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Reviewing the Stern Review

January 24th, 2008

The Productivity Commission has just released a paper called The Stern Review: an assessment of its methodology (the full paper is a 1.3Mb PDF). It’s very good, I think, giving a balanced presentation to the Review, its supporters and critics and those who fit into neither category. Here’s the summary:

The Productivity Commission today released a staff working paper titled The Stern Review: an assessment of its methodology. This technical paper contains a detailed examination of key elements of the Review’s analytical approach. Originally prepared as an internal research memorandum following release of the Stern Review’s report, the paper is being made more widely available given its ongoing relevance in light of Australia’s Garnaut Review.

The staff paper finds that the Stern Review made some important analytical advances. The Review sought to move beyond analysis based on the mean expected outcome to one that incorporates low probability, but potentially catastrophic, events at the tail of probability distributions. The Review also attempted a more comprehensive coverage of damage costs than most previous studies.

The paper also finds that value judgements and ethical perspectives in key parts of the Stern Review’s analysis led to estimates of future economic damages being substantially higher, and abatement costs lower, than most previous studies. The paper notes that the report could usefully have included more sensitivity analysis to highlight to decisionmakers the consequences of alternative assumptions or judgements.

Looking at the way debate has evolved both within and outside the economics profession, a few points have emerged

* No-one credible now disputes the view that a well-designed set of policies could greatly reduce CO2 emissions at very low cost. The Stern Review is marginally lower than average at 1 per cent of GDP, but it would be hard to find any serious analyst claiming costs much higher than 3 per cent. These are once off changes in levels corresponding to a once-off loss of between a few months and one year of improvements in material living standards. It’s intuitively hard to see how risking the worst case outcomes of climate change to avoid such a small economic cost could possibly be justified.

* While there is still plenty of dispute about the economic costs of doing nothing, relative to stabilisation, the median estimate has been revised sharply upwards following the Stern Review. On the issue of discount rates, the (still controversial) choice of a low rate by the Stern Review pointed up the dependence of earlier estimates on rates that now look implausibly high. And on the treatment of risk and damage to the natural environment, Stern’s look at these issues points up how badly neglected they were in the past. If anything, subsequent discussion has suggested that Stern was too conservative.

The speed with which the economic debate has evolved has left the political advocates of doing little or nothing stranded. Most of them had no qualifications in climate science, and embraced delusionist arguments against the science because they were opposed on political, economic or culture-war grounds to the kinds of policies needed to stabilise climate. Many of them clearly envisaged a campaign in which they would fight as long as possible on the science before turning to the economics. But the speed of change has left them flatfooted. Rather than being able to make a graceful retreat to a prepared position, they are trying to argue against what is now the mainstream economics position, while still being lumbered with their now-discredited attacks on mainstream science.

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  1. January 27th, 2008 at 16:07 | #1

    STT wrote:

    I can see your fundamental point that in the future getting a tonne of iron ore out of the ground will take more energy than it does now (if our mining technology doesn’t improve, which it will). On top of that, energy will be more expensive as we suck out the last of the easily accessible oil.

    Two problems here:

    1. Eventually the energy required to extract a fossil fuel resource will exceed the energy returned by burning it. i.e. the EROEI is less than 1. We are already close to that point with oil sands.

    2. When we suck out the last of easily accessible oil we will inevitably move to sources of liquid fuel that require vastly more energy (and therefore carbon emissions) to produce, thus accelerating the growth in CO2 emissions.

    Its all very nice for the techno-fix optimists here to spray around links about solar, wind etc, but its meaningless unless there is real policy in place to mandate the use of these technologies (whether it be regulation, taxes or emissions trading).

    I am yet to see single politician anywhere in the world do what’s needed: Make fossil fuels more expensive.

    When Kevin07 announces he’s going to double the fuel excise and triple electricity prices I’ll reconsider my position, but until then the optimists are kidding themselves.

  2. Ian Gould
    January 27th, 2008 at 16:48 | #2

    “Ian, this isn’t correct. No off-peak power gets wasted. It’s cheap, sure, but if there’s no demand for it, it doesn’t get generated.”

    Actually SEQEB effectively gives away power to local councils amongst others, or they used to anyway.

