Home > Economic policy, Environment > Carbon taxes vs emissions trading

Carbon taxes vs emissions trading

July 7th, 2008

Now that nearly everyone is agreed on the need for a market-based policy instrument to reduce CO2 emissions, the biggest unresolved question is whether to implement carbon taxes, tradeable emissions permits or some hybrid of the two.

I support tradeable permits, but I’ve never really spelt out my reasons for doing so. It’s important before doing this to observe that the differences between the two approaches are more limited than most of the discussion suggests. Both ensure the existence of a price for CO2 emissions and both can be set up to distribute the costs of emissions in a lot of different ways.

That said, tradeable permits have some significant advantages in my view.

I have three main reasons for preferring permits, which I will list in order of significance

First, while the natural starting point for both systems is one in which the government collects the entire implied value of emissions, either as tax revenue or as the proceeds from auctioning permits, the emissions trading system allows for (but doesn’t require) free allocation of some permits. Particularly in transitional stages when not all sources are covered, this can be used to offset unanticipated distributional consequences of the scheme, and thereby increase its political feasibility.* (OIt’s important not to issue too many free permits as was done with the first round in the EU, but some limited issue might be beneficial. I don’t want to overstress this point as much the same outcome can be achieved by paying cash compensation out of tax revenue.

Second, since we are uncertain about the elasticity of demand for emissions we are faced with a choice between allowing this uncertainty to be reflected in uncertainty about reaching the targeted level of reductions in emissions, uncertainty about the price, or some mixture of the two. Given the risk that we will fail altogether if individual countries fall short of their targets, I’d prefer some uncertainty about the price

Third, and most importantly, the ultimate solution has to be an international agreement to reduce emissions in the most cost-effective way possible. The obvious way to do this is through the creation of international markets for emissions permits. Although a full-scale global market might be some way off, regional or multiregional markets linked through something like the existing Clean Development Mechanism could be set up reasonably easily. By contrast, I can’t see how, in a world of sharply varying exchange rates, it would be possible to set up a co-ordinated global system of carbon taxes. I should say, though, that Warwick McKibbin had a piece arguing for something like this in today’s Fin. I’m going to invite him to comment on the issues, or maybe write a guest post.

Whether or not these arguments are conclusive, it seems pretty certain that emissions trading (perhaps with some modest hybrid elements) is the way we are going to go. At this point, it’s more important to push for urgent action than to get hung up in disputes about the details.

* Obviously, if you’re strongly opposed to any compensation of existing emitters and are prepared to risk total failure rather than concede on point, this is a disadvantage rather than an advantage

UpdateWarwick McKibbin has kindly responded to my invitation, and kicked off the discussion with an alternative view

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  1. July 7th, 2008 at 20:23 | #1

    John

    I agree that we need a world price for carbon. This can be achieved by picking arbitrary targets for each country and then having each country trade until a world price is reached. Problem with this is that if one major country pulls out the global market will be undermined – or in the European ETS analogy if one country over-allocates the system price will collapse (not hypothetical). The reason that attempts through history to have a single world currency has never worked is because money is the promise of a government and difference governments have different degrees of credibility. One decent shock (i.e. the Vietnam War) was enough to destroy the Dollar standard. Emission permits are promises of governments to hit a carbon target. Surely you do not believe that the credibility of a right wing US administration that might be elected after the next Democratic Administration has the same commitment to climate policy as that of Japan or Russia or India? So a global carbon market is a theoretical construct that cannot in my view survive a change of major governments over the political cycle in major countries or given the shocks that we don’t know yet will occur. We need to develop a system that will last many decades.

    The alternative is for all countries to have a domestic carbon price either from a domestic carbon tax, some other price mechanism or a hybrid carbon market along the lines that Wilcoxen and I have proposed. Coordination across these markets plus concerted attempts at technology transfer (these country specific long term permits can be used by developing countries to attract low carbon technology) Why is this important? Because we cannot risk the global effort is undermined by a large country mis-behaving and all markets collapsing. Surely you do not have blind faith that all major countries at all points in time will support a global carbon market?

    The reality is that we can reach your ideal common price by starting with a common price (novel short cut it seems). Why go through a completely unscientific process of making up targets? It is unscientific because science only gives us some guidance for a global concentration target. It does not give us the global emission reduction path (that is based on presumably economic argument of lowest cost way of achieving the concentration target). Science tells us absolutely nothing about what each country target should look like. That is a moral and economic question. Economics tells us that greenhouse reduction should occur in the lowest cost countries and that countries with a comparative advantage in producing most outputs with the least emissions should have carbon intensive industry located there. You have to admit that it is possible that in a efficient equilibrium some countries emission might rise from where we are and some must fall. That is efficient – the rest of your argument for a cap and trade with all country cutting must be a moral argument.

    How does the McKibbin Wilcoxen Hybrid work? Just like monetary policy. Countries run there own system coordinating at the global level through the UNFCCC process. A long term emission goal is negotiated for each country (take the Kyoto targets – no do not discard what we have achieved so far – a typical red herring critique of our approach by the renewal energy lobby). Then have a uniform reduction over time in emissions built in – starting well below current emissions. Create a long term permit like a long term bond with diminishing annual permits for each year reflecting this long term target. Give these long term permits to all citizens and industry within a country. Trade these in a flexible domestic market like a long term bond market. A central bank of carbon issues annual permit announcing a price for each of the next 5 years. Anyone who can’t hit their annual commitment from owning or buying long term permits or buying annual coupons from long term permits can buy an emission permits from the central bank of carbon. The price of annual permits is therefore capped and constant for 5 years. This is adjusted domestically based on a mix of science, the global policy situation or by international agreement if there is a global system. The long term permits are flexibly priced within a domestic market. No one can manipulate the short term market price. Each country runs their own market so the existing domestic institutions can run the market. Different countries will do better and worse jobs but the cross border damage is limited within countries. The world coordinates on the same annual permit price in each country if a global regime can be negotiated. Think of this as a global cap and trade market with clear rules on compliance based on no country having to bear an unfair burden of cost relative to other countries where this is measured as the carbon price reached in any year. Two targets (long term emission reduction, equalizing short term economic costs across countries) and two instruments, the short term and long term carbon price.

    How do we bring in developing countries? Developing countries can start with a long term target above current emissions and a reduction decline over time equal to the industrialized economies. The short term carbon price would be zero in those countries until they hit their constraint at which point they are in a common price world. But the long term carbon price would be positive.

    Advantages relative to global cap and trade or a Garnaut like system:
    - Prevents systemic collapse from own bad country in a global system (I assume we live in the same world)
    - Controls the short term costs so countries are willing to be involved because they have insurance on relative costs
    - countries can start individually and then build towards a common system but with control over costs while the system is built
    - Is a mechanism for commitment by China ad India but with different short term costs
    - Provides an important market in which long term risk can be hedged
    - reduces the cost of capital for capital intensive high carbon industries to by enabling them to hedge the risk of having to close a carbon intensive asset in a crisis future scenario. Yes we might have to close a coal fired power station but the loss in real asset on the balance sheet of a corporation is offset by a gain in the long term carbon asset held by that company and so we can move quickly without as much political opposition.

    The rest of the advantages particularly the focus on long term risk management can be found in the various papers on my website http://www.sensiblepolicy.com

    Thanks for the opportunity to respond.

    Warwick McKibbin

  2. BilB
    July 7th, 2008 at 20:52 | #2

    Thanks for stating your position, JQ.

    My extreme dislike for the emissions trading scenario is based on the lack of immediacy, lack of obvious purpose, its fuzzy application, its contractual lag, and its potential for fraudulence.

    Lack of immediacy: A tax can be applied to day, a trading scheme requires an extensive structural development with supporting legislation.
    Lack of obvious purpose: the emissions trading scheme theme appears to be an end in itself. Once implemented the public will have no real sense of involment or contribution. The fact that the only objective for either a tax or an ETS is to rapidly develop complete alternatives fossil and one use fuels, this primary goal appears to be lost to the logic of “reducing emissions”, a soft fuzzy outcome.
    Fuzzy application: It appears that every entity that most certainly is a key part of the problem is applying for, and appear to be getting, exemptions and/or special considerations.
    Contractural lag: Once established and installed an emissions trading scheme is essentially a long term contract with business and will become a constant drain on the political and legal system sorting out anomalies. And once determined to be inefficient will take a very long time to unravel. It is this very point that makes it very attractive to business.
    Potential for fraudulence: any tradeable concept invites those who prey upon the uninformed, and those who will defeat the purpose of the function through manipulation of process. And an internationally extended tradeability only manifies that scope for fraudulence many fold.

    I believe those who have enveloped themselves in the emissions trading process have been drawn into the labyrinth of detail and have lost their objectiveness simply through duration of their committed time.

  3. July 7th, 2008 at 21:52 | #3

    Is it just me, or will the “McKibbin Wilcoxen Hybrid” be a difficult sell in the upcoming public information campaign? :)

    I understand why ProfQ prefers to set a target rather that a price. I agree that if everyone else is going the ETS route then Australia has to as well. I concede Warwick’s point that one misbehaving country can break any global carbon market (but I have no idea why his proposal is any less susceptible to this). All valid points, but its all so bewilderingly complex, I believe its going to be next to impossible to sell to the public.

