WorleyParsons’ PR coup last week indicated a thirst for big interventions into an otherwise rather bleak energy policy landscape1. The ~$100k feasibility study regurgitated by the MSM (and analysed by Robert here) was, as Brian alluded to, chump change from their handsome profiteering from Canada crapping all over its Kyoto commitments under the Harper Government. It remains to be seen whether WP actually capitalises on its good press and goes ahead with the projects, or simply banks the warm and fuzzies and continues its search for business opportunities elsewhere. If the projects do progress beyond the speculative phase, it would raise some interesting questions around the diversification of a business like theirs into solar (rather than, for example, consolidating its interests in various carbon intensive fields).
The first is around corporate culture. The ‘Anglo-American’ model of capitalism, as Martin Wolf usefully calls it, is a collection of deeply culturally assumptions about how a business should operate: their goal (profit maximisation), the ‘commodfiability’ of businesses themselves, and so forth. Assuming WP operates within this culture, who do we blame if the solar thermal plant is not found to be ‘financially viable’? The government for not studiously applying Coasean theory in time and getting Emissions Trading going? The market for not sufficiently pricing the carbon efficiency of the project – ie. another market failure after years of warnings? These are as much questions about our expectations of governments in designing an emissions trading scheme (and sending appropriate signals during the consultation phase) as businesses, but I think worth asking.
The second is around the broader policy context of projects like this. As Robert’s various posts of late have demonstrated, there’s no shortage of daring engineering projects and neat technical fixes. However, as I argue in a co-authored piece in the current issue of the Australian Review of Public Affairs, such proposals are not enough. We also need to start discussing energy demands as social things, rather than simply a matter of correct pricing or installing a well timed deus ex machina, if we’re going to make any real headway on climate change. As we point out, quoting Nicholas Stern and Cameron Hepburn, ‘[c]limate change policy … raises questions that are fundamentally and inescapably ethical’…”
Any comments, criticisms or feedback on the piece itself would be appreciated, as we’ll be turning it into a longer ‘Journal’ article. (I’d particularly appreciate comments from some of the self described ‘marketdroids’ 
- Two particular stories stand out: (1) Australia’s main carbon capture collective, CO2CRC, flagged the need for an additional $300m to keep the ball rolling on their research; and, (2) In a move which underlines their uninsurability, Parliament moved on legislation to protect Carbon Capture and Storage projects should they leak (or damage lifeforms we have little to no understanding of) ↩[back]
OK, I’ll bite.
You’re quite right that market solutions don’t seek to change people’s preferences. It treats them as a given, an exogenous factor to the model.
Market solutions don’t try to change preferences that are “fundamentally culturally shaped”. They work within them. If you want to criticise economics for that, I think the onus is on you to suggest how one might fundamentally re-shape culture.
Take air-conditioning. In a hot country, which is only going to get hotter, how could a government re-shape our deep and understandable desire to be cool in summer? Get Stephanie Rice to do TV ads begging us to switch off the air-con? You talk vaguely about “facilitating community debate”, but I think you need to be a bit more specific than that.
Governments might affect our love affair with automobility via urban consolidation, as you mention. You have no argument from me on that score, living as I do in the ridiculously sprawling city of Adelaide.
But changes to planning laws will take ages to have significant effect. You cannot bulldoze entire suburbs overnight, Haussmann-style. Adders will still sprawl in 2050; you cannot wave a planning wand and instantly turn it into the Hague.
So, the ETS has centrality in relation to climate change simply because it can be implemented relatively quickly. In some form, it’ll be up and running in 2010. That would seem easier and quicker than changing cultural norms.
I can’t talk to the economics side of things, but I think what we often see as large cultural changes can be broken down into far simpler elements. No, we may not be able to change people’s desire to get cool, but we might be able to change the ways they think about that. Right now people think like Homer Simpson, ‘Mmmm, air conditioning’, every time the mercury hits 35 degrees. We need to get them to think more like, ‘I should get around to insulating the damn house’, or ‘Gotta put up that shade cloth/grow a grape vine’. Even the market signals need to be different. Maybe we’ll eventually have to legislate airconditioning out of the private home, leaving it only for public spaces (could create community, by getting people out into libraries, pubs etc.)
Cultural changes are not really that hard. Most people now can’t imagine not being instantly contactable, whereas ten years ago most people weren’t. That’s a huge change. I would argue that those cultural changes are already happening, but we’re just in the denial phase (I know climate change is bad, but please let them come up with a techno fix so I can keep all my luxuries) for now, until some big scary thing happens (such as a $200 dollar a barrel oil price, or a cute species becoming extinct).
