An argument for emissions trading

With resurgent debate over the relative merits of carbon taxes and emissions trading, attention has turned again to Europe where the market price of emissions permits has fallen sharply as a result of the financial crisis and recession. Most commentators have seen this as a strike against emissions trading, but actually it’s a positive. The big concern about price uncertainty arises when we are very uncertain about the cost of reducing emissions. Under cost uncertainty, setting the emissions target too low could impose unexpectedly high costs on the economy.

What’s happening here is that we are uncertain about the rate of growth of the economy. An emissions target is countercyclical since it imposes a relatively high cost when the economy is strong, and a much smaller cost when the economy is weak. This is a Good Thing.

My view, for what it’s worth, is that a well-designed emissions trading scheme is the best available option. But given the weaknesses of the government’s proposed scheme, I’m prepared to consider alternatives.

Note also that different macroeconomic shocks give different outcomes. Warwick McKibbin has done some work showing that an upward shock to growth in one country will benefit other countries less (and perhaps not at all) under global emissions trading than with a price cap or hybrid policy. That’s because the growing country will demand more emissions permits, pushing up the global price.

It’s easy to see that McKibbin’s modelling result is consistent with the analysis here. By symmetry, a negative shock in one country will harm others less under emissions trading than under the price-based alternatives. And the same logic applies to sectors within countries. It’s easy enough to see then, that for any economy with a fixed aggregate target, or for the world as a whole, emissions trading will tend to reduce the benefits of booms and the cost of slumps.

Framing nationalization

With even Alan Greenspan Smother move and Lindsey Graham now in support, and the alternatives canvassed in the Geithner “plan” thoroughly discredited (even Wall Street hated it), large-scale nationalization of US banks now looks inevitable. But, as Obama has observed, this kind of thing seems alien to US culture.

This looks like a classic Lakoff framing problem. How can the obviously necessary, also be made to seem natural? There have been a couple of approaches so far.

The first is to emphasise that the Federal Deposit Insurance Corporation routinely takes over failed banks. So, as Paul Krugman puts it “nationalization is as American as apple pie“.

The second is to focus on the ultimate goal which is to return the banks to solvency and private ownership. Hence the lovely euphemism coined (I think) by Calculated Risk “preprivatisation

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Economists agree!

Tim Lambert links to this article by Eric Pooley in Slate’s The Big Moneye which points out that, for all the disagreement among economists regarding the details of climate change policy, there is substantial consensus on the following main points
(i) the cost of action to stabilise atmospheric concentrations of CO2 and other greenhouse gases will be of the order of 1 per cent of GDP
(ii) a strong mitigation policy is preferable to business as usual

There is also widespread, though not universal, support for the view that it is best to act early and strongly rather than waiting for more information.

The article makes the point that the quarrelsome nature of economists obscures the level of consensus and that has certainly been my experience.

Also from experience, I know that quite a few readers of this blog are unwilling to believe that (i) can be right. But the argument from personal incredulity is not a sound basis for reasoning. It’s easy to check that the cost can’t be much more than 10 per cent of GDP (about five years worth of economic growth), which contradicts the common intuition that cheap energy is economically vital. Once you accept that upper bound it seems silly to disagree with the experts on the best estimate in the range 0-10.

Economists criticise the emissions trading plan

I’m one of ten economists who has signed a statement criticising the inadequacies of the Rudd government’s emissions trading scheme. The statement is over the fold.

The weakness of the scheme and the fact that emissions reductions achieved through voluntary action or the newly announced home insulation scheme don’t attract credits have led to a revival of the debate over the merits of a carbon tax, as an alternative to emissions trading. Of course, it is possible to have both, as in hybrid schemes such as that proposed by Warwick McKibbin.

The question of whether to go with a carbon tax, emissions trading or a hybrid turns on two main issues. First, with a tax, or with a hybrid scheme where the emissions price is capped, we get price certainty at the expense of uncertainty about how much emissions will be reduced. With a pure emissions scheme, or a hybrid scheme in which the tax acts as a price floor, we have certainty about achieving at least the target level of emissions reductions, but uncertainty about how high the price might be. As I’ve argued before, the risks of not cutting emissions enough outweigh the risks of setting the price too high.

