0.4 percent of a wrecking ball makes …

… a ball bearing perhaps?

0.4 percentage points is the estimate of the CPI impact of the carbon price, published in the Herald Sun (hardly likely to understate it). In the attempt to stop this catastrophe, the Australian political right has trashed its intellectual credibility, embraced lurid conspiracy theories, reduced its leading publications to laughing stocks, and promulgated a string of easily falsified talking points, each one more absurd than the last. So, now that their predictions of doom have come to this, what will be their response? My guess is that they will double down – Catallaxy and Andrew Bolt are already on the job.

Of course, a price of $23/tonne is just the thin end of the wedge. Most estimates suggest that we need a price somewhere in the range $50-100/tonne to produce a long run shift to a low-carbon economy. That might amount to a price increase of 2 or 3 per cent – about the same as the GST.

165 thoughts on “0.4 percent of a wrecking ball makes …

  1. The $50 carbon price may be right. In Australia it should make the RET superfluous and make gas an economic replacement for brown coal. I would like to see what would happen under a cap and trade system in which all permits were auctioned and offsets disallowed. The EU claims to be heading that way under Phase 3 of their ETS.

    However politicians can’t seem to help themselves from wangling freebies for rent seeking constituents. Here Andrew Wilkie praised the carbon tax but made sure a business constituent, a zinc smelter, was 94.5% exempted. Thus carbon pricing schemes end up as a mish mash of exemptions, deductions and other escape clauses.

    In the EU the glut of free permits and questionable credits has seen their permit price slip to $10 and below. Supposedly after 2015 (should Gillard survive) these EU offsets can be used in Australia but restricted to 12.5% as opposed to 50% in Europe. It’s hard to see a CO2 spot market price ever exceeding $30 in Australia nor the freebies eliminated. If the aim is really big emissions cuts (eg 50%) it is set up to fail. I also believe we must slap a carbon tariff on goods made in China until they come on board.

  2. @John Dawson

    Imagine what folly it would have been 100 years ago to try and project the problems of our time and act to solve them with the knowledge technology and resources available then.

    The same argument can be used against those that deride renewable energy generation, to continue with the +100 year old technology of digging up coal and boiling water by definition must be a folly.

  3. @Hermit I take the view that these are anomalies and are symptomatic of a disruptive technology, the nett result appears to be a reduction in emmissions with a goal of a zero emission energy industry.

  4. It is rather dismal for an opposition to focus on a ‘tax which will roon O-straya’ given that their alternative policy to similar CO2 emissions reduction commitments has even got less legs to stand on. Take the experience of the EU, if anything will roon a nations economy, it will not be a carbon scheme, for there are far bigger financial black holes in the inflating economic universe. Rather, the proof in the pudding will be whether, however mangled, any carbon ‘tax’ scheme will actually be effective in reducing CO2 emissions.

    Further, the EU approach has invariable been portrait as corrupt and mangled, given the ‘tweaking’ and phased approach they have taken. Given the complexity of the intervention and it’s lack of precedents are there alternatives? In the US, despite their rhetoric, they also have embarked on various levels and scale to reduce their emissions, and indeed there is China with its delicate balancing act. Ultimately, are there any indications of the different approaches success in CO2 reduction?

  5. the small CPI increase is a good thing too if the shape of things to come is http://www.usnews.com/news/articles/2012/07/19/report-generation-x-doesnt-care-about-climate-change

    Just two percent of those aged 37 to 40 said they follow climate change “very closely,” a 50 percent drop from 2009. More than half said they follow climate change “not closely.”
    Why the drop?

    Study author Jon Miller says that climate change is a complex issue that requires a lot of time to fully understand. It also is not likely to start meaningfully affecting people’s lives for many years, when Generation X will have died out!

  6. A tax question for Prof J.Q. or any other economist. If a carbon tax of x dollars per ton is levied and all the revenue raised is given back to consumers by way of rebates how is this inflationary overall? The policy is revenue neutral so no inflation push or deflation push comes from government spending. Assume for each person, the carbon tax component of the new coal electricity price would be exactly covered by the rebate. Assume no tax and rebate costs as the government already has tax and rebate mechanisms in place. (Yes, I know this assmuption is dodgy as there will still be a churn cost, but let the assumption stand for the moment.) If consumers so wished they could spend the rebate on coal fired power and effectively pay the same rate for power, hence no inflation.

