Liveblogging Emissions Trading Allocation Challenges Forum

UNSW is hosting a forum today on how to allocate the emissions permit auction revenue pie. As a central plank of climate mitigation policy, the value in the first 10 years is expected to exceed the total value of government bonds on issue (~$100bn+ TCI reckons more), so every vested interest is lobbying to get a piece of that under the guise of ‘national interest’. (The forum will run until around 1pm. Jack Pezzey has just delivered an excellent paper on ‘who wins with free permits’)

Update: I’ll be clarifying things below and providing links to presentations as they become available.

Update: PDFs of presentations available here

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Alec Cameron, Head of Australian School of Business has made some introductory remarks on the importance of emissions trading in the overall schema and the dilemma of balancing intergenerational equity impacts with short to medium term and the importance of facilitating a balanced debate in the university sector because of competing voices of lobby groups.

Regina Betz introducing the first session: how to make the system fair to get support from the community? who gets the permits will get a wealth transfer? Here are the key views on how to allocate:

Green Paper: progressive moves towards 100% auctioning, moved away from Garnaut: strongly affected industry. “Quite fuzzy” on whether generators will receive cash or free permits. 100% auctioning dependent on whether
Garnaut: 100% auctioing with transitional assistance
NETT: Mix of auctioning and free allocation to generators and TEEIIs

Unfortunately nobody has come from the TEEIIs or Garnaut to present their case for allocation

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Keynote Address

Cameron Hepburn from Oxford University. Orthodox Economist. Wrote a piece in SMH today reflecting on some of these problems.

Disclosure: he founded Carbon Bridge and Vivid Economics

Targets effectively set the carbon price (which is why emissions trading is like a tax).

There’s probably an implicit carbon price cap [in any scheme] because very high or low prices would be politically unpalatable. You don’t need hard price floors and caps: reserve price on auctions or banking/borrowing can have similar impacts.

Base year is very important. (cf. Barry Brooks’ latest post on our Kyoto Committments in danger). [Hugh Saddler points out: 1990 and 2000 base year target bedevilled by problems about coverage (whether to include agriculture, LULUCF etc.]
2050 Target: Green Paper: 60% of 2000 level
EU: 60-80% of 1990 level.

2020: Green Paper: TBA
UK: 26%-32% has a committee to ensure it gets to this target. Stern advocates more.

What proportion should be given away for free?
Auctioning Has Advantages, however, free allocation won’t have much allocation on carbon prices, which are set by opportunity costs.
1. As the BCA has pointed out in their submission, the more a firm pollutes now, the more likely they are to get free permits later.
2. Compared to EU Scheme, where rent-seeking is thoroughly rife and auctioning is minimal. Green Paper is better in this regard – world leading in fact. So fuller auctioning avoids this somewhat.
3. Windfall profits in the EU have been a real problem with the electricity sector particularly. Also a xenophobic aspect: wealth transfer to largely foreign owned utilities.
4. “Efficient Allocation”: [oldest of Weberian economic formalisms]

With these great arguments, why are we even bothering with this debate?

*Carbon Leakage: many NGOs and academics dismiss this issue, but he reckons it is a problem. Analogous with Native Title – an interesting parallel.
Reckons you won’t see firms up and go. But globalised companies control their supply chains across the world, so an increase in China means they can dodge their committments here by increasing output. Especially a problem with Cement, for example. One way around it is to fully auction then put a subsidy/cash handout according to conditions like staying in Australia.

Elligibility: has a slide from the Green Paper showing where the cutoffs are I’ll add later.
Definition of Trade Exposure in Green: not having a physical barrier to trade (ie. everything except electricity) This means everything (!!), though fear of breaching WTO, however may be a way around it with Shrimp and Turtle case.

Coal fired power: Hepburn slams chapter 10 in Green Paper. They had huge windfall profits in the EU because they simply passed on the costs. Some differences with EU because of market structures, but it’s still a problem here.

Questions: EU ETS: auctioning was so small (fraction of a % in first phase, 10% in second year – an strangely arbitrary figure) allocation wasn’t a very strong debate in public consciousness. Betz points out that total amount of auctioning was highest in Germany. It went straight to Dept of Environment who’s having some trouble at the moment with legitimacy.

Frank Muller: Distortion: worried that price signals will be masked and we won’t see transitions towards less carbon intensive production (perpetuation of marginal production in areas like cement and steel). Hepburn agrees, slide with an equation to point this out. Muller has been arguing for border tax adjustments for 15 years…

Definitions of Trade Exposure: Difficult and inherently flawed because firms can sit on the cusp of definitions, however we can try and it’s better than copping out – which is what we’ve been doing so far. He’s been devising complex models to look at game theoretic effects of incentives (ie. performing economic theory).

Conclusions: Emissions Trading is necessary, but not sufficient. Domestic household efficiency probably won’t be effected, for example. Which is where Hugh Saddler comes in – see below.

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Second Panel:
Damian Sullivan from Brotherhood of St. Lawrence.

Low income households will be most effected: low mobility, inability to afford insurance, mobility constraints as structural shifts take place in response to climate change with agriculture etc. He reports on figures found in their latest report with KPMG.