    Carbon taxes are simple, transparent and predictable, and as BilB says, they can be applied tomorrow. Everyone knows who is being paid, how much is being paid, and how it is returned to you, presumably through lower income taxes and higher welfare payments.

    The idea that you could be much better off under a carbon tax if you reduced your (fossil) energy usage should be relatively easy to sell.

  4. Hermit
    July 7th, 2008 at 22:03 | #4

    I’d like to see a worked numerical example of a hybrid system in a two country world. The standout features of a trade scheme are that it should (absent loopholes) hit the target every time and that the carbon price should lower itself in a downturn. Conversely if the price is high the economy can ‘afford it’. A feature of divisible goods auctions like the US sulphur dioxide scheme is that different bid prices may all be accepted or if not 100% buyouts and collusive bidding may prove fragile. To some extent that should reflect differing capacity to pay.

    There is no reason that the scheme should encourage questionable offsets and I believe the California CO2 system will set a limit of 10% or so. Remember that if the overall scheme is blunt the sweeteners can be tailored to specific circumstances eg brown coal gets more hi tech grants than black coal. Finally I think Mother Nature is sending us a tiny hint with the collapse of the Murray Darling so let’s not lose our nerve.

  5. BilB
    July 7th, 2008 at 22:05 | #5

    Off subject,

    Here are some electric vehicle links for you, Carbonsink.

    http://www.evalbum.com/
    http://www.aeva.asn.au/links.htm
    http://www.bev.com.au/

  6. July 7th, 2008 at 22:05 | #6

    If we chose monetary policy because it could easily be sold then we would go back to the old money targeting regime that caused problems in the 1970s because it was easy to understand. I find taxes very opaque. How long would a tax reform take in the real political situation we face. The lobbying would be non stop over time whereas my system only faces a one off allocation fight. In a carbon tax world there is no constituency to prevent future politicians from cutting taxes but if people own the long term carbon rights then they will not like politicians changing the policy and debasing the carbon market. Taxes are seen very differently to share ownership. I prefer a carbon onwership model. Do you really think that governments will recycle revenue in a sensible and transparent way? Keep the money in teh hands of those who cut emissions most.

  7. July 7th, 2008 at 22:12 | #7

    Is there also a difference in the lumpiness of government income? My (probably simplistic) understanding of emissions trading is that the government’s only source of revenue is the sale of the permits. Presumably to get the same long term cost of carbon, the price of a permit will be the present value of all expected receipts from a carbon tax.

    While theoretically there should be no difference, I’m not sure if I trust a government to spend a windfall like that as wisely as an annual carbon tax, particularly with all the talk of compensating poorer people – it might happen in the first year, but then get lost in general revenue.

    Or is there a way in which the government continues to receive revenue under emissions trading?

  8. July 7th, 2008 at 22:18 | #8

    A final point on where the world is really at. Most of the world (either measured by emissions or per capita) has no clear policy framework. Most countries are not taking on targets and timetables because they do want to commit to a system without knowing the cost. Some countries who have taken targets, Japan, NZ, Canada are not even close to hitting these because of domestic politics blocking action. It is the targets that are preventing action. That is the reality. Only the Europeans have a wide ranging ETS and it is full of holes and exemptions for political reasons. Wishful thinking will not solve this problem but it will and has delayed action. Move away from targets no matter what and allow for costs explicitly then in my view more countries will sign on to an agreement. The G8 will not go anywhere and Copenhagen will continue where we are now. Emissions are to the high end of the most pessimistic projections and we have had Kyoto for 11 years and we are in the first year of the binding period with no chance of hitting the Kyoto targets on average between 2008-2012. Why do you think that there is so much debate about what to do post 2012? Pretty strong evidence that we need to modify the approach in important ways.

  9. Steve Hamilton
    July 7th, 2008 at 22:40 | #9

    What a lovely summation of a very well resolved position. I agree entirely, and applaud the clarity of your explanation.

    Cheers

  10. BilB
    July 7th, 2008 at 23:20 | #10

    Warrick M,

    I think that you underestimate the degree of public commitment to environmental action. The public at large, I believe, realise that individuals actions do not represent the structural solution that a rapidly accelerating problem requires. Hence the NSW public rejection of a power sell off for short term budget gains. My opinion of your thrust is that you are dealing with one side of the ledger only, while suggesting that the other side will fall into place, somehow. Even the public at large see through this. The public are willing to face hardship for a visible solution, but a “market forces” solution platform does not constitute decisive action. A carbon tax is tolerable if it is to pay for a solar/alternative physical energy system. This is easy to sell. Snowey Mountains Scheme, Fuel Excise to pay for new roading, Airline ticket tax to pay for what ever that payed for, etc. A Carbon tax to pay for an alternative energy system is visible, direct, decisive, believeable and sellable. An Emissions Trading Scheme is vague, indirect, lacking purpose, and promotes skepticism (a skepticism that could well drive the entire global warming compliance framework into failure, if it hasn’t already).

    In principle to cap a problem with a trade out option is no solution at all. The assumption that a higher priced staple will some how stimulate a land slide towards options can be seen failed in the worlds oil useage. An 8 fold (numerical dollar) increase in oil price over 10 years has not even slightly dented demand, nor stimulated massive use of alternatives. The equally convenient substance, coal, is certain to follow oil in its reliance with real estate prices being the medium for adjustment as rising energy prices cut into budgets.

    Cap and trade is doomed to failure. But the time that will be lost to the point of realisation will be a disasterous loss of opportunity that will make the Howard years seem environmentally productive by comparison.

    I grieve that while economists stimulate their intellects with the mechanisms for trade in an entirely new frontier, the entire purpose is lost.

    In my opinion.

  11. observa
    July 7th, 2008 at 23:36 | #11

    I know where you’re coming from Warwick and can see much merit in what you advocate, but that’s the ETS fan’s problem now. The nitty gritty is a far cry from the glossy ad campaign and what Penny Wong now calls ‘ambition’. Warwick’s right that a world ETS is extremely ambitious and we face the same risk as we do now from the collapse in value of fiat money, largely due to the debasement of the US reserve currency and some Asian currency manipulation. IMO John wants to airbrush this risk away, for simplicity. That’s entirely understandable when the 7.30 Report quotes only 7% of us knowing what an ETS means, around 3/4 who definitely want to act on AGW, 58% who want to go with the Govt on ETS, yet 53%(I’m quoting from recall here) do not want to pay higher fuel and power bills, so no carbonsink, it’s not just you worried about the hard sell. Then Warwick reminds us all where the world is really at with ETS to date. That’s the clincher for mine in preferring to keep any policy on emission reductions in house. You can imagine what that French company are up to in ET, wanting to grow ethanol under the CDM scheme and earn some carbon credits to boot. That sort of sleight of hand leaves me cold and is indicative of the total failure of the new global ETS mantra to address biodiversity. Warwick goes one better, but this sort of add-on to an existing problematic constitutional marketplace, is too fanciful to ever work effectively for mine. The political compromises needed to tack it on will emascualte any desirable outcome. We’ll need a lot more national soul searching and introspection than that. Perhaps it’s an ill economic wind that will blow us all some good in that regard.

  12. Peter Wood
    July 7th, 2008 at 23:47 | #12

    I am in favour of a hybrid scheme, but one that is very different to the one that McKibbin is proposing.

    In my opinion, a cap and trade system with a price floor is the best policy choice. The cap should be sufficient to avoid dangerous climate change and the price floor should be as close as possible to the social cost of carbon. Instead of maintaining a price floor by having the regulator buy back permits, we basically have a carbon tax and an ETS. The floor should determine a fee paid for each tonne of emissions (an “exercise price”). At the same time a set amount of permits are auctioned, which can be traded, and each firm needs to purchase a sufficient amount of permits. The carbon price would be the sum of the exercise price and the permit price. The market for permits would behave a bit like an options market, they would have a very low value unless there is an expectation that the carbon price will exceed the exercise price.

    There are two central issues in all of this: managing uncertainty and resolving the global prisoners dilemma.

    The issue of uncertainty is central to the prices vs quantities question. There are two sources of uncertainty – uncertainty in the cost of mitigation and uncertainty in the cost of climate change. It is not too hard to estimate upper bounds for the cost of mitigation (Prof Quiggin does it for electricity generation here, and some advocates of a very low carbon tax such as Nordhaus also assume the existence of a “backstop technology” that plays a similar role). The uncertainties in the costs and impacts of climate change are much greater, involve a whole lot of “long tails”, and cannot be bounded – in the words of Weitzman, they have “potentially unlimited downside exposure”. There is also the issue of the discount rate, and of environmental costs, which mean that aggregating costs is also an ethical question.

    The uncertainty in the science is a very strong argument for more mitigation at a faster rate, much of the recent science is very worrying indeed.

    When choosing a price or quantity, it will either be too high or too low (because of uncertainty), and there will be a welfare loss. Weitzman (1974) argues that the slope of the marginal cost and benefit curves are what matter and that if the cost of abatement goes up faster than the cost of climate change then a tax is better, if it doesn’t (such as when climate tipping point is a risk) then a cap-and-trade system is better. (Hepburn 2006) “Regulation by Prices, Quantities or both..” has some good discussion of these issues.

