Longtime reader Jack Strocchi sent me this piece from the Times, reprinted in the Oz, with the headline “Carbon crash hits Europe’s emission trading scheme”. The main point is that, with the economic downturn, the price of carbon permits has fallen. The author concludes that this proves the need for a carbon tax rather than an emissions trading scheme.
This is a fine example of the fallacy of “petitio principii” or, in English, begging the question. This does not (yet) mean what TV commentators seem to think, namely “begging me to raise the question”.* Rather it refers to an argument in support of a proposition which assumes the truth of the proposition in advance. Clearly, if price instability is, in itself, evidence that a program has failed, then you need a program with fixed prices, that is a tax.
The main argument for a carbon tax rather than a trading scheme is that, if there is a lot of uncertainty about the cost of reducing emissions, and not much uncertainty about the damage caused by climate change, a fixed price for emissions (that is, a tax) will get closer to the optimal outcome than a fixed quantity.
But what’s happening here is completely different. The demand for emissions has fallen due to the economic slowdown. The reduction in price offsets the adverse impact of the trading scheme on firms that are already facing hard times. Equally, if the economy booms, the price of permits will rise. This is a clear case when a fixed quantity trading scheme performs better than a tax.
* Of course, meaning is defined by usage, so if a word or phrase is used in a particular way long enough, that becomes the meaning. But “begging the question” in its traditional sense is a useful phrase for which we have no good substitute. For the TV usage, “raising the question” is perfectly adequate.
John Quiggin 
I would assume a permit to emit is an asset. I’d like you to point out any asset that hasn’t crashed.
QED
What frustrates the hell out of me, JQ, is this total focus on the “means”, to the complete obscurity of the “end”. The end is providing a complete alternative in every way to open cycle carbon energy transfer to end the unnatural release of the carbon to the atmosphere. For the time being there appears to be some mystical faith that a commercial mechanism will achieve this all on its own. It is my expectation that by the time the realisation is made that carbon stays largely the same despite the commercial mechanism, the adaption lead time is totally dissipated and we are into rapid extreme weather cycles that suck away the economic strength required for building alternatives infrastructure. The environmental action flag that was flown over billions of dollars offered to the Australian auto industry is a clear indicator for the next eleven years of political environmental obfuscation.
A carbon cap is the same as a fixed volume quota less than equilibrium in the supply-demand diagram from Econ 101. If demand drops (in this case for carbon fuels) then the price retreats.
With a year to go on the ETS metal firms like zinc smelter Nyrstar are threatening to relocate to China. Not such a good idea as China is increasingly a net coal importer and the zinc could always be met with a carbon tariff on arrival back home. The big dummy spit I predict will be from Victoria’s brown coal producers.
John,
I’ve given up on ‘begging the question’. It now means ‘prompting the question’ by order of the army of media people who use it in that way. I don’t think of myself as a great purist in these matters – but it pisses me off. Sigh . . .
You can always just call it a “circular argument” which ought to be good for a few years before it becomes hijacked to mean arguments that take place in a rounded room or some nonsense.
Like Nick, I consider the original construal of ‘begging the question’ to have gone. However silly I know dogmatism over language use is, it still rankles to find useful constructions disappearing through what started as straightforward misuse by the ignorant.
I thought the relentless anti-prescriptivists at Language Log might have something to say on this one, but I couldn’t find anything. While there though I was cheered up by this (entirely OT) cartoon by the always great Steve Bell: http://languagelog.ldc.upenn.edu/nll/?p=859.
Here’s Language Hat taking the anti-prescriptivist line, and copping some flak
http://www.languagehat.com/archives/002237.php
As I said last month:
A decade on from Kyoto and all the indicators are worse. Five years of a thumping recession (depression?) an we’ll see real reductions in CO2 emissions for the first time since, well, the Depression.
Its not a good way to reduce emissions, but its effective!
(This is a clear case when a fixed quantity trading scheme performs better than a tax)
Depends on the rate of tax? you could also build in a escalator for economic conditions.
But the real problem with all of this is picking winners as regards alternatives.