    About five years back I looked at the economics of solar-powered street lights. Even at wholesale rates, the solar-powered lights were competitive with the normal wholesale rates. But SEQEB was charging the councils something like $20 per stanchion per year including maintenance and replacement costs.

    It’s also grossly inefficient to run turbines under minimum load which happens overnight at many Australian coal-fired power plants.

    “This means that the greenhouse intensity of an off-peak charged hybrid will be about the same as an ordinary petrol-fuelled vehicle.”

    I think you’re mistaken. Thanks to regenerative braking most hybrids use substantially less power than equivalent conventional vehicles. On top of that, the thermal efficiency of the average coal-powered power plant is significantly higher than that of most internal combustion engines.

    Admittedly you’d have offsetting transmission losses in the electricity grid but I suspect the overall carbon emissions for plug-in hybrids would be much lower.

  3. observa
    January 27th, 2008 at 16:59 | #3

    “Observa, ever stop to wonder what the economic value of that desal plant water will be if the Murray actually dries up entirely?”
    The only reason it was drying up is because the water in it was priced too low for a number of years, bearing in mind 90% of it was used for agriculture. If its long term average flows are dropping to 10% of its past average flows(something we’ve just measured as a result of this drought) then I’m sure we’ll have plenty of lead time to build that desal plant. There’s no shortage of water, just like there’s no shortage of steak in the butcher shops. The world’s full of water, about 80% of the earth’s surface as I recall. It’s just a matter of the price we’re prepared to pay for what quality and quantity. I notice shelves full of bottled water every time I shop too.

  4. Ian Gould
    January 27th, 2008 at 17:12 | #4

    Yes, if everyone else behaving virtuously we wouldn’t need locks either, think how much money that would save.

  5. SJ
    January 27th, 2008 at 18:27 | #5

    Ian Gould Says:

    Actually SEQEB effectively gives away power to local councils amongst others, or they used to anyway.

    As I said, it’s cheap, but that doesn’t mean that it would otherwise be wasted. Electricity isn’t like the last box of tomatoes in the fruit market at the end of the day. There’s no “stock” of electricity that’s going to otherwise end up on a landfill somewhere.

    I think you’re mistaken. Thanks to regenerative braking most hybrids use substantially less power than equivalent conventional vehicles. On top of that, the thermal efficiency of the average coal-powered power plant is significantly higher than that of most internal combustion engines.

    Let’s try some numbers, then, and see what happens. Most of the cites are from the U.S., so we’ll have to deal in miles and gallons.

    A Prius running on electricity only at 70 mph uses about 250 Wh/mile.

    A Prius on highway cycle gets about 45 mpg. Note that this refers to US gallons (3.8 L), and not imperial gallons (4.55 L). The link may not take you directly to the page, the site uses cookies.

    Now, carbon intensities for Oz coal fired stations is as follows:

    NSW – 923.8 kg/MWh = 9.238E-4 kg/Wh
    Vic – 1299.1 kg/MWh = 1.2991E-3 kg/Wh
    Qld – 904.3 kg/MWh = 9.043E-4 kg/Wh

    NSW is in the middle, i.e., Qld is less but Vic is more, so we’ll take NSW as reasonable overall estimate.

    The figures above are “sent-out”, i.e. at the power station gate. We need to allow for 10% losses between the power station and your home, and another 20% losses in the charger and battery.

    That gives a figure for NSW of 9.238E-4 / 0.9 / 0.8 = 1.283E-3 kg/Wh.

    So to travel a mile in the Prius using electricity alone would give us 1.283E-3 kg/Wh x 250 Wh/mile = 0.321 kg/mile.

    The hybrid Prius gets 45 mpg, so it uses 1/45th of a (US) gallon to travel a mile. Burning one gallon releases about 8.8 kg of CO2. 8.8 kg/gallon / 45 miles/gallon = 0.2 kg/mile.

    This means that “topping up” a Prius with off-peak electricity increases its greenhouse emissions by about 50%.

    The comparison wouldn’t be as bad if we compared say, an all petrol RAV4 with the RAV4 EV. Then the emissions would be about the same.