    However, if another form of power now became more attractive as it carried no carbon tax, the consumer could switch to that form.

    The only inflation push would seem to be from higher administrative and compliance costs in government and business. The economic cost of the changeover would be borne by the coal mining and generation interests as they progressively faced a problem of stranded assets. This assumes no compensation for such interests.

    It seems to me inflation is zero to minimal if you do not compensate fossil fuel interests against stranded assets. Stranded assets are a legitimate risk of business in a changing world and there should be no compensation for them.

    Where unemployment occurs (and where it already exists) a separate program named the Job Guarantee could be run. All the future fund monies could be devoted to the Job Guarantee and would pay for all those jobs for about 10 years IIRC. The boost to the economy from full employment would greatly improve the economy and the initiative would pay for itself after 10 years. The Job Guarantee idea is currently recommended by Bill Mitchell though I am sure he is not the only advocator of the idea.

  7. @Jim Rose “It also is not likely to start meaningfully affecting people’s lives for many years, when Generation X will have died out!”

    As we speak ‘Frankenstorm’ Hurricane Sandy, after killing 41 people and causing considerable damage in the Caribbean heading for the US. Last year highly unusual Hurricane Irene devastated large parts of the US eastern seaboard with estimated damage of $15.6 billion. Pile that on top of the damage done by the extreme weather damage done throughout US summer, as in crop failures wildfires etc. No wonder reports are appearing that state “74% of Americans now say that shows climate change is making the weather worse”.

    We are not sheltered from the consequences of direct and indirect climate change impacts here in Oi- Oi- Oi-straya. We live in an society which heavily relies on sophisticated and complex infrastructure. We live in a globalised world where insurance risks are hedged by reinsurance. We rely on heavily industralised food production in climate critical areas to feed global population, which doubled the last 25 years (iirc) and continues to grow unprecedented. Given the current wealth distribution, what will they do to feed themselves, where will displaced people go. How many Naurus have we got?

    I am with The P O Poet, current politicians are corrupt criminals and not a genuine Leader within sight. The contemporary citizenry are a bunch of autoerotic bogans living in msm fairyland semi detached to shopville. The band is playing a gay tune on the Titanic as it enters iceberg waters, it is a matter of time and it is going to be ugly. The sad thing is, it does not have to be that way.

  8. From here:

    http://articles.marketwatch.com/2011-09-09/commentary/30750008_1_climate-change-climate-research-community-global-warming

    “AIG was the first U.S.-based insurance company to adopt a public statement on the environment and climate change, recognizing the scientific consensus that climate change is a reality and is in large part the result of human activities that have led to increasing concentrations of greenhouse gases in the earth’s atmosphere.” — Chartis, a subsidiary of American International Group Inc.

    “The earth’s climate appears to be changing in ways inconsistent with the historical record upon which catastrophe models draw data.” — ACE USA

    “Climate change could cause reduced loss predictability.” — RiverSource Life Insurance Co. of New York

    “Commercial, residential, and marine property classes may be at risk because of climate change.” — General Reinsurance, a Berkshire Hathaway Inc.

    “Swiss Re’s climate experts remain in close contact with the climate research community. Recent initiatives have looked at the effects of climate change on coastal flood damage and storm damage in Europe as well as the economics of climate adaptation…around the world, including Florida.” — Swiss Re AG

    The above are statements from the biggest insurers/reinsurers in the world.

    Looks like Jim Rose’s incredibly perspicacious GenXers [I bet that’s the first time that phrase has ever been used] will be expected to pay higher insurance premia.

    Of course, said GenX sages may opt to insure with companies that refuse to believe that the world’s risk profile has deteriorated. But if those companies do that, they should not expect to buy reinsurance from the world’s biggest reinsurers.

    JR’s GenX know-alls may not care about that and hope that when it comes time to pay up on their claims, their insurance companies will still be in business.

    Good luck with that Oh Wise Ones.

