Warwick McKibbin on climate change

Last night I went to hear Warwick McKibbin at the Brisbane Institute talking about climate change. It was a good presentation and Warwick made an effective analogy between the McKibbin-Wilcoxen plan for climate change which uses fixed prices in the short run and fixed quantities in the long run, and the bond market, where central banks set short-term interest rates but allow long-term rates to be set by the market.

One thing I hadn’t realised, though, is that the plan doesn’t allow for international trade in emissions permits, even in the long run. McKibbin sees this as an advantage, since there’s less of a reduction in sovereignty, but I see it as a big problem for two reasons. First, there’s an obvious efficiency loss in not allowing countries with low-cost offsets to trade with high-cost countries. Second, the biggest source of credits so far is China, the country that is going to need the most persuading to join an international agreement (contrary to Warwick, I’m confident the US will ratify Kyoto, perhaps extracting some concessions on timing and targets, as soon as Bush goes out, and that Australia will do so then, if not earlier). The possibility of gaining credits, combined with the threat of border taxes on exports from non-ratifying countries will be needed to overcome the obvious free-rider problems.

It doesn’t seem to me that the restriction to national markets is crucial, at least to the long-term part of the plan. A modified version that incorporated some form of international trade would be more appealing.

11 thoughts on “Warwick McKibbin on climate change

  1. You will need an international system to prevent what will otherwise be very extensive free-riding by many countries on those countries that actually succeed in imposing limits to permit levels to such a degree that there is a real and significant reduction in CO2 emissions (i.e. assuming that any countries succeed with this in the first place). So you are right.

    But if we have an international system that can impose real and significant reductions globally by successfully limiting emissions permit levels globally, that can effectively measure compliance, and that can credibly enforce compliance on all states so that free-riding is prevented, this system will also involve limits on state sovereignty well beyond anything that exists today. So McKibbin is right as well.

    Now the question is what to do. And the economists can go take a coffee break.

  2. Limiting to the national perspective seems to be the crucial failure.

    Your suggestion for a threat of border taxes for countries outside a “coalition of the willing” seems appropriate.

  3. Speaking of “free-riding”,

    you could go on the World Naked Bike Ride! Brisbane, on 10th March.

    If the wasteful economies just cut back a bit (which is unacceptable, because it would mean a drop in that fiction known as ‘growth’ and would eat in to reported profits, lead then to a slowing of outrageous stockmarket advances and end up in a ‘Depression We Had to Have’) then massive amounts of fossil-fuel emissions could be postponed/saved.

    And pigs might fly!

  4. McKibbin’s proposal for an emissions trading scheme based on a fixed inital price rather than a fixed cap has the advantage that their will be more reductions in emissions that would occur in a scheme with a timid cap. Both the first phase of the EU emissions trading scheme and the cap proposed in the National Emissions Trading Taskforce (the state and territory one) are very timid. The EU ETS has had its carbon price collapse to less than 1 Euro because of the weak cap set by governments, things could be different in 2008-12 however, depending on how cheap it is to reduce emissions through practices such as increased energy efficiency.

    Having international trade in emsissions permits has the advantage of more ‘deep and liquid’ markets in carbon, leading to lower abatement costs. This is particularly relevant to countries such as Australia, which due to its smaller size will have markets much less deep and liquid than the EU. Developed countries being able to spend money on reducing emissions in developing countries has advantages of reduced overall costs, more financial flows to developing countries, and more incentives to recalcitrants such as Australia and the US to adopt emissions targets, because their excuse about developing countries not having targets will be less relevant.

    The main mechanism for financial carbon market flows at present is the Clean Development Mechanism. Most CDM projects are either hydropower projects or monoculture tree plantations, both of which are problematic. A better cost effective approach would be to reduce deforestation in the first place. Mechanisms for this are discussed in a recent report by the World Bank, the reference for which is as follows:

    Chomitz, K. Buys, P., De Luca, G., Thomas, T., Wertz-Kanounnikoff, S., At Loggerheads? Agricultural Expansion, Poverty Reduction, and Environment in the Tropical Forests, The World Bank, October 2006
    http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPRRS/EXTTROPICALFOREST/0,,menuPK:2463898~pagePK:64168092~piPK:64168088~theSitePK:2463874,00.html 31/1/2007

  5. Megan,

    I would love to go on a naked bike ride, but I live in Sweden and some parts of me would strongly object given the weather outside.