    Leaving aside international issues, a hybrid scheme where there is a cap and trade scheme with a price floor and a price cap will result in a lower welfare loss than a cap and trade scheme if the floor is less than the social cost of carbon and the cap is greater than the social cost of carbon. Having a price cap (a safety valve emission fee) is problematic because is there is a risk that the social cost of carbon is greater than the cap, this is due to the long tails.

    It seems likely to me that the eventual cost of climate change will end up being much more than the amount invested in mitigation especially the amount invested in mitigation in the near future. For this reason we should have a price floor instead of a price cap. Garnaut argues against a price floor on p344, but his arguments apply to a price floor maintained by the regulator buying permits. His arguments do not apply to the model described here.

    Apologies for the long comment. I haven’t really gone into the issue of the prisoners dilemma, which is also important.

  13. observa
    July 8th, 2008 at 00:06 | #13

    I can understand your sense of frustration here too BilB, but don’t underestimate the ability of the population to understand tax reform for tax reform’s sake, rather than a tax for specifics. Remember the GST reform. Like you, I’d like to see us try the carbon tax route first(ETS is always an option), but again I see an add-on tax as problematic in the current environment. it would have to be part of overall tax reform for biodiversity and large problems like housing affordability. Just let me digress to that anecdotally for a moment. MasterO(an electrician) and his mate(an accountant)have been looking for rental accommodation for weeks now with no luck. They’re happy to pay more than the asking rental but that’s knocked back. Now they’re not exactly on struggle street so where does that leave the real battlers? How on earth do you tack carbon taxing or ETS taxing onto that sort of economic reality? The plain answer is you don’t unless you can convince the battlers it’s part of some overall reform for all our benefit. I’m not hearing that are you?

  14. BilB
    July 8th, 2008 at 00:31 | #14

    To date I do not think that I have seen a single economist put forward a comprehensive anticipated cost for a fully restructured (Australian) electricity sector based on a mix of (solar) alternatives backed up with estimates from the key industry players with their input on possible implementation programmes and a full impact projection on future power costs. Howard’s attempt to ram nuclear power down the public throat was the nearest possible attempt. If there is one can someone point me at it? I would like to see what assumptions were made and how that reflects on the assumed carbon price.

    The solution to emissions from Australia’s point of view is finite. There are known solutions that have a cost over time, with a start point and a completion point. Everything I am hearing is about avoiding doing that which must be done. Is it really that hard to set a programme of hardware installation and then get on with the job of building the system? Just as the existing system was built in the first place? Has the KISS principle escaped through the ozone hole and been lost to politicians and economists alike?

  15. Ian Gould
    July 8th, 2008 at 00:32 | #15

    “So a global carbon market is a theoretical construct that cannot in my view survive a change of major governments over the political cycle in major countries or given the shocks that we don’t know yet will occur.”

    Tell me Warwick, why do you believe that the hypothetical carbon market is fundamentally different to the CFC-regulation model set up under the Montreal Protocol?

  16. observa
    July 8th, 2008 at 00:40 | #16

    I’d add the killer blow for me with signing on to international C&T, is simply the example of the MDB and COAG recently. No I don’t expect Rudd to fill the Murray with water, but the fact wall to wall Labor couldn’t get its act together re future water flows should say it all for global C&T grand plans. Dead and buried for mine, given the greater jurisdictional hurdles.

  17. observa
    July 8th, 2008 at 00:54 | #17

    “why do you believe that the hypothetical carbon market is fundamentally different to the CFC-regulation model set up under the Montreal Protocol?”
    Perhaps you should really be asking Rudd and the State Premiers why fixing the MDB is any harder than say regulating asbestos Ian?

  18. BilB
    July 8th, 2008 at 01:02 | #18

    Observa,

    The housing shortage requires some attitude changing. The solution may be a version of the American relocatable housing. In fact Global Warming may well demand this as a solution. Under all of the scenarios a percentage of moveable population is necessary. This solution works well for lower income elderly in Queensland. The principle problem with rental accommodation is related to the land ownership content of development property. By removing this element (leased land, special purpose land) from the accomodation structure an entirely different and more flexible accomodation picture can be drawn. Now this is no real solution for all rental needs (large families for instance) but a percentage of modular relocateable housing can significantly relieve rental availablility (look at what the Chinese knocked up in a month). We are suffering from an astonishing lack of imagination and flexibility in our thinking when it comes to accommodation, and this is a direct consequence of our fetish for capital gain above all other considerations along with a very rigid image of community structure.

  19. Hermit
    July 8th, 2008 at 08:35 | #19

    As with GST there will be an initial price shock with ripples. If the two year fixed carbon price is $20 per tonne of CO2 that will be about 5c/L on petrol but could near double the cost of coal to some currently low cost electrical generators. Administrative issues include not only monitoring but what to do about transgressors. With an integrated mine and power station coal volumes will be harder to monitor. The ACCC may have to monitor firms that jump the gun on price rises. Apart from fines there would have to be a legal power of shutting down a repeat offender.

    When the big bills starting coming in the first few weeks of the scheme there may be a cash crisis. Sweeteners such as extra solar rebates won’t help the household with a power bill $100 higher than normal, plus high food and fuel costs. The good Dr Nelson will have a field day until he is asked to come up with something better.

  20. John Mashey
    July 8th, 2008 at 08:52 | #20

    Good material, thanks.

    For those who advocate carbon taxes rather than other schemes, can you explain what you mean, i.e., the devil is in the details and the rates.

    For instance, someone mentioned Nordhaus’s low rates, as in his recent book “A Question of Balance”, and which says (p.15) that optimal price for 2005 would be US$7.40 per ton of CO2 (~100 gallons of gas), i.e., say US$.07 / gallon, and it’s hard to see that most drivers would notice it very much. [Long-haul truckers might.] I.e., I’m expecting oil prices to continue to go up via Peak Oil. If they rise quickly, and carbon taxes are low enough, that will tend to push people to gas and coal, perhaps not always a good idea.

    Anyway, if someone prefers a carbon-tax, it would really help if they could say:
    a) When it starts, and at what rate.
    b) How it would change over time.

    The reason I ask is that when someone says “carbon tax”:
    - they may really mean it to have effects, soon.
    - or … maybe not …

  21. BilB
    July 8th, 2008 at 09:31 | #21

    Good call John M.

    The entire purpose of any carbon pricing is to promote alternatives (thereby reducing emissions). Every day it seems there are calls for greater urgency than the day before’s urgency. From a transport fuel point of view I would be expecting an immediate 20 to 30 cent per litre carbon tax on fuels but this would not appear as an increase as the current excise would be reduced by the same amount. The net gain here is that biofuels would retain their current margin advantage and this would buttress growth of that industry to the point of being able to supply E30 in many areas. E30 by all reports increses fuel economy in every vehicle that I have heard tested to date. This amounts to a significant saving to the general motoring public as well as a decrease in Australia’s CO2 emissions from transport. The losers here are off road fuel users such as farmers and miners who currently use fuel excise free for production purposes. There may be a fix for this problem. Collected monies in this framework would be used in the same way as the excise is currently used.

    Secondly a general tax on all other fossil fuels would be applied at the first transaction in the handling of these materials, with the bulk of the monies collected being put to building an alternative energy industry. The tax does not need to be very large to have a dramatic effect. As energy infrastructure is completed and brought on line it then becomes a self supporting part of the energy production system and no longer requires support as it starts to pay back its capital cost from it’s turnover. This energy would be at a higher price but initially it would be a small part of the total ellectricity production cost and would have a minimal effect on electricity prices. Once the building programme was about a third of the way through the carbon tax could well become unnecessary as sufficient funds would be in the building fund to maintain the development programme, it being topped up as each on line plant is financed through the standard commercial channels. The amount of money required to initiate this building programme may be as little as 15 billion dollars. It could well be argued that a tax is not necessary at all if the government had the gumption to embark upon an energy remedial programme guided by legislation.

    This by far the lowest cost approach with the most certain outcome.

  22. July 8th, 2008 at 11:00 | #22

    I don’t know that I support or oppose an ETS. My problem is that I don’t (fully) understand it (and I follow these issues far more closely than the average punter). In my view, that’s the real problem with the ETS; real or perceived complexity.

    I reckon a carbon-tax-for-income-tax-cut-trade-off could be adequately explained to the electorate. We had a very similar experience a decade ago with the GST, and despite lots of talk of “rollback” and raising the rate in the intervening period, the GST remains in place at the same rate.

    Anyway, at the risk of sounding like a complete dummy (and that’s a risk I take every day :) ) here are some dumb questions about the ETS:

    1. As I understand it Garnaut proposes permits to emit carbon will be auctioned off at the start, so this will be a one-off revenue boost for the government, not to be repeated. Correct?

    2. When the carbon cap is reduced some of these permits will have to be “retired”. I assume that will be done by the government buying back permits. If the price of the permits at the time is very high, will this not be a very expensive exercise?

    If the above points are correct, it seems to me the ETS will provide government with a one-off revenue boost at the beginning, and ongoing, and increasingly expensive costs as the price of carbon rises.

    This contrasts with a carbon tax with provides the government with an ongoing (and increasing) revenue stream that can be redistributed to compensate low income earners etc.

  23. July 8th, 2008 at 11:04 | #23

    I’m expecting oil prices to continue to go up via Peak Oil.