  9. @Katz The survey drew responses from 88 insurance companies and found that while there’s a broad consensus that climate change will result in more severe weather and more insurance losses, only 11 of the companies surveyed have implemented climate-change policies.

    2011 is rather late in the game to sign-up to global warming?

  10. Why do you think it is “rather late”?

    As businesses with a well established business model, I’m surprised at how quickly some of the biggest and longest established of these companies have embraced the possibility of AGW.

    I think that your statement about surprise at the alleged long interval between knowledge of AGW and acting on it is self-serving. After all, you have stated that a much smaller percentage of GenXers accepted the identical reality. In comparison, therefore, you have acknowledged tacitly that insurance companies are much more accepting of these new ideas than GenXers.

  11. globale warming was not mentioned in the recent presidential debates including the townhall. It is a close election, so every vote winner would have been mentioned?

  12. JR,

    Do you acknowledge that GenXers (and everyone else) will pay a higher risk premium on their insurance policies because of AGW?

    If so, then contrary to your assertion, GenXers are already suffering financial costs “affecting people’s lives” long BEFORE they die out!

    You need to adjust your views on this important topic. And this adjustment compels you to change your views on a wide range of related topics.

  13. @John Dawson
    No down side to enclosure? Just happy days eh? I think you need to have a bit of a loom at the effects of the industrial revolution on some of the … less well off members of society. I must say though, your blind faith is breathtaking in it’s dept.

  14. No JR.

    You made an assertion about the absence of effect of global warming on the lives of GenXers.

    Do you now resile from that assertion?

  15. John Dawson agrees that CO2 levels in the atmosphere have increased by over a third since the start of the industrial revolution and that burning fossil fuels has emitted more than enough CO2 to cause the increase, but says humans have only been responsible for part of the increases. He says we have contributed to it. So, if you think that through, then for that to be true, in a period in which atmospheric CO2 levels have risen in proportion to human emissions, something else would also have had to be emitting large amounts of CO2 while at the exact same time that we are completely unaware of, and much more strangely, something we don’t know about would have to be removing large amounts of CO2, otherwise we would have higher atmospheric levels of CO2 than we currently do. Not only would these two process have to somehow match human emissions, but they would also have to result in the carbon isotope ratios we currently observe. The mind boggles thinking about how this could come about naturally. Now perhaps this could happen on a small scale and escape our noticed, but then John Dawson would have said humans are mostly responsible for the increase in CO2 levels, not that we just contribute. So my question is, does John Dawson believe aliens are interferring with the composition of the earth’s atmosphere?

  16. @Ronald Brak

    what a quaint 70’s idea – you must be a baby boomer

    silly fool

    it’s not aliens

    it’s a number of us-es in parallel universes sequestrating carbon from their universes to ours

    and John Dawson is actually an agent of those universes – he is in fact the one and only CEO and sales manager of the “inter-dimensional refuse company inc”

    for a price he will skive off our CO2 as well to some other dumb schmuck universe earth

    Aliens? how quaint.

    p

  17. Jim Rose :
    @Katz have any insurance companies put up premiums?

    A simple Google search will reveal an unwelcome answer for you.

    Do you still assert that GenXers are unaffected by the consequences of climate change?

    Of course, GenXers can claim that their lives are not affected by climate change. Denial can persist for as long as its victim can afford to pay for the consequences of that denial.

  18. JD: That was a ‘because we can’. Let me ask a different question: is there any level of environmental despoiling which is unsustainable?

    As for JR and co’s political debate: I’d vote for any candidate with a strong, coherent stance on climate change, because frankly at this point everything else is window dressing. Happily it does seem to be the case that candidates with credibility on climate change are often sensible and compassionate on other matters as well. (Unhappily, they do not seem to be in many major parties worldwide.)

  19. JD: your response to (2) misunderstood the question. My point is not that we can’t keep burning fossil fuels (unfirtunately there’s plenty), but rather that it is an entropy-creating process – there’s no way this sort of activity is somehow offset by solar energy (which, you’ll recall, is the only difference between us and an chaos-prone closed system). That you imagine it is sustainable is fanciful, like believing in perpetual motion.

