On the policy merits of the stimulus package away from the nonsense coming out of Rudd and Turnbull, there have been some interesting points raised. John Quiggin was perhaps the first to note, and the Australia Institute has expanded on (hat tip Joshua Gans): the free home insulation won’t actually reduce Australia’s emission levels.
“The way the Emissions Trading Scheme is designed, every kilogram of emissions saved by a household frees up an extra permit for a big polluter,” he said.
“So while it’s true this scheme will help reduce households’ use of energy, it won’t reduce Australia’s emissions at all.
“What they do is take those permits freed up by what the individuals have done and sell those permits to the aluminium industry or the steel industry or anyone else who wants them.
This is 100% accurate. The insulation package won’t reduce emissions at all – in fact, it’ll increase emissions slightly, as the insulation will be manufactured and installed before the actual emissions caps kick in in 2012. What it does – aside from stimulating economic activity, which is the point of the stimulus package – is achieve that emissions target more cheaply and easily than might otherwise be the case. That will indeed push down the price of emissions permits for your favourite evil industry of choice (it’ll also do so for organic food shops and pensioners, but that doesn’t ever get mentioned, funnily enough…)
But there’s a simple solution to this. The reason why the government went with such pathetic emissions targets in the first place was due to the fears of the effect on the economy. But we’ve effectively bought ourselves nearly a 1% reduction in annual emissions by this measure. Therefore, as part of the deal, the government should allocate fewer permits than they otherwise would have, such that the cost of permits stays precisely where it would have been absent this measure (this will be slightly less than 1% of total annual emissions, as the government was presumably already counting on some emissions reductions from this source). Treasury should be able to run the numbers reasonably easily. The polluter industries shouldn’t be able to complain, given that it won’t cost them anything they weren’t going to have to pay. And we get actual emissions reductions out of the process.
This should be a no-brainer for the Greens to put on their list for the Senate negotiations – both as a worthy measure in itself, but more importantly to establish an important precedent. If the government takes policy measures to reduce emissions from one part of Australian society, those emissions should not be reallocated to other sectors.
Robert – the cap was set politically, not on the basis of a finely tuned cost-benefit analysis. There will not be any adjustment to the cap – they will be negotiating with the Libs on this one. The cap was set knowing that these sorts of policies would be introduced. There will be more in the future. The government will be happy to put downward pressure on permit prices. Sorry.
Raquel can you send a picture please?
“What they do is take those permits freed up by what the individuals have done and sell those permits to the aluminium industry or the steel industry or anyone else who wants them.”
This seems a rather dubious judgement. Future emissions reductions are not already achieved, nor do we yet know how the targets imposed by the CPRS will be achieved. This sort of argument could be made regarding any mitigation measure and any emissions-intensive enterprise covered by the CPRS, e.g.: Subsidies for solar means more permits for landfill sites! Electric cars mean more permits for fuel suppliers!
The fact is that if we end up with a 15%-below-2000 target (which is surely a plausible outcome of Copenhagen) then we will be trying to go from 108%-of-2000 (where we are now) to 85%-of-2000. If 1% of that 23% is achieved through subsidized insulation, so be it.
Well put Robert. the same should be said for the various state based energy efficiency schemes (NEET, VEET, etc).
“What it does – aside from stimulating economic activity, which is the point of the stimulus package – is achieve that emissions target more cheaply and easily than might otherwise be the case.”
It also assists those on low-incomes to cope with the (already unavoidable) effects of climate change. Well some low-income households, those in either private rental or public housing have been either explicitly or effectively excluded.
Mitchell, what you seem to be missing is the discontinuity between the permit levels and Australia’s actual emissions.
By design, the scheme allows purchasing of foreign emissions permits. So if the price of Australian emissions credits goes over the global market price, companies will simply buy those permits on the global market.
In the longer run, the same thing will work in reverse, and Australians will be able to sell their credits on the global market.