Neither a pure carbon tax nor a pure fixed quantity permit scheme (with permit resale allowed) picks winners except in so far as they discriminate against those players that emit CO2e (which is the whole point of the exercise).
I don’t really think an ETS should be a called a trading scheme. It’s major feature is that the government auctions a fixed quantity of permits. I think calling it an “Emissions Quota Scheme” would be closer to the mark.
Pr Q says:
I am not competent to make an authoritative economic judgement on the relative virtues of carbon taxing over carbon pricing. When I was an undergraduate I would automatically have leant towards carbon pricing on standard free-market micro-economic grounds. But steady disenchantment with the free-market model has made me agnostic about such things now.
My main concern with the ETS is not with the positive theory, on which I will take Pr Q’s word. Its with the the policy practice, on which we have some evidence. (I have a minor role in a research project in this area.)
The ETS can easily turn into another post-modern liberal maze of smoke and mirrors. ETS’s are financial instrument trading schemes. Most such schemes are run through financial institutions. And financial institutions are currently not trust-worth IMHO.
The price of carbon in the USE collapsed well before the current economic downturn. There was anecdotal evidence of wide-spread rorting in the pricing of carbon and favouritism in the allocation of permits. And similiar shady dealings in the carbon-offset and clean development mechanism.
And USE emissions are still rising, even after much scheme tinkering. The April WSJ (News not Op-Ed) reports:
No doubt these are inevitable teething troubles (just like in cultural experiments I hear my alter ego mutter angrily). Undoubtedly there are good political reasons for favouring carbon pricing over carbon taxing. (With suspicious alacrity it has been embraced by the financial industry, not exactly political featherweights.)
But the policy reasons look shaky, given the inherent tendency of business people to game the trading system, esp with industry-captured pricers. And the runaway nature of the greenhouse gas juggernaut makes the case of authoritarian controls (ie regimentation through carbon rating, regulating and rationing) more plausible.
I dont trust elite liberalism. Not after the elite-driven cultural and financial foul-ups of the past generation. And the ETS looks like elite liberalism too me.
Proposition: the state is assumed to be the best mechanism by which the ETS can be implemented, enforced and its revenue distributed for the benefits of mother earth and its citizenry (in that order).
The proposition of a free market mechanism efficiently regulating the emmision of carbon under the control of the state is a fallacy. The Free market mechanisms and state action are like mixing oil and water at STP.
ETS in the hands of state will lead to the same oversight that has occured in our financial system. Instead of fractional banking we will call it fractional ETS, instead of the FED it will be the CARBO FED, instead of CDS we will call it carbon CDS etc etc.
A question for the state. The ETS implementation will no doubt have teething problems, does it have the same ability as a private enterprise to adapt its ETS to maximise profits and minimise carbon emmisions. The state will off course implement new improved regulations (please see paragragh three of my comment for examples).The state will also carefully assess what maximises its revenue before deciding to modify the ETS flaws. The flaws of the ETS must outweigh the cost of the revenue gain. Finally could the state take a long term view, with utmost humility explain the flaws of the ETS to the people and take the punishment of less popularity in the best interests of a better ETS. All the above propositions seem less likely in the hands of the state. Poor private operators will be elliminated but the state (left and right and center) can’t be removed.
A fixed carbon tax seems the best option. I suppose that will become progressive as well. The fallacy is the original proposition that the state will manage the ETS best by having its sticky fingers all over it. The solution lies somewhere in each persons conscience not the consience of the fallacy of the state.
What seems to be emerging is a staged release of permits at a fixed price
This would seem to solve the problem of collusive low bidding. The problem of rubbery offsets could be solved by limited them to say 10% of the total. Note those offsets would re-appear as deductions under a carbon tax eg we planted a tree that’s 10 tonnes of CO2 cancelled. The supposed problems of cap-and-trade just need a more disciplined approach.
I have to agree with Jack and Ubiquity here and it’s pretty obvious to me that the public admin, legal, accounting and financial office jock industries are again gearing up to conspire in another great swindle of the real productive sector of the economy, as if the devastation of their last great swindle isn’t crashing all about us now. Where are the true defenders of the working classes in the MSM nowadays I ask myself. Have they all turned into trained poodles and lapdogs of these plundering classes, or are they all one and the same nowadays? Perhaps a decent bout of unemployment might sharpen some of their senses and their quills.