  20. @Dan good to see that you are in touch with your inner republican.

    The 2008 Republican Party presidential nominee supported cap-and-trade. See http://www.cfr.org/climate-change/candidates-climate-change/p14765 which says that ‘McCain has been one of the most outspoken members of Congress on the issue of climate change’ and he “managed to force the first real Senate vote on actually doing something about the largest environmental peril our species has yet faced.”

    In 2007, McCain he reintroduced his bill, with bipartisan co-sponsorship. In a March 2008 speech, McCain called for a “successor to the Kyoto Treaty” and a cap-and-trade system” that delivers the necessary environmental impact in an economically responsible manner.”

    mccain has since changed his mind because of the loss of voter interest in global warming.

  21. @Dan good to see that you are in touch with your inner republican.

    The 2008 Republican Party presidential nominee supported cap-and-trade. one source said that ‘McCain has been one of the most outspoken members of Congress on the issue of climate change’ and that he “managed to force the first real Senate vote on actually doing something about the largest environmental peril our species has yet faced.”

    In 2007, McCain he reintroduced his bill, with bipartisan co-sponsorship. In a March 2008 speech, McCain called for a “successor to the Kyoto Treaty” and a cap-and-trade system” that delivers the necessary environmental impact in an economically responsible manner.”

    McCain has since changed his mind in line with the loss of voter interest in global warming.

  22. Good for him! I do have some concerns about the capacity of cap and trade to deliver what needs to be delivered, and I also don’t understand how a ‘loss of voter interest’ should mean jack about something as important as this. Political leaders (I use the term in a relative sense) should be saying: this is the big issue, this is what we’ve got to figure out asap.

  23. @Dan In a democracy, political leaders need to win elections. the last Australian leader to take an unpopular big but this is good for you policy to the electorate was Howard and his GST. Hewson was the one before that who gambled on a great big new tax

    Climate change policies are not doing well at the ballot box in many countries.

    The reason for that unpopularity is the voters decide in a democracy. Democracy is not a faculty workshop that demands a high level of knowledge and analytical sophistication and a severe curtailment of self-interest as the price of admission.

    Elections are not going away. The environmental movement will have to learn to sell its messages to voters through thick and thin, and not just be the good times party.

    Schumpeter’s theory of democratic participation is voters have the ability to replace political leaders at regular elections.

    Citizens have sufficient knowledge and sophistication to vote out leaders who perform poorly, vote in minimally competent replacements, and prevent serious misalignments between government actions and public opinion and at little cost in time or distraction from their private pursuits. That is a pretty low bar that the environmental movement can’t jump.

  24. Well, sure, I guess I just don’t understand why it’s not the top of the policy’s to-do list. If your house was burning down, you wouldn’t ruminate on the pros and cons of gay marriage and Roe v Wade. In fact the solution to the GFC suggests itself too – employ people to build green infrastructure. Worry about the deficit at a less silly point in the cycle.

  25. See http://www.foreignpolicy.com/articles/2009/04/15/think_again_the_green_economy?page=0,6 by Matthew Kahn:
    “With the right policies, we can build a green economy and stabilize the climate. A good first step might be to stop telling ourselves that half measures will work and that the transition will be easy and painless: just a few subsidies here, some technological wizardry there, and presto, green jobs. This may be the most inconvenient truth of all.”

  26. Jim Rose,

    Climate is a physical reality which does not react to opinion polls or democratic opinion.

    There is only one Climate reality, and it is the one that is in the process of forming.

    Neither my opinion nor your opinion are at all relevent to the physical reality.

    It is only our collective action that is important.

    Although you clearly do not understand this, we are all better off for facing the challenge of Climate Change. Technology is moving at a phenomenal pace and the resultant efficiencies and economies are serving to improve our standard of living.

  27. @BilB The Greens advocate applying truth in advertising laws to election promises. This is shooting themselves in the foot because of their unwillingness to admit that there will be great big new taxes.

    The Greens are not leading by example by saying that that the transition will be easy and painless: a few subsidies here, some technological wizardry there and presto, green jobs.

    Churchill did better with the promise of blood, sweat, and tears.

