Is the Australia Institute off the planet?

It is natural to ask this question given their media release [HT: Peter Martin] that stated that:

‘When emissions trading comes in, every tonne of carbon dioxide saved by households will simply free up a tonne that can be used by industry. Installing solar hot water systems, driving smaller cars and turning off the lights will not help the environment one bit. The only effect reductions in household energy use will have is to free up pollution permits for the big polluting industries,’ Dr Denniss explained.

“Will not help the environment one bit.” Really? How so?

Once the target is set, the efforts of Australian households to reduce their energy use will only change who does the polluting and the price of the permits, but not the total level of emissions. The only effective way for households to reduce Australia’s overall carbon emissions will be to buy emissions permits and rip them up.

So let me understand this. The only behaviour we could possibly be worried here is environmentally conscious consumers as others don’t currently have an incentive to save. Currently, when those consumers reduce emissions that helps the environment. After the ETS, if they want, consumers could say, consume less electricity, buy emissions permits with the saved money (now more because of the ETS) and tear them up. How exactly is that not better?

The Australia Institute is coming up with some hypothetical scenario that requires environmentally conscious consumers to avoid buying permits. Why should that happen? Indeed, with the ETS, they can buy permits and not actually reduce their consumption. Surely that will increase the supply of environmentally conscious behaviour?

7 thoughts on “Is the Australia Institute off the planet?”

  1. I half heard something of this on ABC radio this morning, with Fran Kelly dutifully nodding along. As I say, only half heard it and it was only later that I thought, hang on, what did he say? Thanks for bringing it up and clarifying. Somebody should tell Fran…

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  2. The point that i was making in the paper is a pretty straight forward one – but one that most poeple seem unaware off – once the government sets an emmissions target the number of permits released act as a floor below which emissions cannot fall, not just a ceiling above which they cannot rise.

    Apart from honestly informing the public about the operation of an ETS i think the paper highlights an important economic issue – namely that if the government sets a target that is based on politics rather than science those who are interested in reducing emissions further will be prevented from doing so via their behaviour and will be forced to do so via the purcahse of permits.

    Why should concerned families have to buy back excess permits from polluters who have succeded in lobbying effectively? Why shouldnt we set a target based on science and let the market sort out the carbon price?

    An ETS can no more solve a market failure if we ignore the science of the underlying problem in setting the emissions quota than a carbon tax could solve a market failure if we ignored the socail costs in setting the price.

    Hope that clears thing up

    richard

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  3. I think that the issue that Richard highlights is an important one. While an ETS is obviously much better than voluntary efforts, people who have been engaging in voluntary efforts who are disappointed with the cap can only reduce emissions further by either buying and tearing up permits, or by reducing emissions in an area not covered by the ETS. Eating less beef would be an example of that.

    This wouldn’t be an issue if the price signal was a tax, but a tax has other problems. The issue that Richard mentions is a reason why I am strongly in favour of having a price floor in the ETS, which should be set to be quite high. I argues for this in a submission to the CPRS Green Paper.

    A price floor could be maintained by either having polluters pay an extra fee when they exercise their permits, or by having a reserve price when the regulator auctions permits.

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  4. Rchard,

    There is only so far you can reduce your emissions by behavioural change anyway. Once you switch to 100% green power, buy a plug-in electric car (or a bike) and stop eating meat, you are pretty much at the limit of what you can do to reduce your carbon footprint through individual behavioural change. If you want to reduce emissions further, you are going to have to effectively undo other people’s emissions. Buying permits (and tearing them up) is as good a way as any.

    The situation that you seem to be criticising already exists under the current system – you can’t go to less than zero emissions without encouraging somebody else to change their own behaviour. Emissions permits will actually give people an efficient means for going beyond zero net personal emissions, if that is important to them.

    Moreover, I think that what you see as a problem is actually a democratic outcome. Let’s say you favour 50% cuts by 2020. If the government chooses a cap of 20% cuts by 2020, anyone who agrees with you has the option to put their money where their mouth is and retire permits to effectively change the cap to align with their preferences. People who are not as concerned with climate change as you can go along with the regulated cap. Just like people are free to give to environmental charities now if they think the government is not doing enough to save the planet. I like the idea that this allows people who are not satisfied with the government’s decision to vote with their wallets.

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  5. If people choose to, for example, turn off light bulbs, that reduces the demand for electricity, and the incentive to burn coal to produce it. This marginally reduces the price of coal and of carbon permits, and of electricity. It may be that this will encourage other people, unconcerned with the environment, to increase their consumption.
    (But not necessarily: it may be that for example many people refrain from consumption, and the demand of the others is inelastic with the reduced price.)

    But this is true for any case where a person individually elects to consume less. It’s possible that by doing so you’ll just encourage others to drive more. Every virtuous person who takes a train makes the roads less congested and makes driving more attractive.

    This is true regardless of whether there’s a carbon permit system or not. If their argument would be true under the scheme, it’s even more true now when the price of carbon is zero.

    So the Shorter Australia Institute is: don’t bother consuming less, other people will ruin the world anyhow. Possibly true, a bit depressing, but not what I expected to hear from them!

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  6. I agree with Richard and Peter – that this appears to create a carbon floor as well as ceiling.

    Those people NOT concerned with climate change will go along with the regulated cap. However, they will have relatively more emissions of the cap to use. As, at least in the near term, it’s likely to be cheaper to purchace carbon credits and pollute than go with green(er) technologies unconcerned consumers will simply take up the slack.

    I might be wrong, but Joshua, I think this deserves an editorial to discuss it. Does this make the arguement for a Pigovian tax rather than an ETS?

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  7. I think the response to our paper has been really interesting, and promoting debate is the role of a think tank. that said, there are couple of arguments that need to be adressed in the comments above.

    1) The idea that buying back permits is ok is a version of Coase’s theorem gone mad. Dont get me wrong, i dont think it is wrong for people to buy them back, but i do think it is wrong to knowingly issue more permits than is supported by the science and then say it is ok for those who are worried about the atmosphere to buy them back. The MAIN POINT in the paper is to use the floor argument to highlight the need to get the cap (and floor) right in the first place.

    2) There seems to ba lot of misunderstanding around the economics of the CPRS it is NOT the same thing as the economics of an emmissions trading scheme. By isolating the 1000 large polluters from the 10 million households the opportunities from gains from trade are reduced. Given that most of the benefits assocaited with emissions trading vis a vis an ETS are assocaited with the dynamic efficiencies associted with gains from trade this is a big problem. If you believe the price effects of the CPRS are enough to drive allthe behaviour change then why not just have a carbon tax?

    3) To that end, if you were setting a pigouvian tax to fix market failure you would estiamte the marginal socail cost of the externality and apply it to the privat cost. There is nothing in the economics textbooks about consulting with business to discuss with them there likely response to the new higher tax. The textbook ETS says that rather than setting the priceyou should set the level of pollution consistent with the goal you want to achieve (eg stable cliamte) and then let the market set the price…but somewhere along the line we decided to listen to the polluters ratehr than the cliamte scientists and we are proposing to set the quota in order to deliver a preferred price outcome…when you think about it the arguments behind the CPRS are getting pretty confused.

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