Points out that proportional economic impacts of an ETS is regressive. Transport is one area where impacts will most be felt. Also electricity usage – if people are already rationing it, there are some big problems ahead.

Green Paper has no specifics on revenue to be allocated to households. Garnaut advocated 50% of auction revenue. Could use energy efficiency measures, retrofits etc., however split incentives between landlords and tennants etc.

Problem of targetting: you could prioritise pensioners who spend lots of time at home but don’t use much power or more power intensive houses (presumably with kids)

Problem of how to account for other benefits: health, ability to use more than just one room in the house if the whole roof is insulated etc.

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David Richardson from The Australian Institute.

A departure from neoliberal theory? Update: Not really…
Mentions Keating’s call for a broad based consumption tax and Howard massively overcompensating for the GST.

Has written some papers available here that are worth a look, most recently The Impact of an Emissions Trading Scheme on State Government Budgets which:

“highlights the need for an additional class of compensation payments that
do not appear to have been considered in the debate so far, namely, payments to
compensate the state and territory governments for the likely increase in the costs
they will face in delivering services to their residents”

Appears to be mostly riffing off this so check it out.

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Jack Pezzey from the ANU: “Who wins in the end from free permits?” Back to basics – this is going to be good.

Presenting a supply/demand graph that I’ll try to get hold of that pointing out that auction revenue is going to be greater than damage to GDP.

ETS MUST CAUSE DAMAGE TO ECONOMY – that’s the whole point!!

Basic economics being ‘disinformed in public debate’ by most MSM… (Here’s looking at you Government Gazette)

Allocation is very largely a weath a transfer. So:

Do emitting firms deserve permits?
Well, that means we have to ask who owns firms? Burden of net costs falls on shareholders (2/3rd of shares owned by wealthiest households, and foreign owners – about a 1/3rd).

Firms make you think that not getting free permits will damage the economy, which is PATENTLY FALSE! It is an issue of politics…

Chalk Jack up as another advocate of border tax adjustments… (along with Frank Muller, Joshua Gans, and others)

Green Paper on compensation to Coal fired power plants: If the change was ‘unanticipated’ (ie. asleep for the past 15 years) it may

“BCA criticism of discontinuities and revenue (not value-added) basis of Green Paper EITE plan seems justified” BUT avoid need for free permits by using border tax instead rather than free permits.

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General Discussion of Second Panel:
ESAS (coal compensation) mainly politics – investor risk is unquantifiable, but make it once-and-for-all ie. future distribution of permits is not effected by future behaviour (ie. we need to frame investment now, rather than allow gaming of it later). Jack doesn’t mind if we promise 50 years of free permits but it’s critical to provide price signals.

Muller points out that heterogeneity of energy usage in lower deciles is massive.

Pezzey reckons they should be like property rights to be onsold to maximise efficiency — a discussion ensues that made me wonder whether I was in a parrallel textbook economic universe.

To reiterate: Free permits for TEEIIs should be conditional to staying in Oz and framed

On Border Adjustment: Hepburn likes it on an intellectual level, but very hard to implement (compared to what???). Reckons you won’t need changes to WTO at a legal level. Calculating embodied carbon is a huge problem, but you can just frame economic output in the mechanism (eg. every unit of cement produced is assumed to produce X tonnes of carbon). Points out that Paul Krugman (and Stern) believe that 95% of arguments against free trade are bogus, but the 5% that aren’t are cogent are dangerous.

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Third Panel: How to spend auction revenue

Erwin Jackson The Climate Institute

We are talking about a Very Large Sum of Money: Modelling with CSIRO: 20% reduction by 2050, we’re looking at current spending on Defense or Education

Community Attitudes (polling data) helping business is NOT POPULAR, so government has to be careful in selling it. Helping disadvantages groups is very popular.
ETS is an amporphous policy that few people understand, so you need ways of engaging people through, eg. energy efficiency. Not direct payments at petrol pump..
Avoid ‘carbon lock’ – decreasing vulnerability to outlying communities and you need a multi-billion dollar package to do it and soon

TEEIIs – Admits the problem of carbon leakage, but Gov’t shouldn’t reward past polluting behaviour (as it stands with Green Paper). Where’s are the incentives to create incentives for low emissions techs?
Congratulates Ross Garnaut for ‘putting a few dead cats on the public table’ heh (eg. Additional $34-95bn in investment in new energy infrastructure needed by 2050).

Just released modelling in how we can get to 2050 target.

Coal fired – in Victoria, actually within privatised power companies – meant that most effective carbon abatement is a bulldozer. Actually reckons that most Luddites are in Trade Exposed Aluminium and Iron and Steel, rather than electricity generation.

Short term window of 5 years to get things going.

**Mentions that labour constraints to energy efficiency programs have been a major problem.

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Owen Pascoe from ACF – focuses on market based environmental solutions, worked in various programs for the past 5 years Another scalp for the neolibs!

Currently a split between 50% compensation to households, 30% to TEEIIs and 20% to Low Emissions Techs)

ACF Suggest:
10% TEEIIs
10% Green jobs… I’ll try to get that graph.

