Scorcher

June 3rd, 2007

I reviewed Clive Hamilton’s Scorcher: The Dirty Politics of Climate Change in the Fin on Friday. It’s over the fold.

I was amused to read, the next day, the Oz praising emissions trading as The free market way to save the world, and noting “the rapid change that has taken place in community and business attitudes over a relatively short period of time as the science of climate change has become more widely known and better understood.” Of course, it would have been more widely known and better understood if it weren’t for the continuous attacks on the science that the Oz was making right up to the last possible moment.

Meanwhile, I notice lots of others making an inelegant retreat from Lavoisier-style scientific delusionism to the long-prepared Lomborg line that it will all cost too much. But, thanks to the Stern Review, the recent statement by Australian economist the forthcoming IPCC report and even the PM’s Task Group, that line has already been outflanked. We’re down to arguing about details and numbers now, an argument where rightwing bloviators have little to contribute. Howard has belatedly realised the fact, accepting both emissions trading and quantitative targets (but not until 2008!).

Scorcher

In 1997, the Howard government came away from the Kyoto negotiations on climate change with a double triumph. First, despite opposition from many green groups and European governments, the resulting Kyoto Protocol relied primarily on the market-based policy of ‘cap-and-trade’ under which rights to emit carbon dioxide and other greenhouse gases would be limited in total quantity, and tradeable between users and countries. This idea, pioneered in the United States, contrasted sharply with the policy of direct ‘command-and-control’ over individuals sources of emissions seen by many in the green movement as the only acceptable way of controlling pollution.

The case for emissions trading, pushed strongly by the Australian and US delegations rests on a simple economic argument. With a trading system, there is an incentive to find the lowest-cost way of reducing or offsetting emissions. The SO2 scheme in the US is estimated to have reduced compliance costs by 75 per cent. This is an impressive demonstration of the power of market mechanisms.

The second triumph came at the bargaining table, when targets for emissions reductions were being negotiated. By pursuing hardline bargaining tactics Australia secured the most generous emissions target of any developed country, allowing an increase of 8 per cent over 1990 levels when most other countries committed to reductions of 6 to 8 per cent. Even more strikingly, the agreement allowed Australia to meet its target entirely by restrictions on land clearing which were on the way in any case.

Ten years later, though, the government is floundering on the issue. Although the Kyoto Protocol came into force in 2005, Australia has yet to ratify it. And on the core issue of emissions trading the government has literally turned 360 degrees, rejecting the idea for years before scrambling to regain its original position under pressure from the Labor opposition, the states and much of the business sector.

The report of the Task Force on Emissions Trading provides the government with a last chance to deal itself back into the game. But the fact remains that, having started as one of the early advocates of emissions trading, the government now finds itself in the position of a last-minute, and rather dubious, convert.

How did all this come to pass? In large measure, it can be explained by the presence, within the Australian policy elite of an influential group of politicians, bureaucrats, business leaders, think tanks and commentators determined to stop any significant action that would reduce CO2 emissions. In his new book, Scorcher: The Dirty Politics of Climate Change Clive Hamilton calls this group the ‘greenhouse mafia’ (a name he says they use themselves) and gives a critical description of its members and activities.

The first official reference to global warming turned up by Hamilton’s research is a 1981 memo from the Office of National Assessments (interestingly, addressed to a Mr J. Howard). Concern over the issue developed gradually during the 1980s, culminating in the 1992 Earth Summit, which led to the establishment of the Intergovernmental Panel on Climate Change (IPCC) a body established to assess the huge, and rapidly growing, body of research on the science of climate change, the likely impacts on societies, economies and ecosystems, and the possibilities for mitigation and adaptation. At this stage, the Hawke government had announced a commitment to the ‘Toronto targets’ calling for a 20 per cent reduction in emissions, but had taken no action to achieve this goal beyond the provision of research funding and some voluntary initiatives.

As the Howard government came into office, the pressure was mounting to match words with actions. The government’s main concern was with the Kyoto negotiations. As Hamilton shows, the government’s negotiating team, led by Meg McDonald of DFAT, treated Kyoto as a typical trade agreement, where the objective was to get as much, and give as little, as possible, an objective that was pursued with remarkable success.