I suppose I’m skeptical of the “engage the populace” approach when it comes to global warming because it’s almost impossible, in many cases, to effectively judge whether one’s actions will actually help with environmental issues.
“Maybe we’ll eventually have to legislate airconditioning out of the private home …”
That’ll make for a popular electoral platform, particularly in Queensland and the NT!
I’ll give you my air-con when you take it from my pleasantly cold, but dead, hands!
Weak as the proverbial they are in the NT obviously, Paulus. Real Queenslanders trust in their timber and tin dwellings and believe a sub-tropical climate is character building.
So, rather than adjust the incentives so that people change their behaviour for financial reasons, we should try to make people want to stay hot in summer instead of using their air conditioners? Good luck with that.
I hope the ‘bleak energy policy landscape’ is not meant to be warmed by the CO2 CRC’s need for another $300M to ‘to keep the ball rolling on their research’. This CRC has been kept busy showing that CO2 can be sequestered underground, which was surely never in doubt. No one has built a plant that captures and separates CO2 from the exhaust stream of a power station, from what I’ve read. Where is the evidence that this can be done without doubling the cost of power, making coal uncompetitive with wind?
As an aside – I was watching The Proposition recently, set in outback QLD in the 1880s, and the period costumes were just about as inappropriate as you could imagine for the climate. I suppose the only bigger point from that is that cultural norms are incredibly powerful, and can allow the most extraordinary behaviours to be the standard.
On a different note, as Yaz has identified, there are rather a number of other things beyond airconditioning that can be done to keep cool in Australia’s north.
Yeah, that was a great movie — one of the best Australian films of the last decade, I think. Apparently it was filmed in mid-summer, in 40+ degree heat every day, with an authentic 19th C wardrobe, and the crew were worried about John Hurt, in particular, getting heat stroke and carking it!
I can still picture the disgusting swarms of flies. Put me off forever from visiting that part of Australia in summer, it did!
From reading your article it sounds as though you want to decide what is good for people and coerce/persuade them to do it, rather than telling them what the costs of their activities are and then letting them work out what aspects of their lives they’ll change.
You need to find more examples than just urban consolidation to convince me that policies other than pricing externalities are useful.
“On a different note, as Yaz has identified, there are rather a number of other things beyond airconditioning that can be done to keep cool in Australia’s north.”
Is that what that song was about?
Paulus – “market solutions don’t seek to change people’s preferences”
I’m no economist, but on an intuitive level I have to strongly disagree with that statement. Surely our preferences are constantly shaped by the market? The choices I make in what I want, and how much I want of it, are always influenced by price and availability.
Isn’t that what markets are all about – finding a balance between people’s preferences (i.e. demand) and what can be produced (i.e. supply)? I would argue that many of our current cultural and social norms have been shaped, fundamentally, by markets; with influences flowing both ways.
A market-based solution to reducing carbon emissions certainly has a role to play in shaping our energy consumption preferences. However, as dk points out in his paper, markets are flawed – they can be manipulated and they often fail. That’s why we need other, complementary measures to sit along side them. It’s also one reason why Nobel Prize winning economist Joseph Stiglitz advocates a carbon tax rather than emissions trading. But that argument was fought and lost long ago…
To me capitalist corporations are inherently expansionary, predatory, give full rein to human greed and tend to privilege the interest of the firm over the public good when these don’t coincide (often). OTOH they need to operate within general social norms in order to maintain their licence to operate and to avoid calling forth laws and regulations to limit their behaviour.
The sociologist Zygmunt Bauman who wrote a lot about postmodernism, globalisation and modern identities pointed out, as I recall, that capitalism tends to promote wants that are shallow and inherently unsatisfying so that the consumer is always ready for further consumption.
With listed companies in particular there is a growth imperative.
So one way or another commercial activity needs to be constrained in absolute quantitative terms in the amount of carbon they produce. Growth opportunities are still available in carbon-free areas of the economy. How this is best done is the question.
But culture and social arrangements determine the framework within which we seek to attain our goals. Culture is not something that just sits on top of economic activity, it determines how we interact with each other and the external world in satisfying the most basic needs. Further, it is is involved in shaping our inner world and how we perceive ourselves, our identity and everything nominally external to us. Capital seeks to shape our inner world so that we act in a way that will increase profits.
If left unconstrained or if left to act within any given set of constraints for a period of time, it is not surprising that outcomes will be produced that we regard as pernicious either individually or when considered against the public good.
Brett — I think you are agreeing with Paulus.
The preferences are the demand and the outcome is the balance between that and supply. Changing supply doesn’t change your preferences, but it will change what you do.