    Are you allowed to say you believe in Peak Oil these days without being labelled a nutter and Malthusian?

    I don’t live in a bunker, I don’t have a stockpile of food, I don’t own any guns or weapons of any sort. I just think there’s a serious problem looming that the mainstream has completely discounted for reasons I cannot fathom.

  24. wilful
    July 8th, 2008 at 11:36 | #24

    carbonsink, I’m not going to come across as much more edumacated, but my undertanding is that permits are annual (or some other fixed period) so it’s a regular income stream for government. So no (or ratehr 100%) retirement. And every year there will be less permits in the system, making them more expensive and alternatives more competitive.

  25. Hal9000
    July 8th, 2008 at 11:48 | #25

    I understand you’ll be able to bank permits, since it doesn’t much matter whether the emissions are today or in ten years’ time. Because they’ll be scarcer and therefore dearer in ten years’ time, however, there will be an incentive for the canny emitter to buy more than needed now, or to emit less now (which is a Good Thing). The possibilities for speculation, are, of course, myriad and it’s here that the small size of the Australian permit market may allow for gaming by hedge fund and like-minded parasites.

  26. Peter Wood
    July 8th, 2008 at 11:57 | #26

    carbonsink

    See Garnut, Draft Report, pp 373-374. Permits will be auctioned on a fixed schedule, weekly, monthly or quarterly. My understand is that each permit will be for a tonne of carbon in a particular year. At the end of that year an eligible polluting firm must own enough permits to cover their emissions. That is when the firm “retires” the permit, this does not involve the government buying back any permits. The cap is reduced by auctioning less permits. The effect on government income will be very similar to a carbon tax.

    In my proposal above (#12), the only difference is that firms pay a “retirement fee” when they exercise their permits, this functions as a price floor.

  27. David
    July 8th, 2008 at 11:58 | #27

    Dunno that there’s anything wrong with Malthus, carbonsink. He was just a bit ahead of his time.

  28. BilB
    July 8th, 2008 at 12:03 | #28

    Hal9000,

    So there it is the first reference to……..the “carbon scalper”.

    I would expect to see the Russian mafia and Mugabe’s mates moving swiftly in to fill this space. Not to mention every oil sheik. More legislation.

  29. July 8th, 2008 at 12:08 | #29

    The effect on government income will be very similar to a carbon tax.

    Thanks for the explanation Peter.

  30. Peter Wood
    July 8th, 2008 at 12:15 | #30

    I was hoping to do a bit a bit of carbon scalping myself :) Instead of offsetting my greenhouse gas emissions using a method where measurabilty, permanance, verifiability, environmental integrity and additionality are questionable, I could hopefully buy some emission permits when they are cheap, and not sell all of them back into the market, leading to a reduction in Australia’s greenhouse gas emissions.

  31. BilB
    July 8th, 2008 at 12:52 | #31

    I suspect, Peter, is that all you would achieve by that is give money to the government, and your certificate (just think about that, paperwork for every tonne of CO2 floating around up there) would float away with the rest of your possessions as the seas rise, or, if you live on a mountain, be chucked in a dumpster for council sequestration by your surviving grand children upon your demise from heat stroke.

    What have we done?

  32. wizofaus
    July 8th, 2008 at 13:28 | #32

    Actually that’s an interesting point – could we see environmental groups raising money to buy up permits they don’t intend to use because they don’t believe the reduction targets are high enough?

  33. Peter Wood
    July 8th, 2008 at 13:39 | #33

    I suspect a much better investment would be for environmental groups to put pressure on politicians and educate both the public and politicians as to why reduction targets need to be higher. It may be good for a stunt though – buy some permits and burn them or bury them in the ground.

    Something in the Garnaut Draft Report that is very worrying is the idea that if we choose to tighten the emissions reduction trajectory then we will wait 5 years (16.2.2, pp 365-366; pp 394). We don’t have that kind of luxury.

  34. MH
    July 8th, 2008 at 13:45 | #34

    JQ or Warwick might like to comment. Interesting concepts provided your business which is say a high carbon emitter is not involved in international business. I have in mind the Qantas scenario. Qantas’s business is a high emitter of carbon, every increase in output increase carbon in the abscence of plant efficencies (more economical aircraft)so any immediate or short term output in the business is carbon constrained. Again Qantas operates internationally so it deposits that carbon across the globe and has to buy hyrdrocarbons as physical fuel in a variety of countries. I am not sure how they will manage to translate or manage the balance sheet inputs of being faced with a coutnry who is a willing participant finding they have no more permits and hence hedge their permits for thier local airlines and give none to Qantas. Equally they may price their carbon permits or taxes differently to us, developed v under developed and so they might again be cheaper or dearer. So how does an international transport business juggle these competing interests and keep goods and people flowing world wide, or do they shrink back into domestic markets only and international air travel becomes an activity of the past.

    Some very interesting implementation issues.

  35. MH
    July 8th, 2008 at 13:52 | #35

    Re my 34. This strongly suggest to me that any attempt at a domestic carbon tax or permit is doomed in the abscence of binding systems of a carbon currency ala BW2 as the response of the firm that is carbon constrained will immediately move to an area where it is not without international agreement. Consider the issue of Emirates v Qantas. Emirates gets its fuel from its owner or host country at a rock bottom price whereas Qantas buys on the international spot market. If I was Qantas I would be looking to set up shop out of Dubai or Emirates somehow. Diabolical policy problem domestic and international it indeed is.

  36. wilful
    July 8th, 2008 at 15:01 | #36

    MH, isn’t it a fact that a jet plane can only fly for so many hours before refuelling, and all jet planes basically fill up in Aus (it being a long way away from everywhere)? So all airlines would pay more to fly out of Aus, which is the desired result, we need LESS airplane flights.

    If QANTAS wanted to import their own tanker of fuel, well it could be taxed on arrival.

  37. July 8th, 2008 at 15:39 | #37

    … and as I understand it, there is no tax on jet fuel for international flights, and 2.8cpl for domestic jet fuel.

  38. wilful
    July 8th, 2008 at 16:05 | #38

    I think there’s an international agreement that would have to be broken for there to be a tax on jet fuel. I only know this from reading Monbiot some time ago, don’t have any specific details.

    Agreements are there to be broken, or amended.

    Domestic jet fuel would surely have to come under any transport ETS/tax scheme.

  39. July 8th, 2008 at 17:46 | #39

    I only know this from reading Monbiot some time ago

    Yes same source, and according to George the emissions from international flights between Kyoto signatories are not counted in either country. They just vanish apparently.

    Domestic jet fuel would surely have to come under any transport ETS/tax scheme.

    I doubt it. Virgin will be lucky to survive $140/bbl oil. Higher fuel taxes would finish them off. Qantas/Jetstar have much deeper pockets I imagine.

  40. TerjeP (say tay-a)
    July 8th, 2008 at 18:29 | #40

    In response to Quiggins three reasons.

    1. Tax breaks for selected players are much the same as free emission permits. So emission permits don’t offer any real advantage in this area.

    2. Price uncertainty in petrol is currently a source of much political agitation (mostly from the left). Why create more problems for your emission mitigation strategy than necessary. A tax allows price certainty and can be adjusted in an orderly manner.

    3. Carbon taxes can vary by nation it is true. However you have argued previously that some nations (eg the developed ones) should pay a higher price than others. Taxes allow just that. International permit trading does not do so as readily.

    Further to point number three it would be possible for Australia to have a flat carbon tax and for the government to simply buy or sell on the open market any surplus or shortfall in permits to meet our Kyoto obligations.

    Selling a policy to people whilst saying you will tell them the price only after they sign up is a receipe for rejection. A carbon tax is far more sellable because it is up front with the price tag.

  41. TerjeP (say tay-a)
    July 8th, 2008 at 18:35 | #41

    The reality of an emissions trading scheme is that it will ultimately have a floor price (for the sake of the greenies) and a ceiling price (for the sake of industry). Better to cut the crap and admit that the price is a political compromise and just impose it directly.

  42. TerjeP (say tay-a)
    July 8th, 2008 at 18:39 | #42

    ultimately have a floor price (for the sake of the greenies) and a ceiling price (for the sake of industry)

    Really it will. Trust me. Look at the income tax code if you don’t think this thing will be tinkered with for political reasons from now until kingdom come.

  43. swio
    July 8th, 2008 at 19:36 | #43

    ProfQ,

    First, while the natural starting point for both systems is one in which the government collects the entire implied value of emissions, either as tax revenue or as the proceeds from auctioning permits, the emissions trading system allows for (but doesn’t require) free allocation of some permits.

    This may have changed in the draft report but Garnaut was of the opinion that the free allocation of permits was a major problem with the European ETS and that the best thing to do with an ETS is have no free permits. Peter Martin was raving on about how good this is a while back and I think he makes a good point. Instead anyone with a case for compensation would have to re-apply for it regularly and recieve it in the form of cash, not free permits. There is no reason this could not be done just as easily with a carbon tax so I don’t think this is an advantage for ETS especially if this is how compensation will work in Garnaut’s ETS anyway.