It is after 1997 that the story becomes interesting. With the Kyoto agreement signed, a substantial section of the business community wanted to take advantage of Australia’s favourable position to participate in global emissions trading markets, take a lead in energy conservation and develop renewable sources of energy such as wind power. This group included much of the financial sector, the gas industry (energy from natural gas is less carbon-intensive than from coal) and even substantial elements of the energy sector, including BP, which had broken from the main international anti-Kyoto organisation, the Global Climate Coalition (after losing more members, the Coalition shut up shop around 2000).

A smaller, but more determined group, centred on the coal-mining and aluminium industries, emerged in opposition. Despite having congratulated the government on its success at Kyoto, this group rapidly emerged as vociferous opponents of the deal. Although they were motivated by concerns about the political and economic consequences of Kyoto, their chosen battleground was the science of climate change, which, they argued, was at best uncertain but more commonly the product of a deliberate conspiracy to deceive the public.

The most prominent public face of the greenhouse mafia has been the Lavoisier Group, which described Kyoto as ‘the greatest threat to our sovereignty since the Japanese Fleet entered the Coral Sea in 1942’ Hamilton notes, the Lavoisier Group was one of a string or similar organisations, the first being the HR Nicholls society, set up by then CEO of Western Mining Corporation, Hugh Morgan, and his executive officer Ray Evans.

The public activity of the Lavoisier Group was matched by effective behind-the-scenes organization by bureaucrats, lobby groups and individual politicians. Hamilton notes that many of the most effective lobbyists, such as Dick Wells of the Minerals Council, are former senior bureaucrats.

All of this activity was cheered on by a substantial section of the commentariat, and particularly The Australian newspaper. In much of the Australian media, there was a striking inconsistency between news coverage, which generally reported the findings of mainstream science, and the opinion pages which accepting the framing of the issue as a political dispute in which balance required equal time for both sides. The only real exception to this was The Australian, where both the news and opinion pages were dominated by views hostile to mainstream science.

Responding to this the Howard government adopted a set of positions that seemed to work well for some time, despite their inherent contradictions. The government officially accepted the science of climate change, but gave key portfolios to vocal skeptics. While refusing to ratify Kyoto, it promised to meet the Kyoto targets for emissions reduction. And having been among the leading proponents of market-based policies it set up the AP6 group, based on the claim that purely technological solutions were needed.

Hamilton’s final two chapters deal with the collapse of the government’s position over the last few years. In this period, the public debate was reshaped by the success of Al Gore’s film An Inconvenient Research, the release of the Stern Review of the economics of climate change, and in 2007, the progressive release of the Fourth Assessment Report of the IPCC. Over the same period, the occurrence of record temperatures, catastrophic bushfires and one of the worst droughts in history convinced ordinary Australians that the time for delay was past.

In retrospect this seems inevitable. By the time of the IPCC Third Assessment Report, released in 2001, the science was already fairly clear-cut. The fact that the earth was warming was well-established, and remaining concerns such as the discrepancy between surface and satellite measurements were approaching resolution (both data sets now show similar rates of warming). The evidence that human activity was responsible for the observed warming was not yet conclusive, but it was strong and getting steadily stronger as alternative hypotheses fell by the wayside. The Third Report concluded that the probability of human-caused global warming was between 66 and 90 per cent. The recently-released Fourth Report gave a probability of at least 90 per cent.

Of course, 90 per cent isn’t perfect certainty, but it is comparable to the scientific evidence we have to go on, for example, when we decide whether to allow the introduction of new drugs or genetically modified crops. In these circumstances, as many critics of extreme environmentalism have pointed out, insistence on absolute certainty is a recipe for paralysis.

Moreover, the remaining uncertainty surrounding global warming does not help a case for inaction. The core projections put forward by the IPCC exclude the small probability that warming will turn out to be the product of a natural cycle, but they also exclude various low-probability catastrophic scenarios, involving runaway feedbacks, collapse of the Greenland ice sheet and so on.

The most likely outcome of improvements in scientific knowledge is an increase in the confidence with which the mainstream IPCC model is held. But even if that does not happen, the news is just as likely to be bad as good.