    Also note that the greenhouse intensities of the Oz generators above are average figures, not off-peak, and as you say, their efficiency is lower during the off-peak. If we allow for this, it will only serve to make the off-peak top-up look worse.

  6. SJ
    January 27th, 2008 at 18:42 | #6

    Ian, something in my reply has triggered the spam filter.

    John, if you’re watching, could you help out please?

  7. January 27th, 2008 at 19:45 | #7

    This means that the greenhouse intensity of an off-peak charged hybrid will be about the same as an ordinary petrol-fuelled vehicle.

    Ummm … you don’t plug in and charge hybrids, the currently available ones anyway. This is only relevant for EVs or PHEVs.

    On top of that, the thermal efficiency of the average coal-powered power plant is significantly higher than that of most internal combustion engines.

    Off the top of my head the thermal efficiency of state-of-the-art coal power is ~35%. Transmissions losses about 7%. Electric motors are about 90% efficient but the battery charge cycle is also about 90% efficient.

    Petrol engines are around 25% efficient (diesel about 35% efficient) but to compare well-to-wheel efficiency you’d need to include the drilling, refining and transportation in your calculations. Similarly for coal powered electricity you need to include mining and transportation.

    Tesla Motors has a good comparison here and here but with the electricity generated with ultra efficient combined-cycle gas not with dirty old coal. If you swap the 60% efficient gas generation Tesla uses in its calculations for the 30% efficiency typical of Aussie coal power, the Tesla EV has roughly the same well-to-wheel efficiency of a good diesel.

    Whoops! Techno-fix fails again.

  8. SJ
    January 27th, 2008 at 20:03 | #8

    Ummm … you don’t plug in and charge hybrids, the currently available ones anyway.

    Well, duh. Ian is specifically talking about a “plug-in hybrid”.

    I’ve gone through all the numbers in the post above that’s awaiting moderation. The bottom line is that that the energy gained from plugging in the hybrid has a CO2 cost about 50% greater than the hybrid can achieve on its own using petrol.

  9. SJ
    January 27th, 2008 at 20:18 | #9

    Quick summary of the post that’s in moderation:

    Toyota hybrid gets 45 mpg. Same car at similar speed on electricity alone uses 250 Wh/mile.

    CO2 emission in hybrid mode is 0.2 kg/mile.

    Using NSW black coal as the electricity source, and assuming electricity transmission efficiency of 90%, and battery and charger efficiency of 80%,
    CO2 emission using electricity from the plug in is 0.3 kg/mile.

  10. January 27th, 2008 at 21:00 | #10

    Well, duh. Ian is specifically talking about a “plug-in hybrid�.

    Well don’t use the term “hybrid” then. What you’re really comparing is battery electric vehicles and internal combustion engines.

    Anyway, you’re basically making the same point as I am, that BEVs are no better than ICEs if the electricity is generated with coal.

    P.S. Why on earth are you using such antiquated terms as “mpg” and “mile”? kg/mile, what’s that? FYI: a Prius is officially rated at 104g/km.

  11. SJ
    January 27th, 2008 at 21:31 | #11

    Well don’t use the term “hybrid� then.

    Hmm, I thought I explained that bit.

    Anyway, you’re basically making the same point as I am

    This is another of those “well, duh” things.

    You ain’t impressing me much.

  12. Hermit
    January 28th, 2008 at 07:18 | #12

    The fallacy of smooth energy transitions and cost-benefit analysis is that in reality we will lurch from crisis to crisis. Rudd is not going to restrict coal any more than Rann will find a low carbon solution for SA. If indeed electric vehicles are not the claimed panacea then that is another business-as-usual option fallen by the wayside. We don’t want to pay more for fuel, water or electricity but we don’t want to drastically cut back either.

    Stern was undoubtedly correct in counselling us to take the pain early since much bigger pain follows delays. However he didn’t understand the realities of populist politics.