Sooner or later there will inevitably be a single global price for carbon.
Once that happens, the price will be out of the Australian government’s hands.
All the current argy-bargy is simply how we get to there, around 2015, maybe 2020.
Labor outsider: We’ll see. Even if the Greens aren’t in a position to get such a deal this time around, there will be a next time and they may well in a stronger position that next time.
The ALP and the Coalition will always be able to do a deal over the cap that excludes the Greens…..The truth is, the ALP and the Coalition are far closer on ETS policy than the ALP is to the Greens. As poorly as the coalition are doing right now, they are still a more realistic threat to the ALP’s political ambitions than the Greens. Do you really think that the ALP are going to deal over this issue with a party that wanted to shut down all coal production in Australia? Really? IMHO, Australia will be quite successful in negotiating its 15% target in upcoming international talks. If the US comes to the table and we get an international agreement, the Libs won’t oppose that target either. The Greens simply won’t be relevent to the decision, even though they will increase their share of the vote and representation in the Senate.
Depends on your definition of “successful”, LO.
Patting ourselves on the back for doing a pissweak deal is the ultimate in shortsightedness.
“Do you really think that the ALP are going to deal over this issue with a party that wanted to shut down all coal production in Australia?”
Oh, come on LO. The Greens never wanted to shut down all coal production in Australia. That’s rubbish and I can’t believe someone as sharp as you doesn’t know it’s rubbish.
I’m sure there’s plenty of stuff for you to complain about in the Greens’ platform without making things up.
d
Actually, Darryl, since it is Greens policy to reduce emissions by 40% below 1990 levels by 2020 and reach net zero emissions by no later than 2050, moving as fast as possible to 100% renewable energy, and since the Greens are sceptical at best about the potential for geosequestration, I am proud to say that it certainly is Greens policy to shut down the coal industry in Australia!
It’s just that the Greens also propose a pile of measures to retrain the people in coal jobs into new, green jobs. That’s kinda what is starting now, really, thanks to the end of the resources boom killing resources jobs in their thousands and the Rudd Government finally realising energy efficiency exists. Momentarily.
Robert, the problem with your suggestion is that there can be no deal in this stimulus that involves altering the planned CPRS, since that leg is a good 6 months from anywhere. And a deal to do it later wouldn’t be worth the paper it may or may not be written on, you’d have to say.
Anyway, I get the feeling you are as sceptical as me about this argument about emissions reducing policies not reducing emissions. It completely misses the point – that is what emissions trading does! It finds cheap emissions reductions in one place to reduce the costs for expensive reductions elsewhere. It’s not the design of this scheme, it’s the choice of emissions trading as the mechanism and the design of a scheme with a low low target and compo for the polluters! The problem is that the target is too small, and this concept is a convenient way of banking on community anger over the small target. Raise the target to a serious level and no-one would complain because we’d all be happy to pull together, using cheap individual action to lower the cost of action for others.
I reckon this is a third order problem, personally.
LOL
Thanks for clarifying the Greens’ policies Tim
Just a question. Have the Greens thought deeply about how you deal with the fact that the people that work in fossil-fuel intensive industries often don’t live where the new low-emission industries will be located?
Reductions in emissions of that magnitude in that space of time require a massive reallocation of resources, including labour, across the economy. It will mean that places like the Bowen Valley in Queensland, and the other regions enriched by the activity that goes on there, will contract significantly, with all the attendant effects on wealth, wages, etc.
People migrate within Australia, but not quickly enough to prevent unemployment rates increasing signficantly when structural change occurs that quickly. Retraining can take quite a long time and there is no guarantee that the people that lose their jobs in one sector will find work in others.
By all means continue to advocate the changes you believe in, but don’t underestimate the impact those changes can have if they happen too quickly.
I stand embarrased and completely corrected. I feel like the articulation of our policy has changed dramatically since I was seriously involved, but I’m sure that’s just me. My apologies LO.
d
Taking my foot out of my mouth for just a moment, I somehow forgot the policy had changed since the 2007 election.