So it seems that the critics of Kyoto, by focusing their attacks on the science of climate change, were backing an almost-certain loser in the long run. The obvious question is, Why?

For most of the book, Hamilton presents the methods, motives and successes of the greenhouse mafia as an example of effective delaying tactics, undertaken by well-organised interest groups particularly in the coal and aluminium industries. He sees the government’s stance as one of protecting short-term economic interests at the expense of our long-term national interest, not to mention those of the world as a whole.

This is certainly part of the story, But this analysis seems unsatisfactory for a number of reasons. Energy companies in Europe and elsewhere have had few problems in adapting to the new environment. Indeed, as Hamilton notes the intransigence of the Australian branches of Alcoa and Rio Tinto contrasts sharply with the positions of their corporate parents. And even Western Mining seems to have decided in the end that the campaigning fervour of Morgan and Evans was a distraction from their core business rather than a political asset.

But the most striking problem with the interest group explanation is its failure to account for the extraordinary ferocity of the climate change debate. As Hamilton notes at a couple of points in the argument, the rancour of the greenhouse mafia reflects a deep-seated hostility to environmentalism that goes beyond any calculation of corporate interests, or even the interests of the market system.

In fact, the dispute is not so much ideological as tribal. For the mining executives who lead the group, the retired engineers who typify the rank-and-file, and the culture warriors who push its case in the Murdoch press, greens or “enviros� are natural enemies. If they wear suits, turn up at business meetings and use the rhetoric of the market, that only makes them more subtle and dangerous threats.

And those who speak with the authority of science are disliked and distrusted even more. The most prominent recent statement from the greenhouse mafia, Ray Evans’ Nine Lies About Global Warming asserts that ‘If the IPCC were a commercial corporation operating in Australia, its directors would now be facing criminal charges and the prospect of going to jail’. Even normally sober commentators like Alan Wood, economics editor of The Australian, make free use of use of terms like ‘hoax’ or ‘fraud’ to discuss the main body of climate science supporting global warming theory.

Green activists and scientists alike are presented, in the rhetoric of the greenhouse mafia, as irreconcilable enemies of markets and freedom. Yet, Kyoto did not mark a triumph of anti-capitalist greens. Rather it signified the acceptance by the mainstream environmental movement that capitalism is here to stay, and that catastrophic climate change can only be prevented through the use of market mechanisms. Faced with a choice between pursuing fundamental social change and saving the planet, environmentalists have opted for the latter.

Serious advocates of capitalism have long recognised this. At meetings like the annual Davos conference and its Australian offshoot, the need to act on global warming is taken as given. The central issue is not the political fight over Kyoto and alternative proposals, but the opportunities for individual businesses and the business sector as a whole to take a leading role in the process.

Overall, the story told by Scorcher is one of a series of tactical victories for the greenhouse mafia leading to what appears certain to be a massive strategic defeat. The end of the Bush Administration will almost certainly signal the abandonment of the policies of denial and delay for which the ‘skeptics’ have fought so hard. The adoption of some form of emissions trading is inevitable, and the resulting political dynamic will ensure the adoption of long-term targets requiring large reductions in emissions. The only outcome of a decade of delaying tactics will be to increase the costs of the inevitable adjustment.

With its early advocacy of market-based policy, the Howard government, and the political right in Australia, could now be challenging the lock on environmental issues held by the left. Instead, having painted themselves into a corner by denying the plain evidence of science, they now find themselves scrambling to regain credibility and relevance.

Clive Hamilton, Scorcher: The Dirty Politics of Climate Change, Black Inc. Agenda, Melbourne 2007, 266+vi pp.

Categories: Economic policy, Environment Tags:
  1. derrida derider
    June 3rd, 2007 at 19:28 | #1

    I wonder how the Lavoisier Group founders feel about the prospect of their grandchildren spitting on their grave?

  2. June 3rd, 2007 at 19:53 | #2

    let’s hope they can raise the spit.

  3. Ernestine Gross
    June 3rd, 2007 at 21:14 | #3

    I see, the OZ now defines the notion of ‘a free market’ as a social system where a regulatory body is required to set quantity constraints. Very strange.