  13. observa
    January 28th, 2008 at 07:31 | #13

    “I am yet to see single politician anywhere in the world do what’s needed: Make fossil fuels more expensive.”
    Tsk, tsk, pay attention carbonsink. The good burghers of Quebec did exactly that-
    http://www.canada.com/montrealgazette/news/story.html?id=5a0e128d-c60a-4f31-a5b4-4dabd49c5bf2&k=68845
    It’s just that they forgot to tell the poor slobs how it all works. That’s essentially why the 60 percenters, smoke and mirrors turning into only one percent, want cap and trade rather than transparent carbon taxing. Then like the Ranns and his Cabinet colleagues, they can use the poor slobs dough to make their cabinets ‘carbon neutral’ and feel all warm and fuzzy inside. The only thing left to do then is make the slobs’ circuses warm and fuzzy too like Iemma is doing-
    http://www.news.com.au/adelaidenow/story/0,22606,23119372-5005962,00.html
    As for the bread part of it well umm..errr, there’s just a wee small problem, but that can be shifted out of sight and out of mind
    http://www.ft.com/cms/s/0/df52ae50-cbb1-11dc-97ff-000077b07658.html
    Gentlemen, start your green engines!

  14. observa
    January 28th, 2008 at 07:56 | #14

    Now where was I? Oh that’s right, downstream with all the poor slobs, paddling like hell to keep my head above water and assessing my situation. It seems I have to pay the dollar costs of desal water and you all the CO2 costs of subsidising cheap cotton for Chinese mills so they can sell their cheaper shirts off our backs anywhere they can and as well I have to help pay for Rann and his cabinet to be carbon neutral and help subsidise those shower heads and rainwater tanks, etc, etc. Ah well the capital gain on PrimeAg shares may help and as well I’ll grab the Feds $8550 in solar subsidy and REC credits and outlay my $15k for solar to the grid, taking advantage of Rann’s new 44c/kwhr mandatory buyback from the power utilities soon. That’s effectively a 10% risk free after tax return. That should keep the head above the poor slobs for a while. That’s green socialism for you I guess.

  15. observa
    January 28th, 2008 at 08:41 | #15

    However, today being Australia Day, I’ll do some extra Aussie dreaming about a new constitutional marketplace for us all that leads to a better mousetrap in our own backyard and the belief that if you build a better mousetrap, the world will beat a path to your door. Happy dreaming.

  16. January 28th, 2008 at 09:42 | #16

    You ain’t impressing me much.

    This coming from someone who expresses a car’s CO2 emissions in “kg/mile”. What next? British Thermal Units?

    Tsk, tsk, pay attention carbonsink. The good burghers of Quebec did exactly that

    I believe they propose similar in British Columbia. Meanwhile in the oil sands province of Alberta carbon emissions are growing exponentially and they’re deperately trying to bury the CO2.

    Honestly, what is so hard about imposing a carbon tax in return for income tax cuts? Is there a problem with reducing taxes on honest labour and raising taxes on planet-destroying emissions? Surely the boffins in Treasury can come up with something that is equitable and fiscally neutral.

  17. Ian Gould
    January 28th, 2008 at 09:55 | #17

    “Using NSW black coal as the electricity source, and assuming electricity transmission efficiency of 90%, and battery and charger efficiency of 80%,
    CO2 emission using electricity from the plug in is 0.3 kg/mile.”

    Three points:

    Firstly, as I’m sure yo urealsie, while black ocal is the largest component of the Australian fuel mix its not the only one.

    Secondly, the average emissions per kilowatt hour include the overnight emissions from power plants operating at minimum load – which is highly inefficient. Plug-in hybrids woudl effectively deliver a big chunk of load-levelling allowing those plants ot be used more effectively.

    Thirdly, the ultrabattery power pack weighs significantly less than the Prius battery pack. So weight and therefore emissions for an equivalent-sized vehicle using the ultrabattery system would be considerably lower.

  18. Ian Gould
    January 28th, 2008 at 09:58 | #18

    “The fallacy of smooth energy transitions and cost-benefit analysis is that in reality we will lurch from crisis to crisis.”

    So what’s new?

    The first oil wells were drilled in response to a shortage of whale oil for lighting.

  19. Ian Gould
    January 28th, 2008 at 10:12 | #19

    “Honestly, what is so hard about imposing a carbon tax in return for income tax cuts? Is there a problem with reducing taxes on honest labour and raising taxes on planet-destroying emissions?”

