Some stuff on emissions trading
Energy issues, Uncategorized - - Posted on June, 26 at 12:20 pm by Tim
Here’s some pieces that look at the issue of emissions trading schemes. My interest is in trying to work out how all this is likely to work, especially in an environment where the public debate is, it seems to me, not really spelling out what the issues are. What struck me about these pieces is the basically optimistic tone they have. Not that they ignore problems, but that they also give some weight to the upside of the changes we are going through. Neither side of politics is explaining the pros or cons very well, and that is reflected in the media coverage (take this stupid piece, for instance). So I’m grateful to readers for passing these links along and hope you find them helpful too.
First up is this piece from international business consultants, McKinsey and Company. Not exactly what you’d call some hard-left greenie organisation.
The piece looks at the basic questions — “What will a significant reduction in the level of greenhouse gases entail? Which approaches will be most effective? How much will it cost to achieve this goal, both in money and in lifestyle changes? Who will bear that cost?” — and considers the prospects in five countries, Australia, Germany, the United Kingdom, and the United States. Worth reading the whole thing, but here’s an interesting bit:
Although we are studying other countries, some important observations can already be made: each of these four large economies can reduce its emissions by 25 percent below the levels they will reach in 2030 if nothing is done to abate emissions. In addition, such cuts can be achieved at relatively little or no cost and without significantly changing the lifestyles of these countries….
What’s interesting about our findings is the scope of the low-cost opportunities available to reduce emissions. If the United States makes no greater effort over the next 22 years than it does today, for instance, its emissions will increase from roughly 6 billion tons of greenhouse gases to almost 9 billion in 2030. This is the “business as usual” scenario.2 But the United States could instead eliminate 3.0 billion to 4.5 billion tons of its annual emissions by 2030 if it consistently and systematically adopted abatement options costing less than $50 a ton. These include raising the fuel efficiency of cars and light trucks, promoting second-generation biofuels, improving the management of methane gas emissions in coal mines, deploying cover crops on farmland in the winter more consistently, planting new forests, and building wind power systems in windy regions.
In the United Kingdom and Germany, total emissions and their growth in the business-as-usual scenario are much lower than in the United States. Although the opportunities to reduce UK and German emissions are on at least the same order of magnitude as the opportunities on the other side of the Atlantic (and in some cases even larger), the absolute reductions are smaller: about 230 million tons below €40 a ton of greenhouse gases in the United Kingdom and about 290 million tons in Germany.
But there was better news for Australia:
In Australia, the potential is even bigger—a reduction of 70 percent at little or no cost.
…Australia stands out, with a possible 560 million tons of abatements—very substantial given the business-as-usual projections of less than 800 million tons of greenhouse gas emissions for 2030. In part, the opportunities to reduce emissions represent such a large share of their business-as-usual level because Australia could limit the large-scale land clearances now taking place in the country (clearances that continue in the business-as-usual projection) and could also shift the growth in its power sector from coal-fired plants to coal plants that capture and store carbon dioxide, as well as other more carbon-efficient alternatives.
Of course, this ties in with those who argue that one of the advantages of an emissions trading scheme is that it will force businesses, governments, individuals to deal with these low-cost options first, the so-called low-hanging fruit. Rather than being punitive, such schemes could be the sort of nudge we all need that opens up all sorts of benefits. As the report goes onto say: “A surprisingly high portion of the abatement options are profitable: they pay for themselves over their lifetime. The more consistent adoption of energy-efficient products and technologies—from energy-efficient bulbs, appliances, and machinery to better insulation in buildings—could reduce national emissions by double-digit percentage points and save more money on energy than the additional cost of the bulbs and insulating materials.”
They then ask the obvious question: “If these opportunities are profitable, why haven’t consumers and businesses already captured them? The answer is market imperfections—for example, a lack of awareness among consumers and decision makers in business. Studies show that large numbers of people aren’t aware of many things they could do or technologies they could use to reduce their energy demand and energy bills.”
Precisely the sort of market imperfections, proponents suggest, emissions trading schemes address.
Next up we have this discussion in The Economist magazine. This looks at a number of reports into the matter and is also surprisingly benign in its conclusions. The key matter they are concerned with is precisely the issue that has exercised our parliament this week: “In every country that has contemplated regulating greenhouse gases, it is seen as a problem: how can policy ensure that legal limits on emissions do not put local firms at a disadvantage to their foreign competitors? After all, if the cost of compliance puts factories in countries with strict rules out of business, while those in grubbier places flourish, a regulation is worse than useless.”
They then note such concerns have caused some governments to contemplate retaliatory tariff regimes and that gets their (the Economist’s) free-market antennae twitching and they wonder “How grave is the danger that these tariffs would counter?”
Their conclusion is, not very: “….it suggests that the politicians are over-reacting, and that their remedies may actually make matters worse.”