    Second, since we are uncertain about the elasticity of demand for emissions we are faced with a choice between allowing this uncertainty to be reflected in uncertainty about reaching the targeted level of reductions in emissions, uncertainty about the price, or some mixture of the two. Given the risk that we will fail altogether if individual countries fall short of their targets, I’d prefer some uncertainty about the price

    This could be fixed simply by having a floating carbon tax rate set with the aim of hitting a specific emmissions target. Yes it would be a bit hit and miss, but if the aim was to get it right over a period of several years, rather than month to month it will be possible to understand the economies elasticity of demand to carbon and be relatively precise in setting the tax rate. The obvious counterargument that politicians will always set the target too low is proven wrong by the independence of the Reserve Bank. Last year they raised interest rates during an election campaign which may well have determined the outcome. We have successfully created an independent board for interest rates. There is no reason it could not be done for a carbon tax. Also an ETS will be just as subject to political intervention. Who will set the price for safety valve carbon permits? How open to change will the overall emmissions target be. And lastly, who will set the rules for emmissions accounting? This last question is absolutely screaming out to be abused by any company with any political connections and a smart accountant. An ETS is inevitably extremely complex and very opaque. Tiny NGO’s won’t stand a chance of holding the government to a fair ETS when pitted against the entire ASX200 in such a complex system.

    Regarding your last point about international trading of carbon emmissions. There is no reason an independent carbon board could not buy and sell carbon credits on the internation market for the entire country. It would give them a supplementary way of meeting Australia’s emmissions target obligations during short term spikes or drops. Alot simpler than everyone in the country needing to worry about it.

    Lastly there is the question of transaction costs. I find it staggering that there does not seem to be any consideration of the difference in administration costs in the debate. Why it is not the central point in the debate between ETS and Carbon Tax is beyond me. Surely if there is a difference in administration costs of tens of billions, or perhaps hundreds of billions of dollars then this should be the deciding factor? Not to mention the question of complexity. When looking at a real world ETS or Carbon Tax I feel that Garnaut should be putting at least as much emphasis on determining the administration costs by running and studying pilot schemes and hungrily searching for every percent reduction in administration costs. Garnaut’s team should have an army of business process engineers, accountants and other experts from the real world working on getting the admin costs as certain and as low as possible. Its faintly ridiculous that the workload of hundreds of thousands or even millions of people does not seem to be an important factor.

    A carbon tax is dead simple. We know how much carbon a barrel of oil, a litre of gas or a tonne of coal will produce. It doesn’t matter how you burn it it will produce the same amount of CO2. There are users who don’t burn it (oil into plastics) but they can be easily compensated in the same way that GST is re-imbursed. It seems crazy that we won’t just price the cost of CO2 emmissions straight into the product when it would be so simple.

    Forgive the length of this post but I am getting a little tired of feeling that the we are going to have an ETS decided upon before the country as a whole gets the chance to really make an informed decision. At this point the debate seems limited to economists but it is fair to say that economists views are often very focused on theory and how things work out in the real world are often a lot different. I would not expect a physcist to design a decent car even though he understands the theory of an internal combustion engine. We are unlikely to have the best system if there is not also alot of input from people who will be the end users (ie all of us).

  44. Ikonoclast
    July 8th, 2008 at 20:10 | #44

    People will talk and talk. Politicians will delay and delay. Corporations will lie, cheat and obfuscate. China, the US and India will do what they please. CO2 emissions will keep rising every year. The drop in conventional oil generated emissions – because of peak oil – will be more than offset by the rise in coal burning, tar sands oil burning and shale oil burning including coal liquifaction.

    All the above will continue until a combination of resource depletion, mass extinctions of the rest of the animal and plant kingdoms, general environmental collapse and severe economic depression brings on a human population collapse.

    I appear to be the only straightforward realist here. You, who believe any different, are the dreamers and denialists. A consideration of the evidence from the disciplines of physics, biology/ecology and human history allows the above prediction to be made with close to 100% certainty.

  45. July 8th, 2008 at 22:28 | #45

    This possibility of politicians altering carbon tax based on political convenience gives rise to fluctuations in value of the permits already issued. If I for example feel that a newly elected government will increase carbon taxes, then that increases the value of a permit issued during a lower tax environment. Vice-versa, if taxes are slated to go lower, an already issued permit will be priced lower, as companies that need to buy permits will be able to buy them at a lower price.

    The existence of these arbitrage opportunities ensures that before long, financial speculators will come to dominate the markets, as opposed to the real carbon-based entities. Who knows, if implemented, we could one day see a bubble in carbon credits.

    http://www.rogueeconomistrants.blogspot.com

  46. Ian Gould
    July 8th, 2008 at 22:59 | #46

    “Look at the income tax code if you don’t think this thing will be tinkered with for political reasons from now until kingdom come.”

    As will a carbon tax.

    Only some of the complexity of the income tax code is due to political meddling, a good part is also due to the ceaseless and enthusiastic efforts of business, the rich and tax professionals to game the system.

  47. TerjeP (say tay-a)
    July 9th, 2008 at 08:06 | #47

    Rogue – with a carbon tax there are no permits “already issued”. At the end of each year companies would simply pay their carbon tax bill according to their emissions for that year and according to the prevailing rate. They may be subject to an audit. Where are the pre-issued permits in such a system?

  48. TerjeP (say tay-a)
    July 9th, 2008 at 08:09 | #48

    A carbon tax can be administered by the ATO along side fringe benefits tax, capital gains tax and all the other taxes. A emissions trading scheme no doubt entails a new additional government department and all the associated bureaucracy.

  49. BilB
    July 9th, 2008 at 08:39 | #49

    Kim over at LP shoots down the emissions trading scheme theme with this reaction:

    “Let’s take this seriously for a moment, carbonsink. Are you suggesting that an ETS could be rolled out next month, with enough stakeholders on board, and with all the modelling and design work done? Or what are you saying?”

    What she is pointing out here is that an ETS requires a whole trading infrastructure, and that does not come for free. So automatically there is a brokerage fee to buy and sell carbon credits. At two and a half percent each way that adds 5% surcharge to your energy bill straight away.

    Where is the efficiency in this sort of mess? This entire scenario has been created to leave room in the vain hope that carbon sequestration might work some day. It has no other purpose. Carbon trading was originally thought out to accommodate the ability to use carbon sinks such as forests to offset emissions. That was until it was realised that forests only have limited capacity to absorb CO2 relative to our ability to release it. Then came the devastating reality that the environment can periodically release more CO2 and methane than it absorbs. This left the whole idea of trading a lame duck until some one latched onto the idea that carbon sequestration might save it. So that is where we are now with the commercial world dreaming up any and every method to keep the idea of trading emissions alive. Why? Because it will be very profitable for a whole new bunch of white collar money manipulators.

    Think about it. Share certificates for every tonne of CO2 that is floating around up there.

  50. wizofaus
    July 9th, 2008 at 09:26 | #50

    What happens to carbon-negative entreprises (e.g. tree-planting businesses) under an ETS? Do they get given free permits that they’re free to sell?

    What would be the equivalent under a carbon tax?

  51. observa
    July 9th, 2008 at 09:38 | #51

    “Only some of the complexity of the income tax code is due to political meddling, a good part is also due to the ceaseless and enthusiastic efforts of business, the rich and tax professionals to game the system.”

    That’s why you always need to be mindful of creating incentives to game the system and making the system as level and bullet-proof for all as you can Ian. The administrative costs of incremental muddling through are coming through loud and clear here too you’ll notice. These are big macro questions and it’s good to see them being mulled over seriously at last, as we have the ominous fallout from well intentioned central bankers’ machinations to deal with very soon. That will no doubt concentrate the mind on the law of unintended consequences and on that note here’s an obvious example rearing its ugly head-
    http://www.guardian.co.uk/environment/2008/jul/03/biofuels.renewableenergy
    Personally I think world money supply is a bigger culprit but nevertheless a glaring externality of well intentioned C&T is no doubt a big part of the problem too. That’s a major flaw in a global ETS, that it promotes the likes of the French Co wanting to grow ethanol on thousands of hectares of so called ‘waste land’ in ET. C&T has little to say about biodiversity and the conservation of natural environment, the atmosphere notwithstanding.

    We also need to be very mindful of transition costs-
    http://www.news.com.au/adelaidenow/story/0,22606,23992078-2682,00.html?from=public_rss
    This report is somewhat alarmist, because it’s really the problem of rapid inflation requiring an implicit force majeure tear-up of lock in contractual arrangements, that one side of the contract could not have anticipated. A timely reminder of the curse of inflation.

    These are threatening currents swirling all about us and we need cool heads if we’re to avoid drowning in the maelstrom. The answer lies in thoughtful and careful redesign of the CM we do have control over, rather than being diverted from the task in trying to control the swirling currents of the world. I am eternally optimistic we have the wherewithal and the brains to do just that and set an examplary path for the ROW. If not us, who then?

  52. wilful
    July 9th, 2008 at 09:58 | #52

    A lot more rentiers (sorry, I meant to say derivative markets) in an ETS.

    I’d prefer to see any business impost be misallocated by Government than misallocated by merchant wankers, buying a new Range Rover.

  53. Ian Gould
    July 9th, 2008 at 17:11 | #53

    “A carbon tax can be administered by the ATO along side fringe benefits tax, capital gains tax and all the other taxes. A emissions trading scheme no doubt entails a new additional government department and all the associated bureaucracy.”