  4. Ian Gould
    June 3rd, 2007 at 21:16 | #4

    JQ: “Meanwhile, I notice lots of others making an inelegant retreat from Lavoisier-style scientific delusionism to the long-prepared Lomborg line that it will all cost too much. But, thanks to the Stern Review, the recent statement by Australian economist the forthcoming IPCC report and even the PM’s Task Group, that line has already been outflanked. We’re down to arguing about details and numbers now, an argument where rightwing bloviators have little to contribute.”

    I think you’re missing a step John.

    “whatever policy I want to push will be promoted on the basis of its putative greenhouse benefits.”

    Example: “Sure a nuclear strike on Tehran could result in a temporary interruption to Iranian oil supplies but this would just accelerate the search for alternative fuel sources.”

  5. mugwump
    June 3rd, 2007 at 21:52 | #5

    “As Hamilton notes at a couple of points in the argument, the rancour of the greenhouse mafia reflects a deep-seated hostility to environmentalism..”

    Hamilton only has to look at himself to understand why. A wealthy, globe-trotting, high-living “environmentalist” who writes a book like “Affluenza” telling the rest of us proles why our aspirations are inferior to his.

    “And those who speak with the authority of science are disliked and distrusted even more.”

    Not true. Those who tell lies or bend the truth with the authority of science are disliked or distrusted even more, as they should be. Has Robin Williams (ABC) resiled from his claim that sea-levels could rise by more than 100m this century? Flannery from his 20m claim? Those who peddle alarmism in the guise of science — a vast majority of environmentalists — deserve nothing but loathing.

    “it [Kyoto] signified the acceptance by the mainstream environmental movement that capitalism is here to stay”

    Where is the evidence for this claim? I have never heard or read any environmentalist speak out in favour of capitalism and freedom.

    It would go a heck of a long way towards generating trust if the environmentalists/bureaucrats came out and said

    “Of course we love capitalism. It clearly beats socialism or any other political system when it comes to raising overall welfare, preventing tyranny, and maintaining freedom. Our goal is to find a solution to the CO2 emission problem that does least injury to global capitalism…”

  6. jstrocch
    June 4th, 2007 at 01:02 | #6

    Pr Q says:

    With its early advocacy of market-based policy, the Howard government, and the political right in Australia, could now be challenging the lock on environmental issues held by the left. Instead, having painted themselves into a corner by denying the plain evidence of science, they now find themselves scrambling to regain credibility and relevance.

    From both a policy and politcal perspective it is just insane the way Aus’s self-professed conservatives have abandoned conservation.

  7. BilB
    June 4th, 2007 at 05:32 | #7

    I’ve just had to suffer through hearing on the BBC another Howard diatribe about AUSTRALIA leading the world on global warming action. Leading nationally, globally and in the Pacific region. Who the hell does he think that he is convincing. This person is a national embarrassment.

  8. BilB
    June 4th, 2007 at 05:35 | #8

    I use the word “diatribe” because that is how I receive anything that Howard says, simply because his opinions are so afronting.

  9. BilB
    June 4th, 2007 at 06:24 | #9

    Further on methane.

    The real scary stuff is in the methyl hydrates stored in icey deposits on the arctic sea floor (and other places). Scientific American has reported on these deopsits a number of times and Arctic ice core examinations have verified that when sea temperatures rise beyond an unknown point these deposits “boil” off releasing mammoth quantities of methane into the atmosphere. This causes a dramatic rise in atmospheric temperatures over a very short time span. If Howard could even vaguely understand the implications of this he would not be delaying as he is.

    some starting information
    http://marine.usgs.gov/fact-sheets/gas-hydrates/title.html

    a waking conversation
    http://www2b.abc.net.au/science/k2/stn/archives/archive88/newposts/1518/topic1518577.shtm

    This amount of methane in the atmosphere would take a very long time to be depleted by ozone erosion and could very well destroy the ozone layer in the process.

  10. Jill Rush
    June 4th, 2007 at 12:17 | #10

    The problem with the battle to get an emission’s trading scheme is that so much energy is being diverted into this argument rather than in establishing this and working on the next stage.

    It is inevitable that trading will eventuate whether through the states or by business by-passing the government. The government talking of aspirational goals does nothing to inspire confidence that it is anything other than a pre election carrot which will become compost after the election.