Tom, Paulus – if preference are equivalent to demand, then surely demand destruction due to high prices is a perfect example of preferences changing in response to the market?
The market can shape not just the short-term outcome, but also our short and long-term preferences. Smart business people discovered long ago that the key to success is not just to respond to demand, but to create demand. Rampant consumerism is the perfect example to illustrate that.
To be more specific, I would argue that our cultural and social norms – underpinned by our actual preferences, wants, desires, and demands – is shaped, over time, by the market. Ergo, a well-designed ETS can also shape our underlying preferences in a positive way.
Apart from that point (which I think is more important than just a semantic disagreement), I agree with Paulus.
Brett,
The basic theory has demand (for anything) as a function of price. So at $3 per apple, you might choose to purchase 100 apples/year. At $2.50/apple, you purchase 150 apples. And so on.
Plot these on a graph, with price on the Y-axis and quantity demanded on the X-axis, and, hey presto, you have the famous demand curve:
http://en.wikipedia.org/wiki/Demand_curve
So it is not a case of “demand destruction due to high prices” — rather, a higher price simply puts you on a different point on the curve.
You may ask, where does this desire to eat 100 apples per year (at $3/apple) come from? Is it a biological predilection for sweet, pleasant-tasting fruit? Some cultural factors at play? The latest advertising jingle used by the apple industry? The Hand of God?
Well, economics doesn’t know, and has no tools to find out. It just takes your preferences as a given. (Disclaimer: I’ve only taken econ theory to 3rd year undergrad, so possibly the factors underlying consumer preference are analysed at higher levels. But I don’t think they are.)
Coming back to AGW, an ETS (or for that matter a carbon tax), are both good policy options because they still allow people to carry on their normal consumption and production activity, but with a financial incentive to reduce the emission of carbon as much as possible. They are better options than:
a) a command-and-control system (such as rationing), which tend to be clumsy and harsh, and cause unintended consequences, or
b) changing consumer preferences somehow (shifting the demand curve for carbon to the left). The problem is that I just don’t know how you’d do this, and dk’s article didn’t offer any detailed suggestions, apart from urban consolidation — which will take a very long time to have effect.
Brett,
Incidentally, rather than Joe Stiglitz, you possibly mean Jeffrey Sachs, the famous economist who recently weighed into the carbon debate in Australia with advocacy of a carbon tax.
http://www.theage.com.au/environment/alarm-on-carbon-trading-scheme-20080714-3f3w.html
I agree with that. The ETS is prone to being gamed, to political pressure, and to the possible mis-pricing of carbon permits causing all sorts of wonky stuff.
A carbon tax, applied uniformly, would be so much simpler and more transparent. But, as you say, the debate is now over.
Paulus -
Ok, I concede the point that price alone does not shift our preferences (as defined by a demand curve), at least not in the short term.
I still think – again, only on an intuitive level – that the structure of markets and the presence or absence of various products in those markets influences our preferences (i.e. shifts the various demand curves) over time. But perhaps, as you say, economics doesn’t have the tools to explain this.
As for the options you give, I would also like to know how to achieve b). But dare I also suggest –
c) Personal carbon trading. There are all sorts of political and administrative obstacles to overcome, but it has some attractive elements. It’s an idea that has been gaining ground here in the UK, and I was recently turned on to the idea by this article. It’s fairer, more flexible and more progressive than either rationing or a carbon tax. Just because it is an idea which is “ahead of its time” (as concluded by a recent UK Treasury study), does not mean we should not be considering it in the Australian context. Quoting from the linked article:
I’m planning a blog post on this soon.
p.s. Stiglitz presented a similar set of arguments to Sachs in Making Globalization Work, a book I highly recommend.
Thanks for the feedback, all. I’ll try to deal with this one substantively in the expanded (Journal) version of the piece:
A naive, positivist vision of ‘emissions units’ supposedly detached from any kind of underlying value judgements (idealist vs. consequentialist etc. etc.) is undoubtedly the basis for emissions trading and the neoclassical models of growth and equilibrium that underpin it.
What I’m really trying to say is that this kind of epistemological framework is in many ways outdated for the challenge of climate change. The likes of Michael Grubb, ironically cited with enthusiasm by the Productivity Commission, have as good as acknowledged as much: we need broad agreement about where we’d like to go with energy policy and put the right incentives in place to that effect.
There are, of course, two massive problems with this: (1) the Neoliberal paradigm that has come to underpin Western Governments in recent times from Norway to South Africa, and (2) our sense of right and wrong about our energy and waste needs is inherently embodied and subjective. Hawkins Ethics of Waste captures the complexities around this second problem beautifully.