    Right because existing ATO staff know all about environmental monitoring, smokestack instrumentation, conversion factors and estimating fugitive emissions from industrial processes.

    Tell you what, how about we hire people who know about such things and write “ATO” on their business cards and pay cheques?

  54. wilful
    July 9th, 2008 at 17:44 | #54

    Ian, when they put child support payments into the ATO that was considered a radical move, but it worked very very well. The ATO certainly know about dodgy accounting and rorting, the skillsets needed probably aren’t that big a leap.

  55. BilB
    July 9th, 2008 at 17:53 | #55

    Ian G, in the carbon tax scenario each primary raw fossil fuel (and there are not a lot of them) will have an index value and the tax amount per tonne calculated from that. This tax will be paid on the invoice of the first transaction involving that material. The amount of knowledge required is minimal. If someone buys coal and then buries or exports it again intact then they can apply for a rebate. That is as complicated as it gets, and that is entirely the point. The only special cases are businesses that extract fossil fuels for internal consumption and there is no sale before the fuel is consumed. These businesses would have to audit their fuel consumption to assess the tax payable (this can be monitored through their product sales).

    I challenge you to come up with a solid reason why it needs to be more involved than that.

    The horrendous flaw in all of the thinking on carbon tax or ETS is the bizare belief that applying a carbon charge will some how cause people to stop using fossil fuels. People will not use alternatives that do not exist. At the moment there is no alternative (available) for oil and there is no alternative (available in significant quantity) for coal based electricity. Show me where Australia has placed an order or developed a plan to provide 120 gigawatts of alternative peak electricity capacity. I haven’t seen anywhere where there is a determined objective to use receipts from ETS to develop such capacity. Everything that I am hearing from government and Garnaut for that matter amounts to spanking the baby to make it stop crying.

  56. Ian Gould
    July 9th, 2008 at 17:53 | #56

    Yes, but whether the people with those skillsets report to the EPA or to the ATO will make exactly zero practical difference.

  57. Ian Gould
    July 9th, 2008 at 18:33 | #57

    :Ian G, in the carbon tax scenario each primary raw fossil fuel (and there are not a lot of them) will have an index value and the tax amount per tonne calculated from that. This tax will be paid on the invoice of the first transaction involving that material. The amount of knowledge required is minimal. If someone buys coal and then buries or exports it again intact then they can apply for a rebate. That is as complicated as it gets, …”

    Let a couple of hundred tax lawyers and accountants at it and see what happens.

    The US pays out several billion a year under a scheme to subsidise “alternative fuels” to people who spray waste oil onto coal dust to produce a “fuel” which more often than not they simply dump after collecting the subsidy.

  58. swio
    July 9th, 2008 at 18:36 | #58

    Right because existing ATO staff know all about environmental monitoring, smokestack instrumentation, conversion factors and estimating fugitive emissions from industrial processes.

    Tell you what, how about we hire people who know about such things and write “ATO� on their business cards and pay cheques?

    Yes, but whether the people with those skillsets report to the EPA or to the ATO will make exactly zero practical difference.

    Ian Gould,

    Of course it doesn’t make any difference which department they report to, but it seems plain as day that incorporating the cost of CO2 directly into the fossil fuels itself will be alot simpler. A carbon tax would mean remove the need for a carbon market at all which would be a tremendous saving as the market will need to take some sort of cut to operate.

    From my point of view you get a carbon tax with government administration or an ETS with more government administration (because its more complicated) plus a national Carbon Market which will have its own overhead and costs.

    Your counterpoint that the government is not very competent doesn’t help us either way as there’s government involvement in both solutions.

    If you feel an ETS is superior perhaps you should construct an argument, or at least provide some solid detractions to a Carbon Tax.

  59. observa
    July 9th, 2008 at 20:37 | #59

    “Only some of the complexity of the income tax code is due to political meddling, a good part is also due to the ceaseless and enthusiastic efforts of business, the rich and tax professionals to game the system.”

    That’s why you always need to be mindful of creating incentives to game the system and make the system as level and bullet-proof for all as you can Ian. The administrative costs of incremental muddling through are loud and clear here too you’ll notice. These are big macro questions and it’s good to see them being mulled over seriously at last, as we have the ominous fallout from well intentioned central bankers’ efforts to deal with very soon. That will no doubt concentrate the mind on the law of unintended consequences and on that note here’s an obvious example rearing its ugly head-
    http://www.guardian.co.uk/environment/2008/jul/03/biofuels.renewableenergy
    Personally I think world money supply is a bigger culprit but nevertheless a glaring externality of well intentioned C&T is a big part of the problem too. That’s a major flaw in a global ETS, that it promotes the likes of the French Co wanting to grow ethanol on thousands of hectares of so called ‘waste land’ in ET. C&T has little to say about biodiversity and the conservation of natural environment, the atmosphere notwithstanding.

    We also need to be very mindful of transition costs-
    http://www.news.com.au/adelaidenow/story/0,22606,23992078-2682,00.html?from=public_rss
    This report is somewhat alarmist, because it’s really the problem of rapid inflation requiring an implicit force majeure tear-up of lock in contractual arrangements. A timely reminder of the curse of inflation which any form of carbon costing has to deal with. Quantity controls mean letting go of price.

    These are threatening currents swirling all about us and we need cool heads if we’re to avoid drowning in the maelstrom. The answer lies in thoughtful and careful redesign of the CM we do have control over, rather than being diverted from the task in trying to control the swirling oceans of the world. I’m eternally optimistic we have the the brains and wherewithal to do just that and set an exemplary path for the ROW. If not us, who then?

  60. TerjeP
    July 9th, 2008 at 21:07 | #60

    With a carbon tax quantities will fluctuate. However who really cares if the CO2 emissions in June are twice the quantity of those in January. What matters is the aggregates over decades.

    With an ETS prices will fluctuate because demand fluctuates but supply will be unflexible. Lots of people will care if emitting costs twice as much in June as it does in January. Especially if you need to pay for heating.

    Given the politics of petrol prices it seems likely that anything that gives consumers more energy price volatility is going to prove politically difficult.

  61. observa
    July 10th, 2008 at 00:31 | #61

    Not wrong Terje. Our industry body has just produced figures to show the cost of steel has added $2000 to the cost of a new house this year, largely via reinforcing steel. As for decking and the like, costs have risen over 30% this year after the last rise of 15% on July 4th and our supplier has just announced another 12% applicable after Aug 31st assuming availability of coil from their supplier. The supplier states-
    ” The volatility of steel pricing in steel decking(currently exceeding a 30% increase throughout 2008) may continue and for this reason [we] strongly advise our customers to factor in further increases in the pricing of medium and long term projects.”
    These sorts of price rises are going to quickly send some construction and building comapnies the same way as the truckers. You could say all this will be good for CO2 emissions in the medium term folks and will take the urgency out of setting up any ETS.

  62. observa
    July 10th, 2008 at 00:48 | #62

    And all the while you never suspected those central bankers could be so green deep down eh?

  63. July 10th, 2008 at 01:40 | #63

    A document which may be of interest is A critical discussion of the IPCC analyses of carbon emission mitigation possibilities and costs by Ted Trainer which can be downoladed as a Micro$oft Word document from here.

  64. BilB
    July 10th, 2008 at 06:15 | #64

    Wizofaus 50,

    The problem with carbon tax credits for tree planting is that planting a tree amounts to nothing substantial. A tree growing amounts to carbon absorption and would be worthy of a tax credit on a year by year basis. But harvesting the tree, or the tree dying in a way that would cause it to decompose, or the tree being destroyed in a fire would require giving the money back as the carbon absorbed was rereleased to the atmosphere. The only situation that warrants carbon credits is where the tree’s substance is used for a time then buried in deep land fill. There are some types of trees that would be worthy of carbon credits, trees such as redwoods and kauri trees where the growth time can be for hundreds or even thousands of years. But there would have to be absolute commitment that the land would not be rezoned to residential, say by making it a world heritage national park. And then the other rider would have to be that the land was not in a part of the world where global warming was likely to make a desert ie any where in Australia south of Gladstone.

  65. say again
    July 10th, 2008 at 21:28 | #65

    can we have some science before racing of to trading CO2
    also majority of opinion has nothing to do with truth
    http://www.globalwarminglies.com/
    youtube and web search has many sites if CO2 or global warming is searched with words like scam..hype…risk…debate…effect on third world…vs iceage etc etc

  66. say again
    July 10th, 2008 at 21:30 | #66

    can we have some science before racing of to trading CO2

    http://www.globalwarminglies.com/
    youtube and web search has many sites if CO2 or global warming is searched with words like scam..hype…risk…debate…effect on third world…vs iceage etc etc

  67. TerjeP
    July 10th, 2008 at 21:59 | #67

    Say Again – I’m a bit sceptical about the website you offer.

    Global Warming Lies is an attempt to break down the science into every day language, provide facts, use logic and common sense instead of the “Your going to die” method.

    The “Your going to die” method of communicating science sounds interesting. How does it work?

  68. Ian Gould
    July 11th, 2008 at 00:35 | #68

    “Of course it doesn’t make any difference which department they report to, but it seems plain as day that incorporating the cost of CO2 directly into the fossil fuels itself will be alot simpler. A carbon tax would mean remove the need for a carbon market at all which would be a tremendous saving as the market will need to take some sort of cut to operate.”