  11. June 4th, 2007 at 12:39 | #11

    I will admit that in 1997 I saw the outcome of the Kyoto negotiations (in terms of using a market mechanism) as a triumph of good sense because centralised “command-and-control” would have been a complete wrecking ball for the worlds economies. However it now seems that John Quiggin and The Australian have joined forces to redefine free markets and capitalism. Capitalism now apparently means central planning. Newspeak as we speak.

    Anybody that thinks that a centrally managed global initiative along the lines of Kyoto will not morph over 50 years is denying a credible slippery slope. Take a look at what the IMF was setup to do versus what it actually does. For that matter take a look at the UN itself.

    It is pretty clear that John Howard will lose the next election. It is also pretty clear that emission trading will come to be. It will not mean the end of the world but lets not pretend that it means we can look forward to the rise of capitalism and free markets.

  12. BilB
    June 4th, 2007 at 13:51 | #12

    Jill and Terge,

    I beg to differ with both of you on emissions trading. Please explain what is being traded for what, and how long can that trade arrangement last.

    Emissions trading may well start but it cannot endure for very long at all as, at the moment, the only tradeable currently available compensator, the green environment, is already outstripped by CO2 output several fold, and the glorious future hope of the trade enthusiasts, carbon sequestration, is not yet ready, if it ever will be.

    Is there something else that people can trade that I do not know about???

  13. BilB
    June 4th, 2007 at 14:07 | #13

    And digging a little bit deeper if the answer is that the tradeable carbon compensating commodity is the green environment, forrests, etc. then how are the oceans and seas going to be accounted for (the top 10 centimetres of the ocean absorbing between half and two thirds of the earths absorbed CO2). Do sea bordered countries get to claim their territorial waters worth but no-one can claim for international waters, or will one be able to sell the CO2 absorbing capacity of open ocean that one is able to control some how? Or am I way off the track here?

  14. June 4th, 2007 at 14:40 | #14

    the top 10 centimetres of the ocean absorbing between half and two thirds of the earths absorbed CO2

    Those that want to flood Lake Eyre will be heartened by this news. They can now add CO2 sequestration to the benefits side of the equation. ;-)

  15. BilB
    June 4th, 2007 at 15:40 | #15

    I miss stated that slightly, Terge. The top 10 centimetres of the ocean, which is teaming with life, produces half to two thirds of the earths replenished oxygen because the sea life converts dissolved CO2 via photosynthesis into the oxygen. The deep ocean absorbs CO2 in a one way process some of which becomes absorbed in the sea floor sediments. My comment is relating to the active cycle CO2. So as far as Lake Ayre is concerned which I imagine comes presupplied with a heavy dose of salt, flooding is likely to create a dead lake. No significant photosynthesizing life. No cigar there.

  16. June 4th, 2007 at 20:46 | #16

    The reasons JQ gives for believing Kyoto will give a net benefit are Stern, IPCC & PMs taskgroup. The latter two don’t provide evidence of a net benefit from action and Stern was widely criticised in by economists for using a 0.1% time value of money (among other reasons). Most economic analysis of Kyoto or other anti-co2 policies have shown a clear net cost. That is a bad thing.

    Unless you’re an “economic denialist”… :)

    The debate isn’t over simply because JQ declares it over twice a week for the past 2 years. And it’s not over because the Liberals are following opinion polls. I agree that the AGW activists are clearly controlling the political agenda, but that doesn’t make them correct.

  17. Ernestine Gross
    June 4th, 2007 at 22:24 | #17

    Pollution, of which C02 is one example, is called a ‘negative externality’ in economics. One of the clearest definitions of the notion of a ‘negative externality’ I’ve come across is by Blad and Keiding. They characterise a negative externality as a reduction in the set of possible choices for at least one individuals (possibly all individuals).

    Money doesn’t figure in this definition at all. However, it is compatible, in a precise way, with the findings of natural scientists.

    I am amazed by the persistence of some people to the request ‘accurate’ calcualtions of ‘net benefits’. It can’t be done ‘accurately’. Full stop. What can be done is to use the best availble conceptual framework and numerical methods with the aim of preventing ‘big surprises’ by means of managing adjustment processes. This, I should think, is much better than peddling empty phrases such as “anti-CO2 policies”.

