points where it is extracted out of the ground than points where it is burnt. Every car or home generator is a burning point, but the only serious extraction points are massive multi-million dollar mines or oil/gas rigs. Its got to be vastly simpler to track those. Once the producer is taxed then they can incorporate it into the price of their product and then wherever it goes, whoever uses it, its already been taxed.

  15. jquiggin
    May 11th, 2007 at 18:07 | #15

    “Most of our coal is exported to Japan, Korea and Taiwan. Do any of these countries have an emissions market that could be linked to ours?”

    Japan is an Annex 1 country, so has to cap its own emissions (including those arising from burning Australian coal) and trade to meet targets. Korea and Taiwan are classed as developing, so they don’t come in until after 2012.

  16. Valuethinker
    May 11th, 2007 at 20:19 | #16

    Economic rent will be created by any cap-and-trade scheme, so the big players are moving after that rent.

    The engineering of the European Emission Trading Scheme (ETS) to the point of uselessness is a warning to everyone. Basically big power producers and emitters have captured a couple of billion (more?) of economic rent for themselves, without tangible evidence that CO2 emissions have fallen.

    The latest data on CO2 accumulation is truly disturbing. It appears that the planet, naturally , is losing it’s ability to sequester CO2 (either emissions from drying up, or plants are sequestering less CO2 as it gets warmer).

    Right now, emission reduction is in the hands of the ‘go slow’ and ‘no big economic adjustment costs’ crowd. Which is probably most economists (step forward William Nordhaus).

    But there is a real risk that actually we have nothing like the time to adjust that that implies.

    It might become necessary to go for an (economically inefficient) regulatory approach: tell power producers that after a given date (say 2025) they have to stop emitting CO2 in meaningful quantities. Require all cars sold to meet certain fuel efficiency and CO2 standards. Rationing of personal air travel, etc.

    The truly disturbing thing about the last 6 or 7 years is the growing amount of data that the rate of change of climate is beginning to accelerate. We may have less time than we thought.

  17. Valuethinker
    May 11th, 2007 at 20:29 | #17

    re 14

    swio the upstream v. downstream debate is huge.

    The reality is you are right, fuel should be taxed at carbon content at point of origin upstream (a little harder for biomass, but doable). If we taxed it at the minehead, the wellhead (or import terminal) and the gas terminal, we would catch 80-90% of the carbon emitted in an economy.

    Politically that raises huge issues. The poor will get hit– food, gasoline, home heating will be more expensive. So will the middle classes.

    It’s likely that the price elasticities of demand for carbon emission are very low. For example, UK heating bills have risen by 60%+ in the last 3 years, but there’s little evidence of a fall in consumption. Most people don’t even realise their new widescreen TV could be costing them £15 a month for the ‘instant on’ feature.

    So we are talking huge taxes, potentially. And we will be missing some of the best and cheapest opportunities to reduce atmospheric CO2 (saving the Rainforest!).

    There will be fraud and avoidance (same problem for more downstream systems, of course).

    The international competitive issues are huge, too. China is a country with GDP per head of maybe $4k, properly adjusted PPP? India maybe $1200. I can’t see either signing up to a $100/tonne of carbon ($28/tonne CO2) scheme, let alone the $300/tonne of carbon that economics suggests is necessary. There would be outright fraud in terms of production statistics. And those are 2 of the 3 largest coal producers and users in the world.

    (after CFC production was banned in the US, smuggled CFCs, made in third world countries, became the third largest illegal commodity smuggled into the US– the price per pound got high enough to justify people carrying it across the Mexican border in tanks on their back)

    And of course those heavy emitting industries, and their trade unions, have massive political power. Picture the screams of the airline and hotel industries, if airline tickets go up in price by as much as they need to (I reckon on the order of £500US for a round trip air fare, Oz to London).

    So I don’t see it happening any time soon even though, economically, it would be the most efficient solution.

  18. melanie
    May 11th, 2007 at 22:22 | #18

    Valuethinker,
    What percentage of the population fly? Last I heard – probably before all the budget airlines – was about 5%. Maybe now 10%?

  19. Hermit
    May 12th, 2007 at 08:47 | #19

    Official carbon restrictions haven’t even begun and already the key players are working out equal ways to share the pain, mainly so that some will be more equal than others. Case in point I doubt my 17 healthiest juvenile trees offset a year’s worth of driving (I’m thinking a shoebox full of bark and leaves). So IMO the offset escape clause shows a way to pollute big and pay small. The next election could be significantly influenced by public reaction to the Howard carbon plan (to be announced shortly) and the Rudd alternative plan.

  20. May 12th, 2007 at 09:49 | #20

    ProfQ: If Japan meets its Kyoto commitments (and commitments to post-Kyoto treaties) we can expect that coal exports to Japan (and other developed countries) will fall, and exports to developing countries will increase. So again, our surplus coal will be burnt overseas, and worse, it will be burnt in dirty, inefficient third-world power stations. Aren’t we making the problem worse?