    A carbon tax by its nature ignores t5he differential cost of carbon mitigation – i.e. the cost of reducing emissions for some entities is far higher than for others.

    The inefficiencies resulting from that swamp the operating costs of a carbon market.

    Also, none of the discussion here to date has taken into account the other sources of GHG emissions besidew fossil-fuel emissions.

    I look forward to hearing how an at-source tax on coal will, for example, address perflurocarbon emissions from the semiconductor industry or nitrous dioxide emissions from agriculture.

  69. Ian Gould
    July 11th, 2008 at 00:42 | #69

    “can we have some science before racing of to trading CO2″

    Yes, after all it was only in 1896 that Svent Arrhenius proposed the greenhouse gas theory.

    We wouldn’t want to rush into anything.

  70. Ian Gould
    July 11th, 2008 at 00:51 | #70

    “youtube and web search has many sites if CO2 or global warming is searched with words like scam..hype…risk…debate…effect on third world…vs iceage etc etc”

    Better yet – search on “global warming” and “Zionist conspiracy”.

    After all, if it’s on the internet it must be true.

  71. BilB
    July 11th, 2008 at 01:17 | #71

    Ian G,

    Your using your economic electron microscope to focus on the problem, not the solution. Your car is hurtling toward a solid stone wall. Are you going to put your foot on the brake? or are you going to put your arm out the window to produce air drag to slow you down? The only thing that will slow down carbon release is to provide an alternative. With an alternative and legislation there is no need for either a tax or an ETS. But the alternative requires funding so a tax provides both the funding and the pressure to change. A tax is almost certainly going to be lower than an ETS as it can be set to only what is required for the alternative building process, and even then that is only required for part of the alternative building process, as this process becomes self funding.

    Businesses that cannot carry the small cost of the tax have clearly been unsustainable for a long time and should shut down, just as inefficient banks are shut down.

    No doubt you have cow fart power in mind as well. To this I suggest that cows eat vegetation that would otherwise rot and produce CO2 and methane. I think that it is an over blown point. Methane is a natural substance as we will all find out when the 13 trillion tonnes of methyl hydrate on the Arctic see floor starts to boil off.

    Perflurocarbon emissions can only be deterred by providing an alternative. If providing that alternative is a matter of cost then funding for that research comes from the tax proceeds.

    It is all very straight forward.

  72. July 11th, 2008 at 09:12 | #72

    Guys, don’t feed the denialist trolls!

    Back to serious discussions, it seems Brendan has yet another new position on the ETS today…

    It is understood that Dr Nelson is considering the hybrid emissions trading system advocated by Reserve Bank board member Warwick McKibbin, which combines the sale of fixed-price annual emissions permits with long-term permits that can be traded.

  73. swio
    July 11th, 2008 at 20:09 | #73

    “A carbon tax by its nature ignores t5he differential cost of carbon mitigation – i.e. the cost of reducing emissions for some entities is far higher than for others.”

    I can’t see the logic of this point. How does an ETS not also ignore the this issue? Unless you are talking about giving away free permits as compensation to certain entities. If that’s what you mean then I refer you to my #43 above where I pointed out that Garnaut’s ETS may have no free permits at all and compensation given in the form of cash on a case by case and year by year basis. Something that is exactly how a carbon tax would handle compensation anyway.

  74. observa
    July 12th, 2008 at 10:17 | #74

    Seriously guys, how on earth do you tack some form of carbon costing on to the current CM we inherit when you have this sort of problem with housing affordability rearing its ugly head-
    http://www.news.com.au/business/money/story/0,25479,24007992-5013951,00.html
    It seems pretty obvious to me you need to look a lot deeper than that for answers.

  75. BilB
    July 12th, 2008 at 12:22 | #75

    Observa,

    Considering the fact that today’s average house is a mansion, I suspect that a lightly smaller house would be the way to cope with that one in the current climate.

    I remember the debate that went on back in 1961 over having to trim back on the number of power points to keep the building cost within the bank’s finance allowance when my dad built the house that he lived in for the next 45 years. Its an old problem.

    But the other method is to thin out some of the materials. Some of those roofing materials, for instance, are still a weighty .45mm thick. There is plenty of room for adjustment there.

  76. Chris O’Neill
    July 12th, 2008 at 13:39 | #76

    Pr Q:

    Second, since we are uncertain about the elasticity of demand for emissions we are faced with a choice between allowing this uncertainty to be reflected in uncertainty about reaching the targeted level of reductions in emissions, uncertainty about the price, or some mixture of the two. Given the risk that we will fail altogether if individual countries fall short of their targets, I’d prefer some uncertainty about the price.

    I think the significance of a probable temporary missing of targets while the price (i.e. tax) is adjusted is greatly overstated. So what if it takes a few years to get the price right? It’s taking years to set up a trading scheme anyway so that argument is defeated anyway. Using price means we have a control system with the most important economic variable under direct control which needs to be adjusted until the desired outcome (emissions level) is achieved. Without that direct control the economic consequences are much more uncertain. Emission levels will need to be reduced over many years so there is simply not the need for “instant” setting of emission levels with all the undesirable consequences of that approach.

  77. Ian Gould
    July 12th, 2008 at 14:52 | #77

    “Your car is hurtling toward a solid stone wall. Are you going to put your foot on the brake? or are you going to put your arm out the window to produce air drag to slow you down?”

    Right, the situation is urgent and needs immediate action so let’s scrap the solution we’ve spent the better part of the past twenty years on and start from scratch.

    Just because it took from 1992 to 1998 to negotiate the Kyoto Protocol and another decade to implement is no reason to assume we couldn;t have a global carbon tax in place by next Tuesday.

    Sure a few hundred thousand businesses here and there will go under but they’re “unsustainable”.

    I guess the people who currently work from them are “unsustainable” too.

  78. Ian Gould
    July 12th, 2008 at 14:56 | #78

    Oh and if the sole purpose of a carbon tax is to raise fund – why not just jack up income tax?

    The whole point of both carbon taxes and emissions trading is to make people pay for the environmental harm their activities cause.

    I’m also struck by the fact that some people who nodded sagely when it was suggested that at some point non-climate-scientists should simply accept the consensus of climate scientists see no need to accept the environmental consensus.

  79. BilB
    July 12th, 2008 at 19:07 | #79

    Ian G,

    The problem itself is obsoleting long held plans. The scientists who were standing on the ice when a melt ice lake suddenly disappeared down a hole and ten minutes later a massive section of ice split off and slid away lubricated by the water that had just gone from the top of the ice sheet to the bottom, at that point realised that the ice which it was assumed would take centuries to melt could well crack up and disappear in just a few. That was a moment of altered perception. That was a point at which long held plans became instantly obsolete, and new plans had to be made. This a war. When the battle changes the strategy must change with it.

    I think that you are exagerating in the extreme the risk to business of the increases that will flow from an ETS or a carbon tax. For most businesses the energy (electricity) is a very small part of the cost spreadsheet. Businesses for which liquid fuels are significant have tolerated a tripling of that cost before the cracks have appeared. There is nothing like that projected for electricity. Further the incresed costs related to energy are proportional to the energy replacement not the tax. The new cost for electricity will not include any carbon tax (in principle).

    Ian G 78

    That is entirely my point stated further up. I believe it is possible to effect the change to alternatives without any ETS or tax at all. Much of Australia’s electricity infrastructure is up for replacement now. A clear thinking government would replace these facilities with CSP on an accelerated programme and the new coal and gas facilities would most likely be at their due replacement time by when the infrasstructure programme got to the point of replacing them with solar or geothermal. It should be realised that the world can only make this hardware at certain rate. Steam turbines take 2 years to build and there are only so many companies in the world who know how to do it. With 194 countries all needing to do massive infrastructure changes all at the same time because they have all sat on their hands over global warming action there will be a huge shortage of turbine building capacity for decades. Rud with his cute little well organised plan, his neat tidy desk is pushing Australia way down the turbine delivery order. So in short, peak oil is solving the fuel part of the equation, and natural atrition could be used to solve the other.

    And what is this
    “make people pay for the environmental harm” ?

    This is not a police action. This is not about punishing bad boys. This is about stopping the damage, and that can only be down if there is a way of stopping ie some non damaging way of doing the same things.

    “simply accept the consensus of climate scientists”

    I hate to say it Ian but you seem to be heavily into good boy bad boy stuff. All any body is asked to do is examine the information properly and see what is going on, not tow tow to what someone is “saying”.

    I have been concerned about this since I learned in high school (in the 60′s) that a family car uses 1000 times the oxygen of a human being. From that realisation I started to look at the oxygen cycle and every thing that I have learned has led me to anticipate all of the changes in the world that we are see around us. The science is only quantifying what I have suspected (and I have no doubt that this is the same as for yourself). And the bad news is accelerating.

  80. July 13th, 2008 at 12:33 | #80

    Hear, hear carbonsink.

    Let’s not feed the denialist trolls, who have shown that they care f**k all for the future of their children and grand-children. Australia spent 30% of its budget fighting the Second World War in order to defeat a threat far less serious than global warming. Anyone who quibbles about the cost of combatting global warming is either a certifiable moron or a sociopath and a complete waste of everyone’s time.