  18. Ian Gould
    June 4th, 2007 at 22:32 | #18

    John Humphrey,

    Warwick McKibbin’s own modelling of the effects of Kyoto ratification on the Australian economy showed a positive impact in the short and medium term and a small negative impact in the long term that was probably within the margin of error of the modelling exercise.

  19. jquiggin
    June 4th, 2007 at 22:35 | #19

    “Stern was widely criticised in by economists for using a 0.1% time value of money”

    Which merely shows that many people who call themselves economists either can’t read or don’t understand a concept as basic as the diminishing marginal utility of income.

    Stern’s 0.1 discount rate applied to utility not income.

  20. Ian Gould
    June 4th, 2007 at 22:38 | #20

    Bilb: “Emissions trading may well start but it cannot endure for very long at all as, at the moment, the only tradeable currently available compensator, the green environment, is already outstripped by CO2 output several fold, and the glorious future hope of the trade enthusiasts, carbon sequestration, is not yet ready, if it ever will be.”

    The point bilb is once you have the emissions permit market working you progressively reduce the number of permits on issue, forcing reductions in emissions. The trading mechanism means that the people who get the greastest economic return from emitting GHGs will pay others for their permits.

  21. June 5th, 2007 at 00:26 | #21

    JQ — I (and other critics) are fully aware that Stern adjusted for the decreasing marginal utility of money. That doesn’t change the fact that there is also a separate concept called the time value of money.

    This is made up of (1) real time preference; and (2) opportunity cost. The sum of these two effects on time preference (abstracting from decreasing marginal utility of money) is most certainly not 0.1% per year.

    The debate about the existence (or otherwise) of a net benefit from Kyoto (or other similar measures) is most certainly not over.

  22. BilB
    June 5th, 2007 at 03:43 | #22

    Ian G, I sure as hell hope that you have missunderstood what is being proposed, because what you have just described there is a carbon rock concert complete with carbon scalpers and a huge number of people who missed out on the show. I suppose that what you are trying to say is that the permits are bought for $20 per tonne of emissions and can be sold if they are not going to be used. Well that is a tax. So call it a tax.

    The real issue is how is this going to promote carbon useage reductions. We have already seen that carbon fuels such as petrol can double in price over a short period and have minimal impact on consumption. Electricity prices could quadruple and it would have a minimal impact on consumption. There would be a small hand full of industries that would disappear, aluminium being one, but generally Australian industry survivors do not compete with anyone externally very directly (Asian competition has knocked out most vulnerable industries) they only compete internally and as long as everyone is facing the same increase then everyone is on the same competetive footing. Ground zero.

    So it is really all about signals from government. It is the government who is going to collect the $20 per tonne for the permits until there is an alternative carbon offset supplier. What are they going to do with the carbon dollars. Howard has demonstrated that his government is fickle on renewables by one day withdrawing support for wind energy projects and the next extending that support, and all along saying that he prefers a nuclear solution that nobody wants. You will have noticed that there is not a huge rush of billionaires installing alternative energy projects in Australia. And it is entirely for that reason. There is no long term commitment. There is no certainty. It could take a very long time for the carbon market forces to set clear trends to give certaintly to energy industry investors. It is all fiddling around the edges and does nothing for the real problem. And as for the economists who have promoted this crazy scheme, when was the last time that an economist was right in advance?

  23. conrad
    June 5th, 2007 at 08:46 | #23

    “I wonder how the Lavoisier Group founders feel about the prospect of their grandchildren spitting on their grave?”

    I think this is why we need to ask 16 year olds what should be done about global warming, and not 70 year olds. Obviously the first has a lot more to lose.

  24. jquiggin
    June 5th, 2007 at 09:02 | #24

    JH, you appear to be making this up as you go along. The time value of money is a standard concept, which, in equilibrium corresponds to the interest rate. wikipedia spells it out, but you can check any source you like on this.

    If you want to invent your own terminology, feel free but then you have to reinterpret all the evidence referring to the standard terms.