  28. I’m up for significantly higher taxes and certainly far from sanguine about the notion that there will be technological silver bullets. But massive investment in PV seems to be an obvious candidate for public expenditure (and job creation).

    I don’t know about you, but I’m very, very average in terms of income by Australian standards and my life is frankly luxurious by any reasonable standard.

  29. And wind. And yes, it will cost. And yes, it will be ‘inefficient’ in terms of CBA. You know what else is inefficient? Unemployed people, and collapsed biospheres.

  30. Basically the policy settings as they stand have a massive, massive (albeit largely – not entirely – deferred) set of externalities attached. The notion that if we ignore them that somehow a more sensible or responsible position – morally, economically, whatever criteria you like – than not ignoring them is bizarre. Even if you’re Hayek, it doesn’t make sense. Happy to do my bit – where’s the 51% on this?

  31. Jim Rose,

    You are just flinging words around aimlessly. Try adding some quantitative substance to your ramblings.

    The fact is that the transition to a Green economy will be painless, and economically positive. The Greens are being both honest and completly factual.

    The “Great Big New Taxes” that I am most concerned about are Toxic Tony’s 1.5% business tax to cover his gilt edged maternity leave “”””promise””””, and the stealth taxes he will need to impose to cover his agricultural corporate welfare Soil Carbon farcical fantasy. That is if he ever gets close to being a prime minister, which I doubt will eventuate.

    But the real concern here is that you believe that an Abbott government would mean lower taxes. That is one huge leap of faith, a leap over one huge credibility gap.

  32. To be more precise, the transition to a Green economy is consistent with steadily improving material living standards, as well as environmental benefits. Conventional measures of GDP, National Income and so on will increase more slowly than they would otherwise. If “Green economy” is taken to mean simply to refer to stabilzing global CO2 concentrations, the required reduction in growth is around 0.1 percentage points, relative to a baseline of around 2.0 for developed countries.

    The OP is an illustration. Australia’s carbon price is already having a significant impact on CO2 emissions, and we can now see that its cost is trivial, exactly as all competent and honest economists predicted (I won’t bother naming the exceptions, but their absurd failure on this topic discredits them more generally).

    This leads me to a response to John Dawson’s silly, but amazingly common, belief that the whole climate change crisis is a plot to bring down capitalism. It’s taken 20+ years to get the carbon price we now have, and the result is an imperceptible increase in prices. At this rate of progress, the end of capitalism is further away than the heat death of the universe, which will render concerns about global warming irrelevant.

  33. @BilB will the transition to a green economy require a carbon tax?

    Beware of members of the green left and progressive left who conveniently join the Ed Prescott club: taxes have large effects because elasticities are large.

    This policy conversion is after a life of saying the top tax rate and high incomes tax marginal rates do not affect economic growth, investment and the labour supply by much.

    Peter diamond recently wrote a paper and WSJ Op-ed saying that taking the tax code as given, the top marginal income tax rate should be 48%; but it could be as high as 76% if the tax code was shorn of deductions without lowering growth rates.

    Is the true case against the carbon tax is it might raise revenue, but will not change behaviour much towards a green economy? For a small carbon tax to work, elasticities must be high, which they are not when discussing any other progressive left agenda.

    an example: people used to argue for high taxes on tobacco and alcohol because price elasticities were low. They now argue for high taxes on tobacco and alcohol to reduce consumption and addiction even through the price elasticities are no higher than before. Expressive voting at its best: no interest in whether the policy they cheer for actually works

  34. @Jim Rose It is easier to ask you if you have any evidence to support your inferrence that price (tax) does not influence consumption of tobacco? (hint: huge body evidence to support hypothesis that price to influence tobacco consumption).

  35. Rog, I said that “people used to argue for tobacco and alcohol because price elasticities were LOW”.

    Gary Becker argues that tobacco and alcohol price elasticities were high in the long-run. He is right, but many are allergic to the reasoning he used to get to that conclusion about rational addiction.

    again beware of people who conveniently join the Prescott club: taxes have large effects because elasticities are large – after a life of saying the tax rates do not affect behaviour.

  36. Jim Rose,

    The initial target for reducing CO2 emissions significantly is to defossil fuel the electricity industry, and carry forward with a substantial electrification of transport.

