Home > Economic policy, Environment > A tender model for carbon pricing

A tender model for carbon pricing

December 9th, 2010

My UQ colleagues Lynette Molyneaux, John Foster and Liam Wagner have produced a paper arguing for a Tender-Price Allocation Mechanism for reductions in carbon emissions. I haven’t had time to consider the proposal in detail, and I don’t entirely agree with the paper’s characterization of the ETS and carbon tax alternatives (I currently lean to the carbon tax, mainly because the CPRS ended up such a dog’s breakfast that it would be better to restart from scratch). But, I think it’s useful to look at all the alternatives.

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  1. aidee
    December 9th, 2010 at 14:23 | #1

    Wondering if you could comment on the Cantwell / Collins CLEAR Act as a suggested mechanism to reduce carbon emissions. Essentially a batch of carbon shares that are bought by those that generate carbon dioxide through production and/or as a point source that introduces carbon e.g. coal mines, wells, etc… The population would be the recipient of the sale of these shares to offset the initial jump in pricing for goods and services reliant on these sources of carbon. Shares are then surrendered over time. There is only one bank of shares which disappears over time – no need for cap and trade, carbon offsets and the remainder of jiggery pokery which is taking place.

  2. Fran Barlow
    December 9th, 2010 at 16:10 | #2

    @aidee

    That sounds like a somewhat confused carbon tax and dividend scheme. Perhaps you just explained the income flows poorly. How do they price “shares”? Are you simply wanting to hypothecate proceeds to end users?

  3. Ben
    December 9th, 2010 at 16:48 | #3

    I can’t see how Molyneaux et al’s proposal would ever work in the real world.

    If the government can’t communicate something a ‘simple’ as a super profit tax on resources can you imagine them trying to sell this to the electorate?

  4. December 10th, 2010 at 01:43 | #4

    Here’s the Carbon Tax Center’s analysis of Cantwell’s the CLEAR bill. (Not an “Act”; it was not enacted.)

    “Should Carbon Pricing Advocates Support the Cap-and-Dividend Bill?” at http://tinyurl.com/2765gpe.

  5. Hermit
    December 10th, 2010 at 05:56 | #5

    The proposal fails the KISS test and may not make much headway. However should supporters influence the parliamentary committee we will have examine each of the claims line by line. Tendering for electricity provision is not like building a sports stadium. In the latter case if something goes wrong the big match can be held somewhere else. If electricity supply fails people lose their jobs and in some cases (eg home dialysis) could even die. I wonder if the proposal hasn’t given enough regard to security of supply with respect to backup services and voltage stability. Like it or not the currently unpopular forms of electricity supply are the ones that provide stability.

    A suspicious element is the way carbon penalties apply beyond a threshold. That seems to create the possibility of amplifying errors if that threshold is fudged in some way. However it would be wrong to make small criticisms if the big idea might has merit. I suggest the authors rewrite or create another paper that is more accessible. For example they could set out side by side comparisons of how they envision carbon tax, ETS and tendering would work. Derive electricity cost estimates under each scenario. As it stands the paper is too theoretical as a basis for a real world policy.

  6. Ikonoclast
    December 10th, 2010 at 07:09 | #6

    I note that Prof JQ has come round to the idea of a carbon tax. I have held that position for a long while. The notion of creating a market in a negative externality is, and always was, artificial and absurd. The opportunities for rent seeking, gaming, corruption and compliance avoidance are rife in any such scheme. The idea of letting the “magical” guiding hand of the free market automatically “manage” pollution policy (under legislation about ten times more complex than a carbon tax act) was a recipe for hidden agendas, lies, delay and failure.

    The simple, straighforward process is best.

    1. Implement a carbon tax.
    2. Remove fuel excise and roll it into the carbon tax.
    3. Remove all fossil fuel subsidies.
    4. Levy a carbon tax on all imports which do not pay a carbon price in country of manufacture.

    Market pricing carbon is a game where the various participants have multiple ulterior motives from windfall profits and rent seeking, all the way to deliberate obfuscation and permanent delay of any progress on carbon emissions. The carbon pricing fiasco is a win-win game for carbon polluters. Either they delay change indefinitely or they get a scheme that hands them more windfall profits. Only suckers fall for that trick. Let’s hope the public have finally woken up to the corporate gamesters who want to wreck the world for millennia for the sake of one decade’s profits.

  7. Ernestine Gross
    December 10th, 2010 at 09:07 | #7

    I have read the paper by Lynette Molyneaux, John Foster and Liam Wagner (Molyneaux et al).

    I agree with those, who have reservations about a cap and trade (ETS) system and I have mentioned my reasons on several ocasions. In brief, an ETS is easy to conceptualise in a one period global economy; gaining agreements among nation states is the big problem in this case. However, it is more difficult in a multiperiod economy – at least several decades – where the ‘adjustments’ require major long term investment decisions in physical capital, and allowing for new scientific information to arrive in the future. The latter is the actual problem. In this case an ETS does not generate enough relevant prices; the relevant missing prices are future market prices – not futures. So, we have two problems of market failure; one the absence of a market for a significant negative externality (ghg emissions), two, incomplete future markets for what I call ‘administered prices’. (McKibbon and Wilcoxon are aware of this problem and they propose a pragmatic solution)

    I can’t be sure whether this is what Molyneau et al have in mind when they make reference to “uncertainty” because they do not describe their notion of uncertainty, either directly with an explicit theoretical model or indirectly by reference to a fully specified theoretical model. I hence assume, this is the problem which Molyneaux et al have in mind when they make reference to “uncertainty”.