  25. Ian Gould
    June 5th, 2007 at 09:35 | #25

    Bilb,

    Different companies and different industries have a different marginal cost of carbon abatement.

    The point of a trading scheme is to allow the ones with the highest cost of internal reductions to pay other people to reduce emissions by more than they would otherwise.

  26. Ian Gould
    June 5th, 2007 at 09:40 | #26

    As to the claim that the aluminium industry would be “wiped out”, check both the MEGABARE and McKibbin modelling of Kyoto implementation which both show that employment in the aluminium industry would continue to rise, just at a slower rate than in the BAS scenarios.

  27. BilB
    June 5th, 2007 at 13:00 | #27

    Ian G,

    You are going to have to spell all of that out a little more clearly. Are you saying that every company is going to have a customised price for their CO2 emissions, so if one company is granted a low cost for their emission credits then they can buy more credits than they need and sell them to another company which has been given a higher cost for their credits, pocketing the difference?
    I am only guessing at what “different marginal cost of carbon abatement” and “the highest cost of internal reductions” is means.

    As for the aluminium industry there is no modelling done that can have any meaning because there is no trading system and from this vantage point it is impossible to accurately determine what will happen. From my observations of the aluminium industry (Tiwai Point) and their reaction to electricity price variations in New Zealand there will be a huge amount of posturing going on as soon as there is the faintest glimmer of a price increase. There is always Western Papua just across the bay from the bauxite with plenty of hydro potential.

  28. Ian Gould
    June 5th, 2007 at 14:36 | #28

    Bilb,

    Permits will be issued to companies based on their current emissions. If we go down the McKibbin path they may be sold to industry. If we following Kyoto, they’ll probably be issued for free at least initially.

    Over time, government will either cancel/buy back some permits; reduce the amoutn of emissiosn authorised by each permit or, in the McKibbin version, increase the price for additional permits.

    Companies that want to emit more (or maintain their emissions as permits are cut) will have to buy additional permits either from other companies or in the McKibbin model from the government.

    Companies that can cut their own emissions for less than the market price will be the sellers of permits.

    Up to this point, because the cost of emissions has been minimal, companies haven’t designed their production processes to minimise emissions.

    Wjhen thye can make money from it you’ll see companies cutting their emissions in any number of ways from turning off lights overnight to replacing electric heating with natural gas.

    The aluminium industry has been screaming and posturing since at least 1995. They’ll continue to do so. But to be blunt, Alcoa has a multi-billion dollar sunk investment in Gladstone. They can’t pick up that investment and move it offshore. At worst, they’ll put their new investment elsewhere.

  29. Ernestine Gross
    June 5th, 2007 at 15:12 | #29

    “Wjhen thye can make money from it you’ll see companies cutting their emissions….”

    I read this to mean, ‘when they can reduce costs by reducing emission ……….

    It seems to me, ‘making money’ is possible only for traders in secondary markets (eg futures)

  30. Ian Gould
    June 5th, 2007 at 19:33 | #30

    Ernestine, if they can resell their permits, they can turn a profit, especially if the initial allocation of permits is gratis.

  31. BilB
    June 6th, 2007 at 06:32 | #31

    Ian G,

    That proposal has the whole Murray Darling feeling about it and would be only a fraction as successful as that failure. For starters giving away free permits is a no win position. Those permit holders get a free ride and have no incentive to reduce their emissions. The guy next door who had to pay for his permit is going to be completely annoyed, and the guy who was denied a permit is going to release CO2 with out telling anybody, simply because he has no other choice.

    That doesn’t make sense at all. I doubt that a government that argued against a sales tax structure in favour of a flat GST would have the moral position to come up with a bitsy programme as described.

  32. BilB
    June 6th, 2007 at 09:04 | #32

    after thought
    Morals and government these days appear to be mutually exclusive.

  33. Ernestine Gross
    June 6th, 2007 at 10:49 | #33

    Ian, there is a serious incentive compatibility problem with an ‘emission trading’ scheme as described by you. (The problem is akin to a problem with many options in performance scheme for CEOs. At best the scheme works when it is redundant – ie people act on moral grounds in the appropriate way – and at worst it is counter-productive – ie the opposite to what is desired is achieved.)

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