    My preferred method for the grid energy industry is to apply a 3 cents per unit levy on the retail rate for electricity. When I first proposed this my retail rate was 13.5 cents per unit.

    The advantage of this approach is that it raises around 7 billion dollars per year. This is sufficient to completely replace the energy infrastructure over a 30 year period. The second advantage is that the infrastructure is created effectively debt free so there is no capital servicing fee content in the electricity supply cost. The third advantage is that the infrastructure is owned by the consumers, not the providers. The fourth advantage is that of predictable delivery and results, important where there is an essential emissions reduction profile to achieve.

    The investment fund would have been available to industry to use applied for by tender based on the infrastructure type and the delivered energy cost. So private industry does the build and operation.

    This approach was howled down as being a slush fund for industry and unworkable.

    So instead what we have is a 9 cents per unit increase in the retail price of electricity, and absolutely no certainty of deliverable emeissions reductions.

    However, with the Carbon Price emissions are reducing.

    Now to answer your question, and lets not quote the WSJ as it does not speak of the Australian experience, new information leads me to say that in principle we do not need a Carbon Tax to achieve significant emissions reductions. But…and it is a big but, there does need to be significant government initiative to promote the uptake of key technologies as they become available.

    Emissions reducing enabling technologies and initiatives:

    Distributed solar electricity production both private and commercial.

    Rapid uptake of electric vehicles of all scales

    Rapid uptake of hyper efficient transport (VWL1 and all equivalents) [reduced energy bills,reduced roadware, reduced road space required, reduced parking space required, reduced rail intersection parking space required, overall increased functionality]

    Promotion of solar industrial processing.

    All of these are consumer funded investments requiring only legislation support form government. ie minimal cost.

    The existing Carbon Pricing is sufficient to induce the energy producers to perform the required changes, I believe. By far the largest shift to renewables will be performed by the consumer with the driving vector being corporate greed coupled with a degerating business model. ie as consumers are able to drop the cost of energy from their budgets through domestic solar and other, living standards will increase even as global oil prices steadily rise, and grid energy will increase in cost due to altered consumption patterns.

  37. @Jim Rose
    Are you refering to short term or long term elasticities?
    I’ve lost count of how many times those dismissive of the carbon tax have used the flimsy argument that “people aren’t going to walk around in the dark just because electricity costs more”.
    If that is your view then you have missed the point entirely, pricing carbon is not about people going without or even dramatically changing behaviour, it’s about shifting production methods to supply close substitutes or even identical products but in a less carbon intensive fashion.

    Using marginal tax rates and growth as an analogy to carbon pricing is misguided at best, the only alternative to growth is no growth and it’s hardly surprising that investors prefer a lower after tax return to stuffing their money under a matress.

    However, for the vast majority of carbon intensive activities there is an energy efficient alternative.
    The only reason those alternatives are not already the status quo are because they have not been able to externalise any of their costs unlike the fosil fuel industry. Carbon pricing is simply about creating a level playing field where alternative production methods can compete on their merits.

  38. Oh,

    other enabling technologies:

    Smart appliances, including machinery. (these adjust consumption patterns to optimise solar energy useage, essential for closed “use it or loose it” systems)

  39. @Jim Rose you also ask “Is the true case against the carbon tax is it might raise revenue, but will not change behaviour much towards a green economy?”

    I can see your intention and methodology, seeding doubt by using opinion to refute facts. In almost every situation, when called upon to provide evidence, you duck and weave and then pop up with another mysterious confabulation. That’s OK and I don’t have a problem with that, people have their own issues which can influence their perception and it all becomes part of the story. But like it or not we are heading towards zero emissions energy production and that is that.

  40. Cost to burn a tonne of coal for most Australian coal plants before July 1st: About $3
    Minimum cost to burn a tonne of coal in Australia after July 1st: About $70

    Coal capacity mothballed since July 1st: Playford B 240 MW, Tarong 700 MW, Yallourn 360 MW.
    Switched to Seasonal load following since July 1st: Northern Power Station 520 MW
    Planned Gas capacity shelved since July 1st: Dalton 1,000 MW

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