Confusion on the ETS

A group of economists (including John Quiggin) have launched a call to radically alter the Government’s proposed ETS. Much of the issues are unobjectionable including the large compensation and free permits. I have long argued that the ETS alone is not enough. However, this statement is untrue:

… the Rudd government has designed a scheme in which every tonne of emissions saved by households frees up an extra permit for the aluminium or steel industry to expand their pollution. In addition to destroying the moral incentive for households to ‘do their bit’ to reduce emissions, this design feature renders all other policies aimed at reducing emissions pointless. For example, households who spend $7,000 installing photovoltaic solar panels might believe that they are helping to reduce emissions but in fact the only impact of such investment will be to slightly lower the demand, and in turn the price, of the fixed number of pollution permits issued by the government.

The point of an ETS is that you make home decision based on prices. If you happen to want to do more, it is easier to do that not harder if there is an ETS. Without an ETS, you install solar and save emissions. With an ETS, you don’t even have to do that to save emissions. All you have to do is buy permits and park them. The fact that installing solar without doing that doesn’t change Australia’s contribution means that that is a bad choice for would be volunteer pollution reducers. It is not a reason to object to the ETS.

10 thoughts on “Confusion on the ETS”

  1. While I would have liked to spell this out a bit more, I think you’ve oversimplified badly. Let’s consider three cases
    (i) Homeowners respond to price incentives by adopting efficiency improvements that yield positive net private benefits
    (ii) The government subsidises homeowners to implement schemes that would otherwise not yield positive net private benefits
    (iii) Altruistic householders voluntarily implement measures that do not yield positive net private benefits.

    In cases (ii) and (iii), there is an apparent intention to achieve reductions in emissions additional to those implied by the initial target. But the effect is merely to lower the price to net purchasers of emissions permits.

    The paragraph you criticise refers to case (iii), but your analysis is of case (i).

    Of course, if everyone agreed that the target had been chosen correctly, there would be no moral case for extra action. But the point of the statement was that the target is inadequate, and that the scheme precludes voluntary action to do better.


  2. John, you are misunderstanding me. Let’s do this carefully. We are modeling the behaviour of ‘do gooders’; that is, people who have in their utility cost to emissions produced.

    Prior to the ETS: the only way for do gooders to reduce emissions was through their own behaviour. So they might install a solar panel, reduce their dirty electricity consumption and save emissions.

    With the ETS: if do gooders buy solar panels they do not save emissions because dirty generators can utilise their permits to produce for others. But the issue is what happens to their ability to reduce emissions? The answer is that even if they do not buy solar panels, they can now reduce emissions directly by purchasing permits and not redeeming them.

    The ETS provides a government sanctioned way for them to do that. On the other hand, a carbon tax would put them back in the trying to reduce emissions by their own investment route which surely is more expensive than just purchasing permits and burning them.

    Now, I do agree that with an ETS, the impact on emissions from government subsidies is muted or eliminated which is the issue with insulation. But that is different from the issue of case (iii) which is what I am referring to.


  3. That’s fine for do-gooder economic rationalists. I very much doubt that the average citizen is going to regard buying emissions credits for cash as being a perfect substitute for reducing emissions directly. 

    As regards voluntary initiatives, why not allow some consumer choice? If people would prefer to earn credits by installing solar panels, why not let them do so?

    And your argument fails completely in the case of government-subsidised investments like insulation. These have zero effect on the total quantity of emissions, and you can’t use the subsidy to buy credits instead.


  4. I suspect part of what’s going on is Treasury’s dislike of tax expenditures and a belief that without sufficient price-like information altruistic action may be ineffective (c.f. the “food miles” idea).

    Is it clear that ordinary citizens can buy permits?


  5. You say

    Without an ETS, you install solar and save emissions. With an ETS, you don’t even have to do that to save emissions. All you have to do is buy permits and park them. 

    This tells us why ETS is such a bad idea. Quiggin is right because common sense tells us that installing solar saves emissions. Common sense and past experience tells us that buying permits and parking them probably won’t.

    Emission Permits, Carbon Taxes are ways of increasing the price of pollution which is then meant to encourage investment in renewables. Common sense tells us that may or may not happen. To see what  is meant by common sense listen to

    If we invest money in infrastructure to reduce emissions we will reduce emissions. One way to reduce the cost of investing is to reduce finance costs.  A way to get the investment money allocated efficiently is to create a market where it must be spent.

    One way to do this is for the government to stimulate the economy by giving everyone zero interest loans that MUST be invested in infrastructure to reduce emissions (insulation, solar, community solar, etc). The loan is paid back indirectly from the taxes on the investment. This solves two problems – it stimulates the economy with wise investment and it will reduce emissions. If people cannot be bothered investing they can sell their loans to someone who can be bothered. If the government prints the money rather than borrowing it then it does not increase the deficit only increase the money supply which will be spent on an asset.

    We need to get investment in renewables. Increasing the price of pollution may or may not do it. Reducing the cost of investment must work when we distribute money that must be spent on infrastructure to reduce emissions.

    A carbon tax may or may not work. It will definitely work if the money collected is invested in ways to reduce emissions. 

    It is the spending of money that is critical – not the collecting of it.  If we have a carbon tax rather than just printing the money then let us ensure it is spent through a market not allocated by governments.


  6. I’m a consumer.

    I want to reduce emissions.

    I would buy solar panels.

    I would not buy emissions permits.

    This might not be the ration thing, but it’s what I’d do and suspect that it’s what alot of people will do.  So whilst I think this argument is very interesting… I agree mostly with John.  I a human factors expert and the question here to be answered is not what ‘could’ people do but what ‘will’ they do.


  7. Joshua

    I’m with you on this one.  John’s Argument (which he concedes in the first comment) is essentially that the cap is too low.  If the cap was increased to the level which John and the others advocate (ie 25%-40%), this moral argument would dissappear.

    Their argument would have more merit if it was a criticism of the Government for failing to explain how the scheme works and ‘duping’  people into taking this sort of action for the wrong reasons but as an economic criticism of the scheme itself it fails to acknowledge the private benefits that the voluntary reducer received through reduced energy costs or the overall benefit to the economy through a reduced demand for permits.

    More over <a href=””> here </a>.  (and apologies for crediting you as an author, it was written late last night and I meant to mention John Quiggan rather than you.  I’ve asked the boys to correct it).


  8. Under the CPRS, if I were to buy permits and retire them, it would reduce emissions in that year, and indirectly increase the permit price. Under a higher permit price, the government would be less likely to reduce the cap more in later years. So by buying and retiring permits, it is doubtful whether there would be a long term reduction in emissions.

    At present, it is likely that in the initial phases of the CPRS, the permit price will be very low. This could create a bit of a crisis for the government, and force it to improve the CPRS.

    At present households can already reduce emissions by buying and retiring permits, buy buying permits in the EU ETS for example.


  9. Peter,

    An alternative is to plant trees or purchase sequestration credits and retire these.  This wouldn’t affect the number of permits in the pool and the Government wouldn’t know (other than through satelite imagery estimates) or a record of unsurrendered sequestration credits that these emission gains had been acheived (just the same as they wouldn’t know about solar panels or insulation under a carbon tax system).

    Planting trees can have other environmental benefits so this is likely to be looked upon more favourably by the altruistic person out there than the purchase of permits.


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