    Valuethinker: Are you the same Valuethinker posting at TOD and R-squared? If so, we share good taste in blogs :)

    melanie: Precisely. The 10% of the population who fly can most afford higher ticket prices. Jet aircraft are enormously damaging, not just because of CO2 emissions. Accoding to George Monbiot:

    It’s not just that aviation represents the world’s fastest growing source of carbon dioxide emissions. The burning of aircraft fuel has a “radiative forcing ratio” of around 2.7; what this means is that the total warming effect of aircraft emissions is 2.7 times as great as the effect of the carbon dioxide alone. The water vapour they produce forms ice crystals in the upper troposphere (vapour trails and cirrus clouds) that trap the earth’s heat.

  21. observa
    May 13th, 2007 at 14:14 | #21

    “The general idea is that emissions should be taxed where the fuel is burnt. Obviously, it’s crucial that developing countries come in on the deal. Equally obviously that won’t home until the developed countries that have welshed on the Kyoto agreement to move first (US and us) make good on their word.”

    Clever words John but they have the smell of Iraq, beacon of light evangelism all over them. The ‘general idea’ eh? No, what we really need is an agreed, measured, level playing field in the Global War on Warming and that’s an agreed level of carbon taxing facing Chinese and Australian industry, to effect change. As blind freddy can see, carbon caps (that ‘general idea’ of a tax) in one jurisdiction can so easily be circumvented by simply moving to another jurisdiction. As we all know, if Australia halved its emissions via Kyoto type measures tomorrow, China’s build rate for coal fired power stations would gobble that saving in about 4.5 months. As if our industry needs to give China’s industry another cost advantage with Kyoto type taxing measures, while Chinas does not.

    Basically John and the Ruddernomists (quantity control measure advocates)are the new Iraq evangelists, being seen to be ‘doing something’ in their new Kyoto beacon of light(Iraq). Never mind those steak eating surrender monkeys Australia and the US (France and Germany). They were always skeptics right from the start anyway, but now they need to join us in the new ‘surge’ of Kyoto, despite the blatantly obvious fact global emissions have worsened over the 3 years of their beloved Kyoto war on warming. We are to forget that, as well as fence sitting by India and China and jump on board because it’s the surge season apparently. See, even big business (the Halliburtons) are right behind us now, boasts John proudly. Join John and Cos new Coalition of the willing and we’ll all show the world how it’s done. Never mind that history has screamed at us so regularly and so recently that quantity control economics is a recipe for disaster and pardon some of us for thinking this new Ruddernomics is all about getting your hands on the rudder(oil), rather than some more measured international response to the Global War on Warming.

  22. Valuethinker
    May 16th, 2007 at 23:34 | #22

    carbonsink

    Yah that’s me. Trying to create a uniform internet identity for once ;-) . I’m sure you’ll catch me arguing diametrically opposite points of view on different blogs ;-) .

    Melanie.

    Of the UK population, more than 50% fly at least once a year. But 10% do 50% of all flying.

    It’s really, now, only the very poor and the old who don’t do much flying.

    The question is *not* whether we can afford higher ticket prices, it’s whether they will *dissuade* us from flying.

    On which I have my doubts. It’s a superior good, in economic terms, increases in income disproportionately increase air travel. I’m not sure $500 of carbon tax on a return flight London to Sydney, will, in the long run, *reduce* flying. After all $500 is less than the inter-season difference in the cost of that flight, or even the difference between tickets on that flight.

    I think we’ll have to go to explicit rationing, with some kind of marketplace in ration coupons. Long distance flights at short notice then might go for *thousands* of dollars.

    Interestingly the founder of Rough Guides, the travel manual, and the author of ‘the Rough Guide to Climate Change’ has argued for a $250 tax on long distance flights. He has described our ‘it’s Friday night in London, let’s go to Budapest for 48 hours’ culture as a ‘disease’.

    Transport is the most intractable carbon problem, because our price elasticity of demand is likely to be so low. As national incomes rise, distance and amount of travel rises faster. It’s fascinating to watch China fall in love with the personal passenger car– buying a first car in China is a 1 day experience, after which you send photos to all your family and friends. For my parents after WWII in Canada, buying a car was like that.

    By contrast in Rainforest preservation, electric power and in home heating, we could do a *lot*, relatively cheaply.

    Painting rooftops white in the lower 2/3rds of the United States could save up to 10% of their summer electricity consumption (with a 1% cost on the winter heating bill).

    http://www.samefacts.com/archives/energy_and_environment_/2007/05/targeting_conservation_policy.php

    outlines some of the complexities.

    There are a couple of billion people out there in China and India (and even Africa and Latin America) who are on the verge of buying their first air conditioner. We don’t have much time.

  23. rs
    May 17th, 2007 at 09:09 | #23

    At least China notices all those cars are causing various problems in a number of areas, and is taking steps to clean up the exhaust.