    You mean reducing taxes on the rich and increasing taxes on the people doing that “honest labour” when they come to spend their wages?

    Carbon taxes are consumption taxes, consumption taxes are regressive.

    Oh and the economic impact of carbon taxes and emissiosn trading are virtually identical.

    The difference is that emission trading is likely to be mroe efficient and have lower total social cost.

    Unless, like Observa you believe governments are innately more efficient than markets.

  20. January 28th, 2008 at 10:51 | #20

    You mean reducing taxes on the rich and increasing taxes on the people doing that “honest labour� when they come to spend their wages?

    No of course not. I mean raising taxes on something that is bad (emitting carbon) and reducing taxes on something that is good (productive labour).

    Carbon taxes are consumption taxes, consumption taxes are regressive.

    Yes I appreciate, hence the comment (that you conveniently ignored) about designing an income-to-carbon tax switch that is equitable. i.e. focus income tax cuts at the bottom end of the income scale and increase welfare payments.

    Oh and the economic impact of carbon taxes and emissiosn trading are virtually identical.

    The difference is that emission trading is likely to be mroe efficient and have lower total social cost.

    Well fine, but all evidence so far suggests that emissions trading schemes do precisely b*gger all. Frankly I don’t care if its an ETS or a carbon tax as long as its effective.

    Another point: Much as I’d like a price on carbon to be as equitable as possible, at some point lower income earners living in triple garage McMansions in far flung suburbs with zero public transport are going to have to take a hit. Their lifestyles are simply unsustainable in the long term. Either they get crushed by ever-increasing petrol and electricity prices (imposed by the market or by policy) or we provide them with decent public transport and subsidies to make their homes more energy efficient.

    I can’t see the latter happening, can you?

  21. Ian Gould
    January 28th, 2008 at 12:40 | #21

    “…lower income earners living in triple garage McMansions…’

    “Lower income people” who own three cars and a home in the suburbs?

  22. Ian Gould
    January 28th, 2008 at 14:02 | #22

    That was snarkier than I intended.

    I think I’ll just state a couple of key points:

    1. Carbon taxes and emissions trading both have the potential to have regressive effects. Careful design can minimise those effects in both cases.

    2. We are going to need to use every feasible strategy to address global warming – fixating on conservation or carbon pricing or technology exclusively is equally mistaken.

    3. While we shouldn’t be complacent, we need to recognise that we don’t need to solve the problem overnight. We can afford to spend the next couple of decades reducing emissions in the way which minimises both total cost and the cost to specific groups within society. That means, for example, that we can use existing vehicles and existing fossil-powered powerplants until the end of their economic life before replacing them.

  23. observa
    January 28th, 2008 at 14:23 | #23

    Ian, carbon cap and trade is an administrative nightmare handing out taxing powers to big carbon and mumbling all the time about auctioning permits to capture their economic rent http://www.bloomberg.com/apps/news?pid=20601085&sid=ax1AtdlxTcRs
    Consumption taxes may be somewhat regressive except that with fossil fuels it is the rich that consume the most and would be hit hardest by carbon taxing. If you don’t believe that, why the hell are MDCs being told to cut CO2 in order for LDCs to take up the slack?

  24. Ian Gould
    January 28th, 2008 at 18:19 | #24

    Observa, cap and trade in other fields such as nitrogen dioxide emissions and salinity trading has quite a good track record.

    The choice between emissions trading and a carbon tax essentially boils down to whether you want to set a firm target for emissions and let the price fluctuate or you want a fixed price and are prepared to let emissions fluctuate.

    Personally, I have no confidence in thew ability of governments to choose the correct price but some faith in the ability of scientists to tell us the safe level of future emissions.

    I actually believe it is a real positive that the EU is moving from grandfathering free emission permits to auctioning them.

    Furthermore, you’ll notice that a number of countries which have emissions trading also have carbon taxes it’s not an either-or and there is no single best one-size-fits-all solution.

  25. January 28th, 2008 at 18:47 | #25

    “Lower income people� who own three cars and a home in the suburbs?

    Well yes, the families with combined incomes below $100K, McMansion mortgaged to the hilt, credit cards maxed out, and a pair of 4WDs in the garage.