Still embarrassed and sorry.
d
Don’t worry about it Darryl
FWIW, Robert et al – I don’t have a major problem with Australia’s 2020 target as I think poeple are underestmating the challenge of per-capita emission reductions of that magnitude within the next 11 years. Remember, the all those CGE models are basically static CGE models that don’t properly take into account transitional costs.
That said, I fully support Australia moving toward a 2050 per-capita target that is equal to that of other countries. That will mean that future emission reductions will have to be quite deep. However, I think that should be manageable at a reasonable cost because it is more likely that the low-emission technolgies that are necessary to deliver deep cuts affordably will be available.
LO, you’re not taking into account international trade in permits.
Nor are you taking into account the pile of cheap offsets likely to become available from the agricultural sector.
Sorry, but I am a total non believer in the capacity for any form of trading system to do any-thing at all about CO2 emissions.
It is an entirely metaphysical construct that is based upon the fantasy of the “invisible hand” and that some-how the “market” will solve all our problems.
You want Ponzi schemes? I give you Carbon Emissions Trading. You want South Sea Bubbles? CET is the go! Does any-one want to buy a bunch of tulips?
There is no “market” solution. Repeat there is no “market” solution.
There are solutions that will be mediated via the market, that will demand that the market either mediate them well or get out of the way.
The market solution Idiots have put the cart in front of the horse and proceeded to amputate the horses legs.
Huggy
Huggybunny: markets are not a panacea, but they often work, and work well.
The problem of ensuring that you don’t starve is solved by a market – an imperfect one, sure, but a market nonetheless.
Incidentally, Tim, I’d say that the biggest problem is the targets, not the compensation for polluters. I find it distasteful that they’re going to get rewarded for being prats over the past decade, but paying them hush money isn’t actually going to put more carbon into the atmosphere.
One more point, Tim: if you accept the premise that a CPRS with pumped-up targets will reduce emissions, doesn’t that behove those who support additional measures on top of it (for instance feed-in tariffs0 to articulate more carefully the point of doing so.
For feed-in tariffs, you might argue (and IIRC you do) that it’s supporting an embryonic industry that has the potential to allow us to reduce emissions – globally – at a lower cost, break up power sector oligopolies, reduce the need for expensive grid upgrades, and avoid icky technologies like ones that start with n or end with -stration.
But it’s not enough any more to just say ‘solar feed-in tariffs will reduce our greenhouse emissions’ because post-CPRS, it’s no longer true.
on the technical point, i think insulation in my unit would reduce my aircon’s electricity usage, so wouldn’t that reduce emissions at the power station?
And does anyone know if the free insulation covers unit blocks?
sorry, read it again a bit more carefully … someone else will naughtily use whatever savings i make.
“Nor are you taking into account the pile of cheap offsets likely to become available from the agricultural sector.”
.
What are you expecting is this regard Robert?
Is this the benefit from stopping land clearance ? The Victorian govt recently declared a new set of national parks – will these areas C benefits be sold off by governments then?
As a primary producer I would hope that any C credit the agricultural sector generates attracts top dollar!
What about a carbon tax rather than a cap-and-trade system?
In addition to being simpler to administer, there is always a disincentive to use CO2-emitting products; and companies don’t have a magic number they can aim for to improve profitability.
A carbon tax is a more market driven solution that avoids these kinds of unintended consequences.
One suggested alternative to the cap-and-trade is a system where an independent body, like the RBA, sets the tax on carbon, based on government targets.
Murph: soil carbon; even ignoring charcoal and pyrolysis, as I understand it there’s massive potential for Australian farmers to change their tillage practices in a way that increases carbon content in their soils.
The trick is measuring the carbon uptake and ensuring it stays there.
Leon: this has been discussed on LP regularly, as well as on the economics blogs. The short version is that a tax and cap-and-trade are six of one, half a dozen of the other.