    The second reason for my reservation about an ETS lies in income distribution data. In my opinion, the income distributions across nations and even within countries such as Australia are too ‘unequal’ (the range is too big) to have a (pseudo-)market solution work without requiring further policy intervention. It is not clear how Molyneau et al deal with this problem because they consider only a sub-set of energy producing firms.

    If my assumption about the notion of uncertainty in Molyneaux et al is not totally wrong, then I am missing a description of the decision making problem for each and every agent in the economy (various types of producers, individual house holds and non-market agents) and I am missing the description (and proof) of the solution to the problem for the entire economy.

    IMHO, it would be useful if Molyneaux et al would first write a paper which makes precise their theoretical model and then another one in which they apply their model using, say simulation methods.

    Having said that, I am sympathetic with the approach taken by Molyneaux et al because I know from experience that academics in economics are often discouraged to produce first a theoretical model in the abstract and then an empirical application because ‘people’ want applied work with numbers and predictions ‘now’. IMO, this is a false signal. As Hermit says, one then has to go through( the mixed bag of ‘theory’ and ‘applied’) line by line and, if I may add, there are endless discussions because nobody actually knows what is going on.

    A final point, the term ‘carbon tax’ is unfortunate. It realy is an administered price. It seems to me the term ‘carbon tax’ has a similar connotation as the term ‘bonus’ – a rip off of ‘moms and dads’.

  8. Ikonoclast
    December 11th, 2010 at 07:26 | #8

    If a carbon tax is an administered price then any and every tax, excise, fee or charge levied by a government is an administered price. I agree with Ernestine Gross that a carbon tax is an administered price but then so is every other government tax. Every tax functions as an administered price.

    Taxes, as administered prices, can be used to modify economic behaviour when market failure is obvious and continuing. That is the material point in the case of a carbon tax.

  9. Ernestine Gross
    December 11th, 2010 at 21:36 | #9

    @Ikonoclast

    Words are so tricky, aren’t they? While I would agree that taxes (and subsidies) can be used to influence economic outcomes (via budget constraints and incentives of agents in the economy) and this may be aimed at mitigating ‘market failure’, I wouldn’t like to substitute the term ‘administered price’ for taxes in all cases. Broadly speaking, there are two distinct types of market failure, imperfectly competitive markets (including historically given wealth distributions that are such that a ‘minimum wealth condition’ is grossly violated) and incomplete markets. The point in case, ghg emissions, and many other significant negative externalities of production or consumption, are examples of market failure due to incomplete markets. I intended to suggest that the term ‘administered prices’ is preserved for market failure due to incomplete markets. Apologies for having being too cryptic.

    Now you may say incomplete markets refers to the case where prices are missing altogether while imperfectly competitive markets produce ‘wrong prices’ – in some sense (eg monopolistic and strategic behaviour of corporations). And, you may say, if there are incomplete markets then all prices are ‘wrong’ even if there are otherwise competitive markets. And I would agree with you (indeed this is the practical implication of the generic inefficiency result from the theory of incomplete markets). But, I would go on to say, it is nevertheless useful to know which type of ‘market failure’ one is addressing with a particular policy and for this purpose it is useful to have different terms.

  10. December 13th, 2010 at 10:19 | #10

    The issue of price certainty is interesting… Reduced competitiveness of emission-intensive technologies/industries intended outcome of putting a price on carbon. And why do companies “need” to pass on the costs? Higher energy prices and production costs can be countered by process innovation, efficiency gains, and product differentiation. All to often, the debate centres around who should bear economic burden rather than tackling climate change, and GHG reduction efforts so far are motivated by market forces, not scientific requirements.

    An ETS with allowances being auctioned remains a viable and most cost-effective way rather than any form of carbon tax or command-and-control approach, but is in itself insufficient.

  11. Alice
    December 14th, 2010 at 20:41 | #11

    @Ernestine Gross
    I never thought about this until Ernestine made this important point
    “The second reason for my reservation about an ETS lies in income distribution data. In my opinion, the income distributions across nations and even within countries such as Australia are too ‘unequal’ (the range is too big) to have a (pseudo-)market solution work without requiring further policy intervention. ”

    We certainly dont need another GST type flat tax. It wont help the already unequal income distribution. We do need to undo keating’s tax cuts for the upper decile of income earners in the 1980s from approx 69% to 40% (reverse it) or we need to really tax the upper one percent, or upper 5% higher before we consider making the ETS like another GST slapped on Mums and Dads.

    Its hard to know whether it isnt just all another Mum and Dad con (Telstra? QR rail?).

    Keynes talks about animal spirits in the economy and some interpret this as a type of herd behaviour.

    What we see now is a type of “herding” behaviour – whereby Mums and Dads spending is being increasingly sold to interested parties and we are in fact being “herded.”

    Case example – KKs rapid expansion of speed cameras – how long before speed cameras are privatised and they multiply even more and fines rise?
    Parking is being sold via longer hours of operation and more expensive parking fines.
    We are being herded to shopping malls. We are being herded to tollways. We are being herded to supermarkets. We are being herded to fewer select petrol stations.

    Are we being herded towards an ETS?

  12. Alan
    December 15th, 2010 at 00:00 | #12

    @Ernestine and Alice

    I share your reservations. I also worry about the extent to which the speculariate which seems to have become the ruling class of the planet are licking their collective chops at the income stream they can extract from a trading model.

  13. Alice
    December 15th, 2010 at 06:09 | #13

    @Alan
    Agree Alan – nothing is too sacred for the “speculariate.”

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