    Are you saying these people don’t exist?

  26. observa
    January 28th, 2008 at 21:35 | #26

    “The choice between emissions trading and a carbon tax essentially boils down to whether you want to set a firm target for emissions and let the price fluctuate or you want a fixed price and are prepared to let emissions fluctuate.”

    Ian, fluctate has two very different meanings here. A carbon tax is a one way price bet. Upwards and that means demand falls. OTOH cap and trade has fluctuated alright, with little or no overall reduction in overall demand, simply because the resultant price of emission caps fluctuated downwards. Basically they collapsed. Now the scientists can tell us what level of reduction we need to achieve but they are impotent as to how to get there and how quickly. Cap and trade has failed to date and now we’re told all we need is a surge. The reason it has failed so far is that at a theoretical level, you need to either cap emissions at the point of extraction of the fossil fuels(the simplest approach), or cap it at the consumer level, which is nigh on administratively impossible. That’s akin to everyone being issued with a carbon credit card cap and using it up as they consume, presumably with every good or service they buy having a CO2E price tag attached to it. Failing that impossibility, the fallback is to cap the few big industrial users, who have an incentive to game the system exactly as they have done. Now supposing successful caps could be applied logically and administratively simply at the point of extraction, there is the problem of not knowing what price increase would ultimately be thrown up to produce the desired end target. Not so with carbon taxing. The maximum theoretical price would be the total tax take needed to produce the current level of govt expenditure(well short of running huge surpluses) Now that’s a lot of readies in anyone’s book, yet that value of tax is theoretically and ultimately available to the owners of those caps over time. Who knows what economic rent they’ll ultimately be able to extract from them? They certainly don’t or anyone else, which is the great unknown information problem for auctioning caps. Our ancestors may be gobsmacked at what water(land) rights to the MD basin are worth nowadays, when they were carving up their bottomless river all those years ago. try buying some environmental flows nowadays and see what we’re up for. That’s the legacy we could leave our grandkids with cap and trade.

    You missed the obvious third option, which could develop over time as a mix of the two appraoches. Basically we emit C tonnes now and want to get to say 0.4 x C tonnes in thirty years. the govt issues C tonnes of licences right away, reducing by 2% per year for the next thirty years and cahrges an annual licence fee for same. They can be traded openly, provided the annual ongoing licence fee is paid. If not paid by the due date, the permit is cancelled and reissued on the open market under the same terms. Like a drivers licence but not tied to the original licensee and like purchasing a drivers licence the fee could rise over time. That’s the only ‘fluctuation’ as you call it, I’d like to see. That could allow most of the economic rent to be captured communally and the scientists’ hallowed targets met, without the large informational uncertainty involved in buying those caps today.

  27. SJ
    January 28th, 2008 at 22:16 | #27

    Ian, of the three points you list above about the ultra-battery, only #3 is really a point in its favor.

    You say: “Firstly, as I’m sure you realise, while black coal is the largest component of the Australian fuel mix its not the only one.

    There’s an argument to be made here that if there was a lot more wind generators connected to the system, then battery storage for cars would make good use of off-peak wind power. There was a CSIRO paper to this effect (last year? year before?) but I think he was talking about using home-installed roof top wind, could be wrong about that, can’t find the paper at the moment. I’ll dig it up later if I can. But as things stand, and as I’ve already said, when we’re talking about off-peak power, coal is the only game in town. The only other sources that generate during off-peak are those that are uncontrollable, like wind and run-of-river (i.e. non-storage) hydro. There’s bugger all of those things at the moment. Other things like wave and tidal power might add to this in the future, but at the moment they aren’t there. So the ultra-battery may be useful at some point in the future, but the use of the thing right now as an off-peak charged device would only make things worse.

    You Say:Secondly, the average emissions per kilowatt hour include the overnight emissions from power plants operating at minimum load – which is highly inefficient. Plug-in hybrids would effectively deliver a big chunk of load-levelling allowing those plants to be used more effectively.