    Remember that we are taking about huge cuts in emissions levels from were they are now if we are to have a meaningful effect on global warming. Many argue that we need to reduce emission to 80% below the global total for 1990. This means radically changing our economic systems, which are fundamentally dependant on the burning of fossil fuels in every sector. Just imagine what is going to happen to the price of the tires on your bike!

    Although the per capita amount is central the moral issue of who should pay, it is the total level that is relevant to actually getting something done about climate change. And we in the rich parts of the world can’t handle this problem on our own. Developing countries account for 39% of world emissions and will be responsible for three-quarters of the increase in total CO2 emissions that will occur between 2004 and 2030. Total world emissions are expected to be 60% over current levels in 2030. China will be the world’s biggest emitter 2010.

    If just a few rich countries unilaterally cut emission there is good reason to expect their efforts to be undermined by other countries that will be able to increase their consumption of fossil fuels or that simply follow business as usual. Either way gaining much in competitive advantage.

    Pigs can’t fly, but they can get together and agree to organise themselves in ways that will radically change the world.

    If the pigs really want to do something about climate change they should be willing to give up some of their sovereignty to get organised.

    Peter: global emissions trading is as you say more efficient, but remember that the goal is not to simply slow down the emissions growth in developing countries I describe above but to radically reduce emissions from current levels. This entails and enormous change and would require an enormously aggressive global cap. So no amount of meetings in the World Bank or the European Commission will make addressing climate change a ‘win win’ situation. These reductions will entail painful costs and change.

  6. I think with sufficient political will the problems can be tackled bit by bit. The EU I think is contemplating auctioning permits rather than handing them out willy nilly. The giveaways and anomalies in the Clean Development Mechanism can be tightened up..no more billion euro bribes to Chinese CFC manufacturers. Tree planting can stand on its own merits, not for whopping carbon credits. In France Jacques Chirac has talked about carbon tariffs. Another idea I’d float is ‘pre-carbon taxing’ coal exports until an international scheme is up and running.

    It just needs the political nerve to do it.

  7. One of the problems with carbon taxes is that they could only be levied (and spent) at the national level.

  8. Wilful
    you’re right. However if fossil fuel exports were included in a domestic cap it would be harsh. Australia exports roughly the same amount of black coal as it uses. For a few countries to get the ball rolling on international action ‘second best’ policies might have to be used. However to play the guilt card on free riders those countries would have to be above reproach themselves; that only leaves Iceland I think.

  9. Some sort if tax or cap on exports would be a great idea. Australia exports about 1800 Mt CO2 worth of black coal, and uses about 190 Mt CO2 worth of coal for stationary energy generation. So the amount of coal exported is far greater. Carbon can be stored in soil and biomass, but it can be released back into the atmosphere through fire, excessive drought, overgrazing etc. Policies which encourage coal to be left in the ground are the safest option.

  10. Hermit

    What do you mean when you say “I think with sufficient political will the problems can be tackled bit by bit?” How fast is bit by bit, 50 years, 100 years, 500 years?

    ‘All we need is a little political will?’ Political will is the only issue, why treat it is as just one of a host of obstacle? All the evidence suggests that we suffer from a broad and deep lack of the required political will.

    If your prediction is based on an analysis what is the analysis? If it is based on blind faith, what reasons do you have for this faith?

    I would say that virtually all the evidence points in the opposite direction. Fearing the pessimistic analysis will not make the reality less pessimistic.

  11. The M-W model is a strange beast. Very clever and price based targeting seems more sensible than volumetric targeting. But the absence of trade is, as you say John an important inefficiency – and a political one too as you point out. The model also seeks to limit trading to fewer sources and fewer gasses – or did when I last looked. This is supported on the basis that there isn’t the certainty in other areas. But you don’t need certainty, you just need some way of ensuring that your estimates of emissions are not biased up and so lacking in fundamental integrity. I made these points in a brief paper here.

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