The final one (for now) that I wanted to mention was this briefing paper from the Climate Institute (pdf) which is described as “Synopsis of a CSIRO/ANU Discussion Paper on the Effect of Carbon Trading on Australian Household Energy Budgets”. The key findings of this short paper are these:
*For most Australians, the affordability of energy is likely to improve substantially over coming years, notwithstanding the introduction of emissions trading and the associated increase in energy prices.
*There is some chance that emission trading could result in high carbon prices and deterioration in energy affordability in the short to medium term for low income households.
*There is a range of options to offset any decrease in energy affordability especially:
- Energy efficiency measures and public transport investment will play a significant role over the medium term.
- A redistribution of the income from the auction of permits to low income groups in the form of energy affordability payments.
The section on energy affordability is interesting, with their estimates suggesting that the percentage of income people spend on energy needs will fall over time (see their various graphs). They also touch on the “low-lying fruit” argument and point to the savings available from relatively painless changes. Their main focus, though, is on affordability issues and they note that:
Government and the wider community have a range of options available to them for reducing the impacts of emissions trading and higher energy prices on household budgets and energy
affordability. For example, the auction of emissions permits would generate substantial new government revenues.These revenues are likely to exceed 1% of GDP, equivalent to one third of total state tax revenues in Australia. Redistributing these revenues to low income groups should be a
priority for the Government.
Their concern is the short-term adjustment costs as schemes take time to fully implement. They therefore suggest a number of interim schemes to help households through such an adjustment. Anyway, as I say, it’s pretty short and worth a read to get an overview of what they saying.
I’ll cover more such reports and articles as we go along.
Posted in Energy issues, Uncategorized |
June 26th, 2008 at 12:39 pm
Said it before, say it again: I have read several major, heavyweight reports on the energy problem, including one from those well known tree-hugging commies, the US Army. They all put energy efficiency at the top of the list of priorities. It is the easiest, cheapest, fastest, cleanest and biggest component of the energy use equation, and requires virtually no change to our lifestyle, just a small initial and largely one-off investment.
It is not only low hanging fruit, but a very large and tasty crop of it as well.
June 26th, 2008 at 1:52 pm
That 70% figure from McKinsey is encouraging…
June 26th, 2008 at 5:01 pm
It might be encouraging Tim but the fact that Oz has increased emissions by 31% since 1990 isn’t. I’m no fan of jumping on the international cap and trade bandwagon for this very reason-
http://www.news.com.au/story/0,23599,23919300-401,00.html
Auctioning off what is essentially eternal carbon taxing powers to international capital is not my idea of sensible policy. How the left have begun to believe otherwise is beyond my comprehension. Dazzled by the emotional appeal of it all is my guess.
June 26th, 2008 at 5:13 pm
Here’s another taste of international capital waking up to prospects of the bright new gravy train and salivating at the thought-
http://www.efinancialnews.com/usedition/index/content/2450714697
http://www.efinancialnews.com/usedition/index/content/2449266665
June 27th, 2008 at 12:22 am
While I’m certain that signing on to international cap and trade is pure folly, I’m equally certain it won’t be necessary in the medium term anyway, due to the impending economic implosion, the result of another failure by those who should have known better-
http://www.atimes.com/atimes/Global_Economy/JF25Dj03.html
Central bankers around the world have now given us a legacy of very serious monetary inflation, the US Fed being among the worst culprits. Here’s the US picture-
http://www.atimes.com/atimes/Global_Economy/JF25Dj01.html
with the Guru trying not to get too hysterical about the inevitable now. Don’t be fooled that this is largely a US problem because annualised inflation in India has hit over 11% and caused the RBI to raise ‘official’ interest rates twice in a month to 8.5%. That’s a dog chasing the market tail, as lenders begin to chase a real return on their savings now. That will quickly drive interest rates 2-3% above inflation and you don’t have to be an economist to know what that means. Central bankers have nowhere to go now but wait for the inevitable crash and it will be a monster of their own making. That will certainly curb CO2 emissions in the medium term no doubt. However I’m sure this crash will cause some deeper introspection as a result and hopefully some better answers to some overriding problems than knee-jerk cap and trade silliness.
June 27th, 2008 at 10:16 am
On second thoughts perhaps the introspection has already begun-
http://www.news.com.au/story/0,23599,23930522-29277,00.html
http://www.news.com.au/story/0,23599,23930115-29277,00.html
June 27th, 2008 at 10:52 am
I’m not quite sure what you’re driving at here, Obs. Your link is to an article about an ethanol proposal for East Timor. We can argue about whether biofuels make sense from an emissions viewpoint (my view is that they don’t - and the Fretilin spokeperson’s point that sugar cane won’t grow on marginally fertile land is well made IMHO), but this is about emissions trading schemes, no? The schemes being considered involve auctioning permits annually, with the annual cap reducing over time. How is this an ‘eternal taxing power’? And surely the point of an auction is that all comers have equal bidding rights - how is international capital privileged in this, given that most of the largest emitters (Morris Iemma notwithstanding) are still in public hands?