If untangling their last financial derivative nightmare isn’t Herculean enough, their new one is racing ahead in earnest as I spaek. I came across a pretty good summary of them when tracking down some of the new acronyms (VEETS, REES, NEETS) and naturally it was the result of some law firm research work, since they need to get their head around their burgeoning prospects. Have a gander at it at law firm Johnson Winter and Slattery. Google JWS and from their menu choose ‘news’ and then newsletter 13th July 2008 ‘Trading Schemes Update’ and there is a PDF file link to their summary of ‘Mandatory and Prospective Environmental Trading Schemes Operating in Aust’. They don’t get paid for researching and neatly summarising all that, but clearly think it’s a very worthwhile investment.
Law firms are certainly not alone. Take UXC Limited. UXC who I hear you ask? Who the hell are they? Well apparently they’re involved in IT systems for Govt and metering and monitoring services for utilities, but that’s not the bit that’s important here. They have an environmental arm (don’t they all nowadays) but the important bit is their Field Services Group. Now you can find them on hsaa dot com dot au and there’s a nice green froggy picture for you to click on to see how you can get some free CF light globes and and water/energy saving shower heads. Well not exactly water saving because if you click on their FAQs you’ll find that they’re not interested in gas heated water, just the electricity stuff, although it doesn’t matter if you rent, just so long as you pay the power bill. Conveniently they have a range of different colour and wattage type CFs and energy saving shower heads, but if you still prefer your own they can fit a flow restrictor to keep you happy. Do they come back if you’re not happy with any of this? Well unfortunately no because the estimated CO2 savings from the estimated electricity savings are now created carbon credits forever and see you round. Of course they could sell the CCs but they could hang on to them and rent them out to firms that want to ‘manage their carbon risk’ as one Goldman Sachs bigwig put it.
Hang about a bit, What if the householder changed all this back after they left I hear you say. Well that’s a bit like taking a plane trip and buying some tree planting offsets. You hope they’ll plant the trees and eventually, well you know it it is. At least they actually fit the damn things unlike Origin energy with my old man. They signed him up for greenpower and then sent the shower head and a pack of CFs and would he mind signing and sending back the form to say he’d fitted them please? You do get a bonus green fluoro footy for the grandkids this way. Funnily enough Origin had to backtrack on the overall deal because even the Govt baulked at them claiming Snowy Hydro in their grand plan. No matter, because they can always go global shopping for the most amenable carbon credit scheme. Perhaps like AGL with the Chicago Climate Exchange (CCX). Along with wind and solar, they’ll take offsets from forest plantation owners, existing hydro and methane from landfill, even if you have to tap methane or else kaboom! On and on it goes as they build the next big swindle in derivatives. Hopefully the Chinese will accept carbon credit for real products from their dark satanic mills in future. Keep your fingers crossed.
There is no stopping this manic preoccupation with AGW and its rolling bandwagon. Any criticism of the shortcomings of amelioration proposals is heresy now. Argumennts for caution for biological diversity and countervailing market power for its preservation are swept away like rainforest for palm oil and corn for ethanol in a tsunami of emotion and moral badge wearing. Leave me out of it.
In future, please direct lengthy diatribes like this to Weekend Reflections – this kind of thing makes threads unmanageable, and WR is there for that purpose- JQ
Sounds a lot like a carbon tax.
A trading scheme may or may not make economic sense, but it doesn’t make political-economic sense. If it turns out to be easier to reduce carbon than expected, the trading scheme loses any force, because the permits become cheap. If it turns out to be more difficult to reduce carbon than expected, the government that issues the permits can be convinced to issue more of them.
Infrastructural decisions are really what it will take to solve this problem. And they have never really been made through market mechanisms, and I see no reason why they should be.
