The sad state of the CPRS

I’m no political scholar but I thought the deal was this: the Government tries to pass legislation through both houses of Parliament a couple of times. If they fail, they can call an election with a double dissolution to decide the matter once and for all without minorities blocking it. Now I don’t expect that is worthwhile for some fuel price monitoring or minor taxation issues. But for the biggest economic issue facing the country over the next fifty years? What better issue is there to hold an election on than climate change policy?

From what I can gather the Federal Government appears to have put that on the back-burner for exactly the reason that the far right have argued for — the rest of the world hasn’t go its act together yet. However, do I have to remind you that Australia’s decision to act here has little to do with the rest of the world. We neither lead it nor will have an impact if we don’t follow it. The issue is that we will likely want to be part of a global solution should it arise (you know, for moral reasons) and that it is better to decide and work out how we are going to do that now to give our businesses an advantage and relieve them of uncertainty than to wait. It is for the moral reasons that this is worthwhile putting to real vote.

Near as I can tell, the Government is given up trying to be a proactive leader on this front. I’d like to be proved wrong but all the signs point in the wrong direction.

Altruism and cap and trade

Paul Krugman has written 2010’s treatise on climate change policy. All should read it. The ultimate conclusion is that the probability of catastrophe should guide climate change policy and this is something that I agree with. The question is how and that is a much harder question that Krugman does not really address.

But he does touch on the issue of taxes versus cap and trade but without taking a stand. I suspect he thinks there isn’t much in it. But I do want to comment on one argument against cap and trade that raises its ugly head again:

What Hansen draws attention to is the fact that in a cap-and-trade world, acts of individual virtue do not contribute to social goals. If you choose to drive a hybrid car or buy a house with a small carbon footprint, all you are doing is freeing up emissions permits for someone else, which means that you have done nothing to reduce the threat of climate change. He has a point.

Krugman then dismisses this on the basis that altruism is no basis to conduct policy. However, he could also use some economics. Suppose that altruistic behaviour is currently holding emissions down to a significant degree. If you put in cap and trade, it looks like those actions will lead to emissions being allowed elsewhere relative to not providing those actions. However, that presupposes our would be altruists are naive in their altruism. If they are sophisticated, emissions caps give them more options rather than less for actually reducing emissions. What they can do is buy permits and burn them. They don’t have do change behaviour, altruists just need to be altruistic with their money. Pure, simple and far more straightforward than trying to work out what impact you are currently having by walking and not driving. Certainty should drive more altruistic behaviour, not less.

An emissions tax, it should be noted, does not provide this same opportunity. There are no new options for altruists. What is more, to the extent that such behaviour is holding down emissions, it is also loosening the pressure on governments for a higher tax as they can target the same level of emissions with a lower one. Increase altruistic behaviour and the pressure for a higher future tax is reduced. In other words, it seems that the concern that altruistic actions will come to bite them back with a limited impact on emissions, is even more salient with an emissions tax.

LED Lighting in Japan

sakura
Click for more of our Sakura images

A new innovation is all the rage in Japan… and yes, it’s even better than the iPad ;-). LED lighting is starting to reach the mainstream, and it is both efficient and good. For example we saw this one being advertised on a train as a drop-in replacement for any 60 Watt household lightbulb. Each LED tube consumes only 7.5 Watts and lasts 40,000 hours, or about 4.5 years continuously. While elsewhere people talk about LED lighting, here in Japan regular families are starting to buy them for home use. With prices as low as AUD25 and often ranging AUD50-100, it is starting to become an affordable option. The benefits are not just in energy efficiency. LED lights are cool and the color can be made to appear “natural”. One common complaint is that each LED unit produces only a limited amount of brightness, but it should be sufficient for most households; in any case you can use multiple units. New innovations are allowing for super-bright LEDs, and during the weekend we enjoyed the jaw-dropping experience of “night sakura”: several hundred fully flowering cherry blossoms gracefully lining the moat of the Imperial Palace. These were lighted using LEDs, and I was amazed that each lighting unit was just about the size of a 7-inch frying pan but a couple of inches deep. Only two or three units were needed to light up each cherry tree. They were very bright, but in a manner that was pleasing to the eye and did not overpower the delicate texture of the cherry blossoms.  The park claims to have reduced CO2 emissions by 90% to 0.2 Tonnes by using LED instead of conventional lighting. I imagine LED lighting will become widespread pretty soon, not just in Japan but around the world too.

Of smug and smog

So here in Boston we have moved from a two car commuting family to a single car that is used for incidental activities rather than regular travel. The kids walk to school while I walk and catch the bus to work. Even though it is the dead of winter I have actually sustained this new routine mostly due to the ability to work on the bus with my iPhone. The exercise is doing me good and at some level I am supposed to think I am contributing to the environment.

I also listen to podcasts on the bus as I did when I drove to work. So it was of some surprise that I listened to a recent episode of Tim Harford’s More or Less (while on the bus) about the environmental impact of bus as opposed to car travel. Tim repeats the issue in his FT column today.

According to my colleagues on the BBC’s More or Less programme, cars emit 127g of CO2 per passenger per kilometre and buses 106g, based on average occupancy. Even London buses average a mere 13 passengers.

