ETS in The Punch

I have an article in The Punch today on costs and the ETS. Not sure about the title!

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How and why the ETS could cost you

Joshua Gans, The Punch, 24th August 2009.

In 2007, Chris Goodall contended that walking may cause more environmental harm than driving.

The Australian's KudelkaThe Australian’s Kudelka

A noted that a 5km drive would add 1kg of carbon to atmosphere while a walk would seemingly add nothing if you just looked at its direct effects. However, Goodall contended that for many people, they would need more energy to sustain a regular 5km walk. To make up the 180 calories would likely generate 3.6kg in carbon emissions. The trade-off wasn’t even close.

What is significant is that Goodall wasn’t some member of an anti-environmental think tank but himself a strong environmentalist and the author of How to Live a Low-Carbon Life.

And it was he who was suggesting, contrary to one of Al Gore’s dicta in An Inconvenient Truth, that substituting driving for physical transportation might not be environmentally-friendly at all; even if it is friendly to your physical health.

I’m sure we can argue of the details of Goodall’s calculations and make sure we don’t come to a resolution as to whether walking should be banned or not. But to an economist, this whole issue encapsulates why we should have an environmental trading scheme (ETS) like the Government’s proposed Carbon Pollution Reduction Scheme (CPRS).

In discussions of the economic costs of climate change policy, there is a great deal of guesswork. For instance, there have been forecasts of how such policies will impact on the price of food or the cost of energy.

This usually rings all manner of alarm bells about the overall economic impact of the CPRS.

But, each and every one of these makes assumptions not only about how people’s behaviour might change when faced with higher costs but also how a price on carbon would percolate through the production chain and drive the prices consumers pay.

For example, an increase in electricity prices is going to impact more on businesses that use lots of electricity.

For instance, canned goods would be impacted upon in the making of the can itself, the mining and processing of minerals to make the metal in the can, the processing plant that puts the food in the can and then on the conditions in the supermarket that distributes it to consumers.

Will the price of such goods go up by the full price increase in electricity? It is unlikely.

For starters, canned goods require less energy at the supermarket end than fresh food that impacts on climate in the supermarket itself.

But even along the way, the choices food providers made as to how they processed food and constructed cans were based on an electricity price without carbon. Add that carbon price and they may well change their practices.

The point is that it is impossible to tell how all of this will work its way through and sort itself out in terms of prices to consumers.

To be sure, it could be a disaster in that businesses and people have limited choices to move away from high carbon consumption ways.

But every shred of experience with economic impacts of this kind tells us that choices are much wider than what we had previously thought.

When faced with a higher expense, people find no end of ways of avoiding that expense. And each time they do, they soften the economic impact of the CPRS.

The only thing we know for certain is that unless we set a carbon price (or the means of getting one), we will not find out precisely what can be done. It will take time.

But again, that is the point. We need to get started right away.
www.economics.com.au
Joshua Gans is an economics professor at Melbourne Business School. He writes on these issues at http://www.economics.com.au

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1 thought on “ETS in The Punch”

  1.  
    Joshua, that’s a good point that doesn’t get made often or clearly enough.  Material substitution will occur, although not always easy to predict.
    I had a discussion with someone about how much an ETS would push up the cost of steel and how that would filter through to constructing wind farms (given that a large fraction of the $$ go into steel).  He said if the price of steel goes too high, something else will be used, the cost pass through is not 100%.  Even if a different material is not used, the threat of competition will limit the cost pass through somewhat (exact % is almost impossible to predict).

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