Robert,
Agreed a “market” is good at mediating an exchange of goods or labour power (to borrow a Marxist concept);in a situation where goods and services can be freely offered and withdrawn.
How long do you think it will take for the market in “sub prime” renewable energy credits to emerge? Well, actually negative time because that market is already operating in several parts of the globe.
The really tragic and sad thing is that most of the solutions to the global warming problem already exist. The market is unable to accommodate them because of “market failure”. This has been the mantra of organisations such as the ESAA; for example, for years.
Even your “pet nukes” program is kept away by “market failure” – hooray for market failure I say.
Unless we can find a way to introduce the new technologies and processes that does not depend upon some sort of kludged on market process then we are all doomed.
Your market based approach is just an open invitation to every urger, pimp, wide-boy, merchant wanker, wall street tout, financial molester and criminal gang to give us a repeat of the current “economic crisis”. This “global financial crisis” is just the biggest act of criminal fraud ever. You want more of the same ? Just set up a market mechanism to save the planet. What?
You have to be joking or really sick to support that.
Huggy
Pragmatically, even if one were to accept Robert’s suggested principle (from the last sentence of his post) – that whenever specific emissions reductions are achieved by government policy, the national emissions cap should be correspondingly reduced – there appears to be a place to apply it within the CPRS as proposed, namely at the strategic review of the Scheme which is to occur every five years (see White Paper, chapters 10 and 16). In the Scheme, the national emissions trajectory is specified by five years of definite caps, and then a ten-year “gateway” which provides upper and lower bounds on what the caps will be, 5 to 15 years from now. At the five-year reviews, the gateway is to be narrowed and extended. So that is an occasion on which this argument could be made.
Robert – I’m not forgetting that at all – emissions trading has its impact through the opportunity cost of holding permits – that leads to reallocation of resources and capital can be reallocated more easily than people – i just can’t believe that people don’t understand how pricing carbon works its way through the economy!! It doesn’t matter if we import a bucket load of permits – there are still transfers involved on top of the changes in behaviour caused by the changes in relative prices and opportunity costs. The change in relative prices makes part of the existing capital stock less productive and in the short-term leads to a subsitution toward more expensive technologies. Do you really believe that economies shift seamlessly between equilibria? Are we suddenly living in a neoclassical world with completely flexible labour markets and perfect capital markets? No, which means there will be adjustment costs and they will be concentrated in some regions of the economy more than others. Even think about a world where there is a global carbon price and it is high enough to deliver the 450ppm or lower – what do you reckon that price would be? The estimates I have seen are pretty high – it would significantly change Australia’s industrial composition – all modelling shows that. That doesn’t make it the wrong thing to do but you can’t just sweep the adjustment costs under the carpet.
Robert a few other things.
You know that the EU has basically ruled out including land use and land use change in its ETS because of the complexity of including it and making sure that any offsets lead to genuine emissions reductions. That means that it would have trouble linking with international schemes that include those offsets. We are years away from including that sector in Australia’s scheme.
I’m also less sanguine about international trading than you are. Global emissions trading will involve the trade of enormous amounts of complex derivatives – the GFC has demonstrated how destabilising those derivatives can be without proper regulation and I’m not confident that the international regulatory structure will be up to it. At the moment, the majority of those derivatives are traded OTC, which means that it can be difficult to trace who is holding carbon risk. Much of that trade is also speculative. International trading will also leave national ETS vulnerable to shocks emanating from off-shore – especially if there is linking to countries for which it is difficult to verify emissions. I think we are well over a decade away from having a global carbon price and that Australia will limit imports for quite a while so that we retain some control over Australia’s carbon price. Warwick Mckibbin has written some pretty sensible things about all of these issues.
Also, correct me if I am wrong – but the Greens would prefer to restrict the proportion of permits that can be imported – no? My understanding of their policy is that they want to see emission reductions occurring at home, not Australia paying for emission reductions in other countries. If those restrictions on imports are large enough, and Australia had say a 40% target by 2020, then convergence in permit prices to the world price would be limited.