    The average emmission figure represents a “best case”. Increasing the off-peak load on the power plants to bring the emmissions up to average does not give a greenhouse saving when the alternative, i.e. running the hybrid on petrol, would save one third more greenhouse emissions.

    carbonsink, I don’t know what your position is, and I don’t much care. Facts added into a discussion usually help, regardless of the units that they’re given in. I gave references and derivations for my 0.2 kg/mile figure, which is equivalent to 0.12 kg/km. Your statement “FYI: a Prius is officially rated at 104g/km.”, I see as pointless handwaving. It’s not supported by any references, and even if it was, would not change the conclusions I drew. You even acknowledge that you agree with my conclusions. Grow up, sport. Not everyone on the internets has a personal vendetta against you.

  28. SJ
    January 28th, 2008 at 22:20 | #28

    The italics didn’t work out properly above. The third paragraph should start like this:

    There’s an argument to be made here that if there was a lot more wind…

  29. Ian Gould
    January 28th, 2008 at 22:48 | #29

    “Well yes, the families with combined incomes below $100K, McMansion mortgaged to the hilt, credit cards maxed out, and a pair of 4WDs in the garage.

    Are you saying these people don’t exist?”

    I’m saying if you want to see lower income people next time you’re in Brisbane I’ll take you around Inala and Logan Central – or Greenslopes or Wynnum or Redcliffe . In all cases you’ll note the absence of both SUVs and McMansions.

    A combined family income of $100 K is pretty much smack on the median and certainly doesn’t make you lower income.

    Try a combined family income of $40K.

  30. Ian Gould
    January 28th, 2008 at 22:55 | #30

    “OTOH cap and trade has fluctuated alright, with little or no overall reduction in overall demand, simply because the resultant price of emission caps fluctuated downwards. Basically they collapsed.”

    Yes, the price of permits which were given away for free and which were going to expire in around six months with no penalties for emissions in excess of the permits a company held collapsed.

    Your point?

    The Europeans only started imposing penalties on companies for not having permits this calendar year – and the penalties won’t actually be imposed until next year.

    Basically, European emission trading prior to 1 January 2008 was a dry run with no practical impact – and everyone knew it.

    “Cap and trade has failed to date…”

    No, cap and trade has been used successfully for a decade or more to control pollutants other than carbon dioxide.

    “You missed the obvious third option, which could develop over time as a mix of the two appraoches. ”

    Actually no I didn’t you’ll notice I specifically said the two approaches could be combined.

  31. January 29th, 2008 at 07:28 | #31

    I’m saying if you want to see lower income people next time you’re in Brisbane I’ll take you around Inala and Logan Central – or Greenslopes or Wynnum or Redcliffe. In all cases you’ll note the absence of both SUVs and McMansions.

    Well if these people already use public transport and they don’t have huge McMansions to heat and cool then they will be less impacted by rising energy prices. If your primary concern is for low income earners, why not use the proceeds from a carbon tax to raise the tax free threshold to $40,000?

    The people I am talking about are the people formerly-known-as-the-Howard-battlers, the aspirationals, the mortgage belt … whatever you want to call them. They are going to be hit hard by any kind of price on carbon, and if we’re going to solve this problem they have to be. They need to get the message that their lifestyles are unsustainable.

    Problem is, these are the very same people that sit in the middle of the political spectrum and determine the outcome of most elections. It will take a politician of extraordinary courage to punish these people with higher petrol and electricity prices.

    Grow up, sport. Not everyone on the internets has a personal vendetta against you.

    Charming.

  32. observa
    January 29th, 2008 at 08:20 | #32

    “Yes, the price of permits which were given away for free and which were going to expire in around six months with no penalties for emissions in excess of the permits a company held collapsed.
    Your point?”
    My point is that while they’ve all been dicking about with fluctuating prices and trying to work out how on earth cap and trade is really going to work, a level playing field carbon tax would have still been up there impacting on demand and sending signals to the market to find alternatives. However like the good burghers of Quebec, cap and traders are really interested in trying to pull the wool over everyone’s eyes and buck pass price increases to big biz, pretending its not really a tax, all the while passing the defacto taxing power to big biz, because an upfront auction of caps (bearing in mind the impossible information problem)would give their sly game away immediately. Exactly as Quebecans found out quick smart with their ‘green fund’ being passed on.