Add my additional walking to the equation and my emissions may well be higher as a result of this change in activity. Indeed, as I like to work on the bus, I prefer to avoid the crowds. So on the bus I catch at 6:30am there are rarely the average number of passengers.

So what is the environmentalist’s response? It is that the bus “would be running anyway.” The idea is that buses have a regular schedule and so there are going to be times where they are more empty than full and other times where the reverse is out. So the appropriate thing is to look at the marginal rather than the average to work out net impact. As the bus is running anyway but a car would not, buses win.

Tim Harford points out, of course, that the same is true for air travel. Air travel is, for the most part, public transport. So the same argument applies to it: “the plane would be going anyway.”

An admittedly unscientific poll of environmentalists at dinner parties suggests to me that they think “the plane is making the journey anyway” excuse is unacceptable but “the bus is making the journey anyway” excuse is spot on – and that they have no coherent justification for the distinction. Their favourite excuse is “you have to set an example” – but surely, before you decide to set an example, you need to be sure that you aren’t setting a bad one.

The resolution lies in a very tortured argument.

For all you environmentalists out there, then, here is the justification for the double-standard of taking the bus but not the plane: it is that bus schedules might be insensitive to passenger demand, while planes are highly sensitive – and ever more so since the budget airlines arrived on the scene. Your best argument for taking the bus is a perverse one: that, no matter how many people do likewise, it’s the rare public transport tsar that will lay on extra buses.

The idea is that airlines and bus authorities put on buses to match demand. But airlines are in a competitive market environment while buses are managed by public authorities who are really bad at putting on extra buses. I’m not sure what the empirical evidence really is for that potential out but it strikes me that it could also go the other way. Public authorities have trouble cutting the 6:30am bus that a private company would happily do away with. In some countries, buses don’t leave until they are full — that is the market system at work.

This all suggests that just like we have ‘time of day’ airline pricing we need ‘time of day’ bus pricing. I should pay for travelling on my average emitting bus more than I would pay for stuffing myself into a crowded one. The interesting question is whether I would end up contributing to emissions less once all of this is in place. For the moment, there is no reason for me to be smug but I do enjoy being able to work while commuting.

The fiscal cap

The Coalition have announced their climate change policy. It certainly isn’t cap and trade. The question is: what is it?

The main part is an Emissions Reduction Fund. It appears that this is a fix pot of money that the Coalition will then spend via a tender process to identify projects that will reduce emissions, not involve price increases to consumers, protect Australian jobs and need the funding. What this appears to mean that the Coalition will ‘pay for carbon’ and cap the total pay. It is a ‘fiscal cap and stay.’

But that only appears to be part of what the fund is for. It also looks set to pay businesses for emissions reductions below their historic average. If they agree to reduce emissions, they will be paid for the reduction. It is not compulsory for small businesses.

That said, the Coalition will hold the line at the status quo. Businesses who exceed their current emissions will incur a penalty. Aside from the obvious issue that this puts an amazing weight on working out what ‘business as usual’ actually is for each individual business what if they can actually do that? Does that mean a polluting business can’t expand? Not quite. So long as they can justify it as ‘best practice.’ In other words, it isn’t a ban but a regulatory hurdle. It is claimed that this will be less complex or bureaucratic than Labor’s proposal, although it is hard to see how. It is also, by its very nature, hard to scale up if a target of more than 5% is required by international agreements. (That said, it makes it much harder for Australia to be part of such agreements too).

This approach of setting a budget and then somehow allocating it to a grab-bag of projects is a difficult task. In the bizzaro world we are living in, it is the sort of thing that those who have great faith in governments recommend. By faith I mean in the ability of governments to gather accurate information and allocate funds in a way that doesn’t encourage rent seeking. Call me crazy but this proposal seems a textbook example of how not to do things when you note that in the real world, there is a governmental knowledge cap and a flow of funds to industry in a way that would surely be difficult to account for — even if you can somehow make it transparent. It throws two decades of public sector management improvements out the window.

I had previously called Abbott an environment-hater. In retrospect, I realise that can’t be the case. After all, how can someone willing to expend so much in economic inefficiency for the sake of the environment, hate the environment? The Coalition policy caps the government’s fiscal commitment to climate change but not the economic commitment of the economy. It is still unknown how costly that economic commitment will be and hopefully we will never have to find out.

Let It Rain

I have a new ANU working paper out, titled ‘Precipitation, Profits, and Pile-Ups’.* It arose from an ongoing debate with my wife. She loves it when it rains. I’m normally a bit grumpy about rain. So when she rejoiced about how good rain was for the garden, I’d counter by saying that it made the roads more dangerous. Sure, the vegies are growing better, but how about all those awful crashes?

Continue reading “Let It Rain”

Why we need a carbon price, again

With Tony Abbott and the Liberals moving away from having a carbon price and towards seemingly heavy-handed regulation, today’s piece by Tim Harford is a welcome reminder of the dangers of that (echoing something I wrote a few months ago).