The other question is more pragmatic. Which approach gives the best chance for Australia to contribute to a global agreement that will actually stabilise the climate. In the past, I’ve been of the view that a pure emissions trading scheme is the way to go in this respect, and I still can’t see that an international agreement is likely to be reached without general adoption of emissions trading schemes. . But there’s no doubt that developments over the past year or so have strengthened the case for making a carbon tax part of the mix.

Now, here’s the release

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Bushfire appeal continues

I’m extending the appeal until this evening (Monday). There were some problems with links which led to a lot of people being unable to find the thread. These have now been fixed, I hope and the total is up to $9425 as of Monday morning. You can record contributions here, or in the original thread.


Ransom video

It’s Monday evening, and the grand total for the appeal is $10,025 which is a marvellous effort. It’s certainly a big achievement for a blogosphere which is so often castigated as being trivial, self-absorbed and so on.

Let’s all give ourselves a pat on the back for this, then resolve to show similar generosity all year around, in public policy as well as private charity, and regardless of whether the suffering we aim to alleviate is spectacular and newsworthy, or grinding and prosaic.

Having reached our target, I’m closing off the appeal, but of course there’s still time to donate to this appeal (details in the post below) and it’s always a good time to give some help to others in need.

AARES after-dinner speech

After-dinner speeches are generally best forgotten after the dinner even when (perhaps particularly when!) they are extremely funny. My speech to the Australian Agricultural and Resource Economics Society dinner wasn’t funny at all (at least not intentionally), but a couple of people asked me to write it up for the blog. So I’ve done it. I didn’t have notes when I talked, so this is not an accurate record, more like a reconstruction of what I meant to say

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Fire disaster appeal

As with similar tragedies in the past, I’m using the blog to promote an appeal for donations to help those affected by the terrible bushfires. I’m kicking it off with a donation of $500. Anyone who’d like to take part can record the amount donated in the comments thread below. I’ll report the total from time to time. Past appeals have raised as much as $5000, and it would be great to match that.

You can donate to the Red Cross Appeal here or make a direct deposit to the Victorian Bushfire Relief Fund –
BSB 082-001, Account number 860-046-797. Once you’ve done that post your comment, and encourage the rest of us.

If anyone has any new ideas for fundraising, or would like a repeat of some of the old ones please feel free suggest them.

I’d like to confine comments on this post strictly to fundraising and other expressions of support. There’s already a discussion of the fires, and metacommentary on fundraising can go in the Monday Message Board (running late, but up soon).

Update 12:50pm We’re already over $1000, from donations big and small. Small donations from those who are short of cash themselves are more significant in a lot of ways, than bigger amounts from those who have plenty to spare.

Update 8:20pm Single Black Female rip The total by my estimate is $3650, which is exceptionally generous. If only we could maintain this level of solidarity all the time, and in response to the everyday tragedies of poverty and hunger, as well as in times of disaster, is there anything we couldn’t accomplish?

Update 1:50pm Wednesday

We’re now at $4530 by count, so I’ll offer an incentive. A free post, written by me, on any topic within reason for whoever pushes us over $5000. To avoid some game-theoretic complications I’ve just thought about, I’ll be offering a special award for anyone who contributes between now and the $5000 target, however large or small their donation.

Update 8:50am Thursday The total has now reached $5750, which is a huge success and a tribute to the generosity of readers of this blog.

The donation that tipped the total over $5000 was from commenter “Mike” who gets to propose a topic for a post by me. Honorable mentions to James Farrell and GDavies whose generous donations pushed us very close to that total and thanks again to everyone who has contributed.

I’ll probably wrap this up tomorrow evening, so get in now with your contribution.

Update 9:50am Friday The Midnight Meat Train divx The total is over $7300 which I think is our best ever. Get in quick with your contributions, as I plan to finish the appeal here this evening. (Of course, you can still make contributions to the Red Cross or Bushfire Relief Funds if you’re running late).

Further update To co-ordinate a joint appeal with Larvatus Prodeo, I’m keeping the appeal open for the weekend. With LP readers joining those here, I’m confident that we can raise at least $10 000.

Update Saturday AM Total is now $8185, enough that I’ve stopped trying to do it in my head, and put all the info into a spreadsheet. I know most people have already donated by now, but if you haven’t, or haven’t got around to recording the fact, here’s your chance.