Here is another way of thinking about it – lets say the world price was $80/t (40 euro in a few years time once the GFC is over seems reasonable) – and Australia allowed full importing so that the world price was the Australian price – and lets also say that LU and LUC was still out of the scheme – and lets say that all OECD country schemes are linked – what do you think the impact would be? The impact on relative prices in Australia would be significant – the share of coal in domestic energy would fall significantly – especially if CCS turns out not to be viable. If Japan, which imports more of our coal than anyone else, was in, demand for Australian coal exports would fall significantly. That would go for a lot of our other fossil-fuel intensive exports as well that go to OECD countries. Australia’s balance of trade would also be significantly affected.
My point is simple – Australia is in for a big adjustment in the shift to a low-carbon economy. In the long-run, once the capital stock has adjusted to this transition, things will be fine and hopefully the globe will have done enough to limit the damage from climate change. But in the short-to-medium term, these changes will imply adjustment costs that IMHO are poorly understood because our models capture the LR much better than the SR.
One more quick thing – I know the models that are used to project the impact of introducing the ETS quite well – they are very similar and some circumstances identical to those that are used to model the impact of trade liberalisation policies. One of the ironies of the debate about the modelling is that the same people that used to criticise the trade models because of the assumptions they made about labour markets clearing and ignoring transitional and distributional effects, are now singing their praises because they show quite small impacts of introducing the ETS.
All I want to reinforce is that those models have some strengths in understanding the longer-run impacts (though even here there are problems because it is nearly impossible to model the LR technical changes induced by the carbon price), but are very limited in understanding the dynamic short-run effects. For that reason, Treasury over the next couple of years will be building an a new model that captures more of these dynamic effects. Adjustment to relative price changes rarely occurs smoothly. We should understand that and be prepared for that, and have policies to counteract that, otherwise there will be some backlash in the longer run.
darryl, i do apologise if i embarrassed you. It was not intended as such. Indeed, greens policies have finally been brought much more into line with the science of climate change. Labor outsider, you’d be surprised how many new jobs can be located where old ones will disappear – manufacturing, for example can be deliberately sited in places that will be badly hit. Also, for eg of internal migration for jobs, you only have to look at the mass movement of workers into mining areas in recent years to see how east they can leave again… The greens are looking at this and thinking about it. It’ll be bloody hard to do, but we have to do it, is the upshot.
LO said:
what’s the problem with Australians paying for emission reductions overseas rather than here? Since its a global problem anyway does it really matter?
tim @ 32 – jobs can move fairly easily but there can be some quite high social costs – eg separation of parents from families, people having to move away from communities and family support networks. The impact is much less when its done slowly. I also question whether people will be able to get equivalently paid jobs in the new industries or will they have to take large pay cuts because they don’t have the right skills?
Hey Tim
I’m not claiming that the adjustment won’t take place – it will. But although migration helps to equilibrate labour markets, it is not fast enough to prevent contracting regions from suffering from a range of problems. On top of that, it is not as simple as saying that governments can just redirect new investment into regions that suffer from the change in relative prices. Pricing carbon will change the comparative advantage of different regions and that will result in employment being permanently higher in some places and permanently lower in others.
Really, before finishing the crafting of your policies, have a look at the literature on the regional impact of economic restructuring in Australia. It will give you some food for thought about what policies will be necessary to ease the impact of necessary structural change.
chris and lo, nobody is claiming that the transformation is going to be easy or fun or pain free. It’ll be hard, absolutely. But the alternative is far far harder… Looking broadly, but always keen for input and advice.
Chris – I obviously think it is a good idea to import permits from overseas if there are cheaper abatement opportunities overseas. My comment was more clarifying that I thought Greens policy was both deep emission cuts, and relatively little importing or offsets. The adjustment costs to that policy will be larger.