    I have my own doubts about Garnaut’s free market supposed solution to global warming. I have written of it in the article Garnaut to provide cover for privatisation of Snowy Hydro? and on Online Opinion, but at least Garnaut is right in pointing out that the problem is deadly serious.

  81. wilful
    July 14th, 2008 at 09:38 | #81

    Carbonsink, looks like the EU are going to introduce a permit system for airlines. But 85% free, only 15% need to be purchased: http://www.carbonpositive.net/viewarticle.aspx?articleID=1141

  82. wizofaus
    July 14th, 2008 at 11:24 | #82

    BillB, surely the solution is simply require carbon permits to be bought before any trees are chopped down?

  83. wizofaus
    July 14th, 2008 at 12:21 | #83

    Ian, the fact that we’ve spent 20 years working on a solution isn’t in itself a logical reason to be too attached to it. The evidence regarding the effectiveness of ETS’s so far is, well, a little underwhelming. In fact I’m quite willing to predict that in 10-15 years time when we’ve failed to make much of a dint in global emissions and the climate situation is far worse than today that we’ll regret not having attempted something tougher but still palatable and relatively inexpensive when we had the chance. Certainly by 2040 I expect we’ll be looking at the problem as justifying spending the sort of amounts of money that we spent fighting WWII.

  84. BilB
    July 14th, 2008 at 17:59 | #84

    Wizofaus,

    It is best not to include anything biological in the carbon formula at all as it is all already over subscribed. The only thing that we can do is try to prevent its deterioration, all but impossible. So from a carbon trading point of view that leaves to trade…well nothing actually,.. unless of course you believe in being able to make CO2 just disappear like sweeping it under the rug. I guess that you could call that carbon sequestration. A possible dream that will follow the fate of supersonic passenger air travel.

    The biological world will be used as an solar energy conversion catalyst, and shade.

  85. Ian Gould
    July 14th, 2008 at 23:38 | #85

    BilB: “This is not a police action. This is not about punishing bad boys.”

    No! No! NO!

    This is a truly specular misunderstanding on your part – and an illustration of the problems that arise when laymen, however well-intentioned and intelligent, decide to dive into what is essentially a technical discussion.

    When I spoke about making people pay for the cost of environmental harm, I wasn’t talking about punishing them, I was referring to one of the fundamental elements of environmental economics.

    To wqit: Markets tend to misprice goods which have significant environmental externalities.

    Here’s a link to start you off:

    http://en.wikipedia.org/wiki/Coase_theorem

  86. Ian Gould
    July 14th, 2008 at 23:40 | #86

    “Ian, the fact that we’ve spent 20 years working on a solution isn’t in itself a logical reason to be too attached to it.”

    No but it is a logical reason to fear that another twenty years will be wasted trying to come up with an alternative.

  87. observa
    July 14th, 2008 at 23:51 | #87
  88. Ian Gould
    July 15th, 2008 at 00:03 | #88

    “In a question and answer with reporters following the rally, Dion said he has not abandoned his support for a “cap and trade” system for carbon emissions in favor of a carbon tax.”

    http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20080619/dion_green_plan_080619?s_name=&no_ads=

  89. Chris O’Neill
    July 15th, 2008 at 01:38 | #89

    “In a question and answer with reporters following the rally, Dion said he has not abandoned his support for a “cap and trade� system for carbon emissions in favor of a carbon tax.�

    More of that quote was:

    “But he said such a system — which would force companies to buy credits if they go above emissions quotas — is likely years away.”

    “Ian, the fact that we’ve spent 20 years working on a solution isn’t in itself a logical reason to be too attached to it.�

    No but it is a logical reason to fear that another twenty years will be wasted trying to come up with an alternative.

    i.e. it may not be the best system but so much time and effort has already been spent on it that it is now better than the alternatives. Maybe, but I’m still curious as to why the alternatives were rejected in the first place. BTW, how long does it take to set up a carbon emissions tax?

  90. BilB
    July 15th, 2008 at 06:48 | #90

    Ian G,

    “no,no,no”

    I know exactly what you are trying to say. But I believe that you are getting bogged down in marginal effects. Think of the situation of a wall between a desert and a garden. It is just as flat on either side of the wall but to get to the garden requires significant effort. Once we have climbed the wall to drop into the garden average effort is the same only the garden is more comfortable. The wall is the change in energy infrastructure, the effort to climb it is the carbon tax/ETS/CAT (what ever), and is not a permanent feature. Scrambling over the wall does not have to be beautifully executed it just has to be done and done with the minimum effort.

    If you are saying that twenty years have been spent learning how to apply an emissions trading scheme then I will say that that is twenty years wasted, because it is a pointless exercise which represents a complete misunderstanding of the purpose. Certainly the intellectual content of the economic model of the ETS is very impressive, but it is conceptually flawed.

  91. BilB
    July 15th, 2008 at 07:40 | #91

    I should have added, Ian, that had governments taken carbon responsibility twenty years ago then the market driven approach would have been the way to go. But the time is up. The is no room for gentle nudging. We are at the brute force stage.

  92. observa
    July 15th, 2008 at 15:04 | #92

    I see Anna Bligh is not waiting for the Rudd Govt and is moving ahead at a rapid pace with her version of an ETS-

    “AUSTRALIA’S first new coal port in 25 years could be built in central Queensland, to boost the state’s coal exports by 40 per cent.

    Premier Anna Bligh today announced a “trifecta” of proposals for the Bowen, Galilee and Surat coal basins, during a Budget estimates committee hearing.

    Ms Bligh said the Government was considering a $5.3 billion proposal by Waratah Coal, including a new mine near Alpha.

    The Galilee Coal project would produce 25 million tonnes of thermal coal a year for export.

    A new coal port would be built near Shoalwater Bay, between Rockhampton and Mackay, with a 100 million tonne a year capacity.

    A 500km rail line from the Galilee Basin to the new port would open the region to coal exports for the first time.

    Ms Bligh said the Government was in discussions about using Australian Defence Force land, so the adjacent Byfield National park was not affected.

    “The project is expected to create around 2200 jobs during construction and some 760 permanent jobs during operation,” she said.

    The second proposal, the Bowen Basin Growth project, comprises two new mines at Daunia and Caval Ridge, and the expansion of the existing Gooyella Riverside Mine, north of Moranbah.

    The BHP Billiton-Mitsubishi Alliance proposal would boost exports by about 20 million tonnes.

    Ms Bligh said both had been declared significant projects and would undergo an environmental assessment process.

    The third proposal was a 30 million tonne a year open-cut mine near Wandoan by an Xstrata Coal consortium, which was declared a significant project in December last year.

    The draft terms of reference for the environmental impact statements are expected to be released by late September”

    Shouldn’t be any problem getting that EIS through quickly with something as important as an international ETS at stake (we trade and they emit)

  93. observa
    July 15th, 2008 at 15:12 | #93

    Coal exports increasing by 40% eh, on top of that info that Macarthur are exporting over 30% of the world’s pulverised coal now. It all makes sense when you really put those thinking caps on now doesn’t it?

  94. wilful
    July 15th, 2008 at 15:57 | #94

    Observa, your point is what? That politicians are hypocritical and short-sighted? Thanx for the insight.

  95. Chris O’Neill
    July 15th, 2008 at 17:12 | #95

    “Ian, the fact that we’ve spent 20 years working on a solution isn’t in itself a logical reason to be too attached to it.�

    No but it is a logical reason to fear that another twenty years will be wasted trying to come up with an alternative.

    Even if an alternative does take 20 years, at least that’s better than never.

  96. observa
    July 15th, 2008 at 21:03 | #96

    Acyually wilful, I would have thought this perverse action on behalf of wall to wall Labor shows quite categorically that any remaining believers in localised cap and trade policy, let alone ‘metooing’ some failed EU internationalism are delusional, to say the least. It points irrevocably to a horses for courses approach for Australia now, similar to Canada. However, given our intimate involvement with supplying much of the world with the worst posiible raw materials for CO2 emitting, we may well need a much better solution than the Canadian opposition are proposing. That’s my position and I’m calling the delusionists on it right here and now.

  97. wilful
    July 17th, 2008 at 10:34 | #97

    observa, Queensland and Federal governments aren’t the same. Bligh has a sovereign right to do what she’s done. QLD isn’t Australia.

    Of course we have got to stop selling coal sometime soon. So this is a terrible decision she’s made. But to suggest this is all Kevin Rudd and Penny Wong’s fault is more than a stretch

  98. Chris O’Neill
    July 18th, 2008 at 16:57 | #98

    I would have thought this perverse action on behalf of wall to wall Labor shows quite categorically that any remaining believers in localised cap and trade policy, let alone ‘metooing’ some failed EU internationalism are delusional

    “Cap and trade” or any other technique is a method for reducing our own emissions and has nothing to do with the emissions of countries that Australia exports coal to. It might suit someone’s wishful thinking to believe that we could countrol the emissions of China, say, by stopping export of coal to there but such belief is delusional. I can just imagine the type of language from Chinese officials if we told them we weren’t going to export coal to them anymore because we wanted to reduce THEIR emissions. That type of action is never going to work and the only type of action that has any hope of working is Australia setting a good example from its own emission reductions.

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