June 27th, 2008 at 1:21 pm
“The schemes being considered involve auctioning permits annually, with the annual cap reducing over time.”
If that were the case Hal, then it would really be akin to a straight carbon tax, but with the administrative costs of policing thrown in. My take is they want to auction (if not give away freebies to certain emitters like the EU have)emission rights for some years, or perhaps much longer. That’s why international capital is getting cracking now in places like ET. They’re preempting the new constitutional marketplace that’s being touted and actually encouraging it now because they’ve awakened to the opportunities. When Oz jumps on board, US hedge and pension funds for example could buy our emission rights and take them offshore to places like ET. That’s integral to international cap and trade if you read carefully into those efinacialnews links. We’re just going to ‘meetoo’ along with it all, is my read of things. That’s why Iemma wants to unload NSW power assets and concomitant price rises onto the private sector. Why else would he upset his base so obviously? You don’t think he’s nuts or a masochist do you?
June 27th, 2008 at 1:23 pm
Observa, I don’t think it’s the left who’ve embraced cap-and-trade (I certainly haven’t), it’s the ALP, which is not the same thing at all.
June 27th, 2008 at 1:32 pm
To be fair to Iemma, the NSW Govt has recognised for some time the need to jump on board national electricity goals, after Keating’s competion gun to the State’s head. What’s spurred the urgency is the prospect of C&T pricing. Now straight carbon taxing would see the need for Govt’s to immediately consider compenstory income measures like income tax and soc sec payments electorally. With C&T they can blame industry and deflect that to some extent. Naturally Big Biz will be suitably contrite and play the political game while making off with community taxing powers. I thought you guys understood all that business as usual stuff.
June 27th, 2008 at 1:39 pm
Fair enough David, but it’s left/greens generally. OTOH C&T opposition is largely seen as the conservative, AGW denialist position. We don’t fit that simple dichotomy.
June 27th, 2008 at 2:13 pm
Observa, you should probably actually look at the Greens’ policy on cap and trade before you speak for them. My understanding is that we are at least ambivalent about the benefits of cap-and-trade as opposed to carbon tax.
June 27th, 2008 at 10:11 pm
Yeah David, I just hope they have a long hard look at any C&T legislation in the Senate then.
Oh a related side issue here’s an interesting point to note-
http://www.news.com.au/business/story/0,23636,23931063-31037,00.html
Notice how high oil prices don’t help refiners, although naturally owners of oil fields like Saudi sheiks are smiling and some oilcos do combine both. What you need to bear in mind here too is world refining capacity has tightened over the last few years from 111% of consumption to around 103%, so you might expect refining margins to lift and hence profits to rise, just as Caltex’ did in 2007. Notice how high oil prices have knocked them about now and that would shelve any plans for more refineries now, particularly as they are long term investment risks. That’s why pollies banging on about Fuelwatch schemes and such is really just playing to the gallery and lacking any real substance. However the risk to the consumer is some catastrophic loss of refining capacity now, a la the Varanus Island gas plant, bearing in mind any new refinery is a minimum of 3 years away.
June 28th, 2008 at 9:01 am
Speak of the Devil David-
AN unlikely union of Nationals and Greens has moved to reverse a new tax that would see major polluters given deductions for planting trees as carbon sinks.
The Government says the tax break would encourage the establishment of carbon sink forests, making an important contribution to sequestration and delivering natural resource management benefits.
But senators yesterday attacked the plan amid concerns it would disadvantage the farming sector while giving tax advantages to big carbon-emitting companies and encouraging them to buy up prime agricultural land.
The Nationals won the support of the Senate to hold an inquiry into the tax measure.
The Nationals, Australian Greens and Liberal senator Bill Heffernan believe the scheme in its current form would drive up food prices.
Nationals senator Barnaby Joyce said the measure would simply reward major polluters while hurting consumers, who would face higher food prices because of the loss of prime agricultural land.
“Why on earth are we going to give a tax deduction to coal companies, who are receiving record profits, to buy agricultural land so they can get a tax deduction and the Australian consumer pays more for food,” Senator Joyce said.
His Nationals colleague Ron Boswell said that while the tax deduction was already law, senators could stop it by disallowing the regulation that puts this legislation in place.
The Senate inquiry will report back by August 22.
Senator Heffernan said the legislation was seriously flawed and could lead to rorting of the tax break. “If you can plant this carbon sink and, if you have some sort of natural disaster – it does not rain and the trees all die – you still get the tax deduction,” he told the Senate.
Greens leader Bob Brown said the measure would allow investors to plant trees and continue to receive the tax benefit even if the trees were destroyed in a bushfire.
“There is no penalty clause; there is no need to ensure that you have fire procedures to prevent that from happening,” he said.