Other less-than-obvious truths are: that pork and chicken have substantially lower carbon footprints than beef and lamb (yes, even organic beef and lamb); that milk and cheese also have a substantial footprint; that dishwashers are typically more efficient than washing dishes by hand; and that eco-friendly washing powders may be distinctly eco-unfriendly because they tend to tempt people to use hotter washes.

This leads to the conclusion that a price will sort out the truth.

That is why a broad-based, credible carbon price will be the foundation of any successful policy on climate change. The price would affect the cost of every decision we make; it would take away the guesswork. Current carbon pricing schemes, such as the European emissions trading scheme, are a good start, but they leave out too many sectors, and permits are too cheap.

So Abbott will face the obvious situation of going for populist conceptions of what might reduce emissions and then will face scrutiny on each and every one of them. This is the danger where common sense is not likely to be sensible.

As for my view, in washing dishes, we both wash them by hand and then put them in the dishwasher just to be on the safe side.

Insane climate change policies

OK, I had to admit I am getting confused. Up until yesterday, I thought that the Liberals had decided that they were not going to have an ETS or any form of carbon tax because, for many of them, they were unconvinced of the need to do anything with regard to climate change. Or at the very least, did not want to incur economic costs to do so.

But this morning I read this.

Mr Abbott greeted yesterday’s Senate vote by declaring it had saved Australia from “a great big, new tax” by rejecting the CPRS.

Pressed for an alternative, he said the Opposition remained committed to an unconditional target of reducing emissions by 5 per cent by 2020 but would not embrace an ETS or a carbon tax. He said there were “lots of things” that could be done to reduce emissions through other means, many not involving significant costs.

These included more energy-efficient buildings, better land management and biosequestration. NSW Nationals Senator John Williams claimed Australia could offset 100 per cent of its carbon emissions for 100 years by lifting soil carbon by 3 per cent.

Hang on a second? Every one of these seems like the most heavy-handed regulation imaginable. For from avoiding economic costs in climate change policy, these types of prescriptive actions are designed to maximise them. The reason why everyone else in the world has become convinced that the best way to deal with emissions is to price them is because the alternative, requiring people to emit less in very prescriptive ways, is likely to lead to grave inefficiencies. This includes biosequestration which, in the absence of a carbon price, will require a large scale publicly owned project. Not to mention the big compliance issue of measuring emissions reduction to conform with any international agreements that I thought were critical to the Coalition before doing anything.

So maybe I was wrong. Maybe they aren’t simply environment haters but market haters. Quite a combination.

Heartbreaking denialism

The majority of Australians support action on climate change. Yesterday, a faction of the Liberal party — a slim majority — asserted that it did not agree with that opinion and will likely today move to block action on climate change. Whether this is temporary or a permanent party position remains to be seen. What is clear is that there are enough on that side of politics that have convinced themselves that they do not believe in human caused global warming that they are willing to stake their own political futures on it.

The rhetoric, at the moment, is that the science is unconvincing to these people. But it is curious to me that there appear to be no such people on the left side of the political spectrum. If the science is uncertain and there is a range of views, why are the scientific and political views so correlated? This isn’t an issue like stem cell research that gets clouded with religious views (for which there is a correlation). This is pure climate science. And to prove this point there are plenty of those on the right side of politics that are convinced by the science.

This points to what is really going on here. The Abbotts, Michins, Joyces, Fieldings and their ilk are not climate change denialists. They are environment haters; pure and simple. I conjecture that even if they were presented with what they would consider 100% proof that global warming is human caused, they would still vote against any form of climate change policy because their fundamental view is that no quarter going to the environment is worth any cent of economic cost. They need to be exposed for what they are and not be allowed to hide behind scientific uncertainty (real or imagined).

A decade ago, a majority of Australians wanted a Republic and in a heart breaking manner, a split Liberal party managed to block that hiding behind concerns as to whether an alternative system would be workable (uncertain political science that is). It is happening again and we need to raise the core of the debate to the surface in order to keep it together.

Harford wrong on carbon taxes

Well, not completely wrong (he is right that in principle taxes and caps achieve similar economic outcomes if implemented) but let me explain. In the FT today, Tim Harford argues that at Copenhagen negotiators should be focused on getting agreement on a tax rate on emissions to levied at the G20.

Cameron Hepburn, co-editor of The Economics and Politics of Climate Change, points out that quantity regulation puts knotty issues of distribution and compensation at the heart of the international negotiations. Harmonised carbon taxes put these questions to one side. They could be – and would have to be – discussed separately.

The problem with this is illustrated neatly by the Australian case. Suppose that this is agreed to. Then would Australia ratify this agreement? It is unclear. Who would it apply to? Surely more than the top 1000 emitters and likely to involve consumers and agriculture. If we trust that the current CPRS represents what is a possible coalition, that alone might be enough to kill the whole deal in Australia. Instead, an agreed emissions cap for Australia lets it sort out its own way of achieving it. By giving that flexibility, surely more countries are likely to sign on.

Put simply, caps mean that distributional issues that are inter-country have to be resolved at an international level while local ones can be resolved locally. A broad tax leaves inter-country distributional issues until later but ties them to local resolutions in order to get an agreement. Our experience to date suggests that right now, local issues dominate the G20.