  33. observa
    January 29th, 2008 at 08:32 | #33

    The other problem cap and trade will create in the marketplace, is exactly what the ACCC is banging on about with their whinge about a petrol pricing oligopoly and those 4 major oilcos currently Ian. Basically they want to see more importers(ie suppliers) of petrol from different sources. That’s a problem now, given the large investment in infrastructure any new player has to find to take a risk on. How much bigger hurdle will that be with blue sky emission caps added on? As for me I’ll be watching to see which companies scoop up the cheap upfront caps and betting on them long term on the stockmarket. The poor slobs can suit themselves.

  34. Hermit
    January 29th, 2008 at 09:52 | #34

    In defence of cap and trade it is target driven whereas carbon taxation could miss or overshoot. Thus if the cap is a 10% reduction but recession causes a 15% emissions drop the cap is no longer binding. Conversely carbon tax relief might be called for. As far as dodgy offsets (most of them probably) are concerned I’m sure Big Coal would want deductions from carbon taxes eg BlueScope Steel’s request for brownie points for heat recycling. Auctioning of permits could reduce grandfathering and create revenues for cleantech R&D grants.

    That’s all theory. I’m leaning more and more towards recession and skyrocketing energy prices making the cuts that politicians can’t.

  35. observa
    January 29th, 2008 at 13:07 | #35

    Sweet Jesus! Speak of the devil
    http://www.news.com.au/adelaidenow/story/0,22606,23125408-2682,00.html?from=public_rss
    Who let the ACTU Solo nostalgia buffs out of their cages?

  36. January 29th, 2008 at 14:27 | #36

    That’s all theory. I’m leaning more and more towards recession and skyrocketing energy prices making the cuts that politicians can’t.

    Lets face it, the politicians aren’t going to do anything that hurts their constituency, the market (and more specifically the oil market) will do that for them.

    The best we can expect from our pollies is a lot of hand wringing about petrol prices, perhaps another enquiry into petrol pricing, and if they really start to hurt in the polls, a cut in the fuel excise.

    It makes you wonder whether democracy can solve this problem.

  37. Peter Wood
    February 3rd, 2008 at 14:04 | #37

    I have had a bit of a read of Chapter 5 of the Productivity Commission’s working paper. This chapter is on aggregating costs and benefits and discusses discount rates and cost benefit analysis. The working paper has a good discussion of the limits of cost-benefit analysis. There was an important issue to do with cost-benefit analysis that the paper failed to mention. This is related to a preprint by Martin Weitzman that now is titled “On Modeling and Interpreting the Economics of Catastrophic Climate Change” http://www.economics.harvard.edu/faculty/weitzman/files/modeling.pdf

    The latest preprint is dated January 14 so the productivity commission can’t really be blamed for not discussing it. Weitzman’s paper argues that: “(1) because of deep structural uncertainty about the prospects for disastrously large temperature changes, there is a strong prima facie case that the relevant probability density function (PDF) of climate change catastrophes has an extreme tail that is heavy with probability; (2) when these heavy tails are combined with very unsure high-temperature damages, this aspect can dominate the discounting aspect in calculations of expected present discounted utility (even at empirically plausible real-world interest rates); (3) all of this translates into placing severe limitations on the reliability of policy advice coming from standard cost-benefit analysis (CBA) of climate change; (4) the conventional climate-change policy ramp is an extreme lower bound on what is reasonable rather than a best estimate of what is reasonable; (5) removing the artificial limitations on conventional CBAs that comes from excluding very-high-impact disasters is capable of shifting a more inclusive economic-welfare analysis strongly away from the gradualism of a climate-change policy ramp.”

    Parameters such as climate sensitivity have “fat tails”. Climate sensitivity is the expected increase in temperature that would arise from a doubling of greenhouse gasses. There is a small chance (something like 1%) that the climate sensitivity will be something like 10-20 degrees, which would potentially catastrophic consequences. Weitzman’s paper discusses what a “rational economic response” to these issues is and argues that “structural or deep uncertainty is potentially much more of a driving force than discounting or pure risk for cost-benefit applications of EU theory to open-ended situations with potentially unlimited exposure”.

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