Done work with ACOSS, Choice and ACTU to look at how an equitable transition might take place.

Points out that we need to stop deforestation!! Huge ‘abatement opportunities’ – cites recent ANU paper from Brendan Mackey et al.

Focus should be on measures that lead to ‘long term changes in behaviour’…
- Calls for solar feed-in tariffs.
- Electricity network designed with coal fired power stations in mind so massive structural changes

David McKnight points out the inherent passivity of political structures like voting and this very forum – the public construed as the object of politics. Anyone else feeling alienated by the means-end rationality of these presentation should feel consoled by this point..

Pascoe responds that Gore presentation has been delivered to 1% of the Australian population

Jackson points out that TCI focus groups show that people WANT to do something, but you need targetting information, not just letter boxing – this means that there’s a key role for local government, and local measures. States still trying to figure out where they fit.

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Iain MacGill from CEEM/UNSW – Technology and Innovation

(His favourite slide to begin presentations) Technology = Hardware+Software+Orgware.

‘Innovation Cycle’ has many aspects, but given the timescales available to us, we don’t need big ideas, but implementation strategies!!

*Investment in energy structures is “generally lumpy, specific, irreversible, indivisible…”
Points out that delaying tactics may bring victory to encumbents in the long term game.
“Modelling of NEM prices won’t resolve current uncertainties but an opportunity for key stakeholders to drive debate.”

*If you’d based free allocations on modelling a few years ago, you would’ve got it completely wrong based on observed prices since then – this is a war by proxy modelling we’re seeing.

*RD&D only a small part of Innovation Cycle. ETS is currrently irrelevant – ie. no price signals feeding through!! YOU LISTENING PRODUCTIVITY COMMISSION??

*Deployment policies can have unexpected effects – Wind Industry in EU has exploded and marginal costs were much lower than expected. 40GW target was doubled in first few years.

*RD&D plans can have surprisingly little impact
We’ve had a complete failure to deliver on CO2CRC – “is it a false promise or false start?”
Points out that injection trial has just started in the Otways.

Therefore we need to work on proven technologies.

IEA is certainly not averse to CCS, but its modelling shows it’s not very useful as part of the mix – more place for renewables.

Conclusions: Our experience with (EU ETS, NSW GGAS) has failed to stimulate innovation so far. (BCA Report is highly ‘innovative’ because these mysterious companies go out of business heh. Needs more focus on constructive solutions rather than shoring up interests.)

We need ‘policy insurance’ for ETS failure.

Discussion:
Focus on complentary policy (Garnaut doesn’t want ETS+MRET, but energy efficiency requires)
Points out that people wanting to do what’s necessary to avoid dangerous climate change (eg. Al Gore calling for ) are branded waaay crazier than green groups…

Points out that Electricity Market is not a Perfect Market – something that ETS design needs to deal with

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Hugh Saddler from Energy Strategies, established 26 years ago (!) – Support for Energy Efficiency.

Disclosure: contracted to do domestic energy audits in ACT. has done 3000 of them (!) so experience from that informs the presentation

Retrofitting existing buildings: the challenge

What energy is used for in residential buildings: has a pie chart.
Unsurprisingly points out growth in electronics.
“Fuel Poverty” exists in Australia with material effects on health. Doesn’t present figures, but it’s a similar point that Lawrence made – accounting for these is very difficult.

Price signal + Leaflets WILL NOT WORK – Ros Kelly wasted $2m on leaflets in 1991 having absolutely no effect.

Makes some excellent points that hint towards an Actor-Network Theory approach towards these problems, eg.:
When people move into a house, you don’t get any instructions on how to operate the place
most energy users can use some help with this. But if you stay more than about an hour, you’ve probably outstayed your welcome…

Longer Term Issues: lack of skills, labour force problems.
Market intermediaries (retail, tradespeople) play a VERY important role in facilitating an efficient market.
eg. Training of air conditioner salespeople is appalling, for example. Telling you Mark Taylor recommends it is no substitute for knowing how to maximise its cooling over a specific area.

Discussion:
Latest NSW EE Scheme: Saddler is skeptical of Deeming – too much emphasis on device installed. 50% of improvement is usage, which has been a problem with CFL programs.

If there is a lot of low cost efficiency in housing sector, then that could effect setting cap

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Question from Outhred: How could EE be more fully integrated into stationery energy sector (VERY good question)
Retailers know who the consumers are, but the market has evolved so that they become large, low margin and not likely to engage end-users.
White Cert Scheme like VEET has obliged engagement, but you need cultural change and shift further upstream. Skeptical of the possibility. Energy Efficiency requires changes to NEM.
Maintenance contractors with these companies tend to be terrible.

Frank Muller: How do those industries need to change in a carbon constrained economy? Eg. Energy Regulators proposed $15bn on supply side upgrades which is thoroughly inefficient and ridiculous – assuming/performing continuation of status quo. Compare with measly $150m towards NSW Scheme. It’s madness.

Two parrallel universes – ETS World of carbon constraint and Energy Reform Debate where demand is projected to continue fatuous

Garnaut says it’s structural reform of the naughties, but Muller reckons it’s more like the great national building infrastructure projects of yesteryear.