It is not hard to find examples of minimal commitment to the bricks and morter of climate change arrest.
http://www.smh.com.au/news/environment/energy-smart/closure-of-solar-plant-casts-cloud-over-industry/2008/11/18/1226770451101.html
http://www.smh.com.au/news/environment/global-warming/australia-baulks-at-tougher-greenhouse-target/2008/11/20/1226770621413.html
http://www.smh.com.au/news/environment/global-warming/rural-lab-for-carbon-capture-to-close/2008/11/16/1226770256769.html
The interesting one is the BP Solar factory closure. For one the factory that employs a huge 200 people is seen as one of this countries largest initiatives. And secondly it is an oil company shutting the plant in a cost cutting move. Where is the Rudd government environmentally concerned bailout here?
That is what I call commitment. Not.
Isn’t a problem with carbon trading the enormous sums that brokers and other middlemen anticipate?
It looks like a commercial swiz rather than really getting anybody to cut emissions that they could cut,
and the reason it gets more publicity than a tax is because of the commercial profits to be made.
# 18 Valerie Yule Says: November 23rd, 2008 at 5:26 pm
Trading is popular with elites. Taxing isnt. So the political attractiveness of an ETS is not hard to see.
My own thinking is that the state should mandate phasing out of coal electricity generators. And put a huge effort into developing alternative energy generators to replace them.
No doubt easier said than done. But it cuts out the financial middlemen.
scheme loses any force, because the permits become cheap that’s the whole idea, it backs off when the job is done or there is a recession. The cap is a target and it doesn’t matter if it is reached by technology, fuel switching or lower aggregate demand. Note if the cap is fully binding then there is no rebound effect since in theory you can’t buy any more carbon.
That’s the theory. In reality there’s a hundred ways to water it down with extensions of time (to develop ‘carbon capture’), credits or offsets (eg to plant baby trees), generous cash compensation or flat out exemptions. All these loopholes apply equally well to a per-tonne carbon tax except with c&t the physical limit has been declared in advance. The carbon price should float or semi-float in steps. It just needs the political will to do it stringently.
The last two posts have hit the nail on the head.
It is almost as if trading is the goal rather than co2 reduction.And one doesn’t necessarily flow from the other.
“that’s the whole idea, it backs off when the job is done or there is a recession.”
But, of course, the “job being done” means meeting the original target, which may well be inadequate. Using a trading scheme means that you have nothing working towards the upside possibility of doing better than the target.
In reality, I expect the trading scheme to fail due to fragility. All it would take is one unfriendly administration to repeal the thing or subvert the number of permits, or the enforcement, and it’s gone. I expect the next friendly administration after that to wise up and make the kind of infrastructural decisions that an unfriendly administration can’t just reverse, because they have already been built.
As John suggests, there are macroeconomic advantages to cap-and-trade compared to a tax. A problem with cap-and-trade is that if there is enough of a slow down then amount of emissions will go down to less than the level of the cap, and the price of emissions can approach levels close to zero. Banking of permits may limit this. A question that arises with banking is whether the quantity of permits banked is subtracted from the cap in the following year. I believe that it should be because it reduces the possibility (the ‘expectation’) that the amount of emission reductions is less than optimal; it also reduces the implementation risk (e.g. less risk from Phase I EU ETS style overallocation problems).
Fluctations in carbon price can adversely affect parts of the economy dedicated to reducing emissions, and add an element of risk. Having a price floor may be a better way of dealing with this issue than banking of permits.
I hear (& use) the term “begs the question” having a somewhat different meaning. Speaker is stating that the respondent has avoided answering the question, so it should still be asked. Similar but not the same as “begging me to raise the question”
Clearly that meaning has far surpassed the traditional assumes the truth of the proposition in advance. A usage i’ve never heard anyone use outside of blogs.
The Australia Institute has just released a very interesting report on the ETS, noting the inequity of giving permits of polluters who gain when households reduce their emissions…
Click to access file.php
oops forgot to close my blockquote… The last three paragraphs above are mine, not the Australia Institutes.
PS: ProfQ, I wish you’d put edit functionality into your wordpress installation.The preview doesn’t work in my browswer (Opera) and apparently, it’s really not that hard..
http://www.viloria.com/secondthoughts/archives/00001445.html