    Um? “welshed on the Kyoto agreement” ? I think a clear “We are not joining your silly little scheme now or ever” from Gore and the US Senate and the present president (and silence from the last one) is a pretty clear non-welsh. When politicians all agree, it’s pretty clear they expect something’s going on (like “let’s get the US to make it easier for us to compete against them” or some such). Whatever that something that’s going on is, they ain’t doin’ it. Gore didn’t even support joining Kyoto! What did you expect from those not as environmentally enlightened as the great master?

    This is not about economics, it’s about integrating economics into everything else; science, and the political and social and cultural and policy aspects. Then experts in every field related to the variables involved, all coming in together and finding out what happens if we accelerate the development of solar (and/or wind, hydro, nuclear, fuel cell, fusion…) with things like sequestration, improved petrol kpl, more efficient motors, painting roofs, making lawn mowers less ‘dirty’, stopping the deforestation of the rain forest, thinking what to do about the moss and other biomass, working on alternate fuels, coal scrubbers, neutralizing co2 in the oceans, and so on and so forth. Then coming up with a plan that utilizes whatever money we’re talking about in a manner that maximizes our returns, one that will be implemented and not argued about by “sides”.

    Is that possible? The IPCC doesn’t seem to be getting much specific traction (although it does seem to be getting better) with these huge reports, large numbers of authors, a seemingly political agenda, and vague un-scientific scenarios (guesses) that just confuse everyone and get them discussing largely what are irrelevant details and non-sequiters. Or so it looks.

    If everyone wants action now, that’s great. Fantastic. I look forward to it. Nobody seems to be doing a very good job at getting any of it (whatever “it” is) done though. So who gets to figure out how to run this coal-fired train? Or are we just sitting on the Stuart Highway in NT with a ‘roo in our front grill and the radiator steaming, waiting for another car to come by — while we argue with a shrub 5km away?

  24. Valuethinker
    May 18th, 2007 at 01:34 | #24

    rs

    You know of Thomas Schelling? The world’s leading game theorist– Nobel prize winner?

    He gave a talk at Cato Institute, the leading US libertarian thinktank. There is a webcast of it somewhere.

    His basic point was that global warming is a bit like nuclear arms control. Every country has a mutual interest in a good outcome, and a competing interest to play the system.

    Al Gore supported Kyoto, btw, he was responsible for resolving the last minute dealbreaker. It was President Clinton, his boss, who decided not to submit it to the Senate.

    Even in the US, the home of Climate Denial, the political climate has changed unbelievably in 8 years. Amazing what a few hot summers and a hurricane in New Orleans will do for you :) .

    Schelling’s implicit point is that these things are always messy in the doing, and less efficient than one would like. Credibility is all, and commitment.

    That is why the UK is committing to a 60% reduction in GHG by 2050. Because we create credibility for actions by other countries, by signalling our commitment.

    The world can solve the GHG problem. The wealth and the technologies exist. It’s a question of whether we can master the institutional and political barriers to doing so.

    We survived the nuclear arms race. And we beat the Nazis. We very nearly lost, and we were saved by the Red Army and the lives of 25 million Russians. But we did beat the Nazis. The 1000 year night did not come.

    If we can beat the greatest evil in human history, then I am sure we can beat this.

  25. Peter Wood
    May 18th, 2007 at 10:21 | #25

    There is some interesting discussion in the Stern Review on the problem of achieving international cooperation (pp 451-453). These types of problems are often studied using game theory, where the participants in the game have a choice between cooperation, or noncooperation (free riding). So when a politician suggests that we should not reduce emissions because China (which has much lower per-capita emissions) or the US is not, they are effectively saying “party B is free riding, therefore we should free ride too”.

    The Stern Review (p 453) cites a study by Sandler in international collective action which identifies a number of conditions which make it more likely that such action will succeed. One is having leadership by a dominant nation or nations.

    This is where the upstream vs downstream debate becomes very interesting: if we cooperate and significantly reduce our emissions but continue to export coal that contributes to emissions far greater than ours, are we free riding to a certain extent?

    What would Australia adopting a position of leadership involve (a far different state of affairs to the present)? I do not believe that we would be able to adopt a position of leadership and continue to export coal at the rate that we do presently.

    If we were to tax coal exports, as well as providing a market mechanism for reducing supply, we could also use the money raised to fund schools, hospitals, alternative energy research etc.

  26. rs
    May 23rd, 2007 at 09:26 | #26

    If I remember correctly, Al Gore specifically said the US was not going to do it. And the US Senate did vote on it during Clinton. “No”, 97-0 I believe.

    As far as WWII, Hitler tried to fight on too many fronts. The US basically destroyed the entire country anyway (and we had the nuclear option we used on Japan, although Europe was really a different matter, historically and socially.) In the end, second guessing history is not something that really can be done….

    Anyway, I know of Schelling. Have no issue with his ideas, what I do know of them. I’m more thinking that wealth and technology (along with discussion and investigating the options) is going to work out more and more as we go along, so yes I for sure agree that in 8 years a lot of things change (regardless of why hurricanes get stronger or not in any given year).

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