LO@7:
You sure? Even after Turnbull’s latest effort?
There isn’t an immediate link between building carbon credits through land use changes or soil C improvement techniques and ” genuine emission reductions”.
Including agriculture may be complex but excluding this segment from claiming the carbon credits it does make seems terse and political.
If there is a long term commitment to understanding and accurately measuring these C credits it won’t be that difficult to achievea useful scheme.
I suspect the reality will be that the EU will shield it’s farmers from outside competition .We could be selling C neutral products around the world but that will upset too many other interest to get a run.
Additional costs will be imposed on australian producers and consumers if we aren’t given recognition for the C offsets agriculture will make.
Huggy @ 26
“How long do you think it will take for the market in “sub prime” renewable energy credits to emerge?”
“This “global financial crisis” is just the biggest act of criminal fraud ever. You want more of the same ? Just set up a market mechanism to save the planet. What?
You have to be joking or really sick to support that.”
No, this new market, the carbon market, will be one of the most regulated the world has ever seen. The sub-prime crisis was a failure of sub-regulation. Apples and oranges.
In the discussion over whether an ETS is any good that seems to be taking place here, we shouldn’t forget the history. I was still in university back in 1997, but i remember well when kyoto was created that there was loads of discussion about an ETS versus a carbon tax. I remember me and my friends all thinking a tax would be better. However, the ETS won out because it was:
** more politically acceptable**
Business interests are part of our democracy, and back then, the interests that thought that a carbon tax would be too blunt won out – an ETS was seen as a milder, more measured, more business friendly approach, at least in my reading of the discussion.
If it weren’t so tragic it would be amusing, but now some business groups have argued for a carbon tax instead of n ETS, because with hindsight and a bit more thought, they can see how administratively burdensome an ETS is.
We’ve got an ETS, Europe has an ETS, and these policy approaches are literally years in the making. I think we should follow through on the ETS for the simple reason that policy development this big and involved is so slow, that to start again would be to waste too much time, with no promise of a better outcome, once everyone gets their say and the muddy compromise is hammered out. We should attempt to mitigate the flaws of the ETS, I think doing that will be better than abruptly switching to a new approach now. Any changes in approach should be incremental and build on the work already done, rather than just scrubbing off the whiteboard and starting again.
The CPRS is not an ETS, it is a hybrid between an ETS and a carbon tax. Unfortunately, from the point of view of the climate, it is the wrong sort of hybrid.
The CPRS is not cap-and-trade because there is a price cap — the government is always willing to sell more permits at the level of the price cap (initially $40). This means that the so called cap in emissions is not a strict cap.
What is required for policies like insulation deployment to lead to environmental benefits is a price floor in the CPRS or a carbon tax. Instead of having the present government attempt to design the trajectory of the CPRS for the next 12 years before introducing any sort of carbon pricing, why not introduce a carbon tax in mid 2009 and then work out a long term framework.
I’ve never had a job that came with a guarantee it will continue indefinitely. When there’s a downturn people like me lose their jobs and don’t get any redundancy – or retraining or assistance to move elsewhere beyond the minimum Centrelink provides. As a reason to continue the use and export of coal, permanent job security for coal workers is the weakest of all. Coal has to become low or zero emissions or get driven out of business; it’s a leading cause of a building climate crisis and it’s demise has to be a key intent of serious climate policy.
If it’s Greens policy to see the phase out of coal is done with forethought and planning, good on them; that’s policy based on the serious scientific reality of climate change. Oddly, it’s the “sensible” and “pragmatic” mainstream political parties that believe that increasing coal export capability (adding potentially 30 times the emission of what the CPRS is aiming to reduce) is good planning, that not counting the fossil fuels we export as part of our contribution to emissions is good accounting and that no plan for the phase out of coal is the best plan of all.
We still want our cake after it’s been eaten. I’m sure some politician in the sensible centre will regurgitate some for us.