If anything ends up completely discrediting the worship of markets, it will probably turn out to be the vacuous and endlessly deferred nature of quasi-market “solutions” to climate change, which have little support even among those who are ideologically predisposed to them.
You’d assume that the free marketeers would be better off supporting something meaningful… if there was anything in the “rational actor” thing.
Image courtesy of No Right Turn.
IMHO the problem with your argument here is that you have identified the correct culprit for the inaction and then fired your arrow at the other party. The government is the one not taking any action, yet you blame “the worship of markets”. Sorry – but I find that odd.
I agree completely Andrew – very strange post. The market doesn’t choose the cap. The market doesn’t choose which firms receive concessions and whether those concessions are appropraite. They are all decisions by the regulator. In this case governments. Yet this process of taking a viable market mechanism and screwing it up somehow makes pro-interventionists more confident that command and control mechanisms will be more effective than market mechanisms? Please!! If anything, it should make social democrats a little less confident in the efficacy of governments to provide solutions to major social and environmental problems!
Its a question of political power isn’t it?
Who has the greater power to detirmine policy and action on climate change etc, the government or big business polluters?
Mark, you’d be aware that many of the free market side of this equation actually support a carbon tax, not an ETS, on the grounds that a tax has the merit of candour and transparency. That there are serious problems with the ETS as it stands is not the fault of markets, but governments (as Andrew has pointed out). That the market mechanism may not provide an adequate solution is something already recognised by many free market liberals.
The market is dead, long live the market. But wait, isn’t giving away $16b of corporate welfare to the worst polluters a fatal distortion of the market that Garnaut warned specifically against?
Surely Kevin Rudd and Penny Wong could not be so generous with our (the taxpayers) money? Is this really what we voted for? Business and usual = politics as usual.
Would you hold a free market auction for a firetruck to come and put out a bushfire while the fire raged?
I thought the Liberal were the ones who really cared about free markets. But wait, John Rudd does too.
I would have thought that the problems with implementing an emissions trading scheme are political in nature, not related to the underlying economic logic of an ETS per se.
I’m with Paul Krugman on this one.
Andrew @ 1 and LO @ 2 nailed it for me. Rudd hasn’t provided the market yet. If the form currently proposed gets up it will fail primarily not because it uses a market mechanism but because the market is significantly distorted and unable to work efficiently.
Something to put the pigeon among the cats here.
Firstly, I stole the image from Scoop, where it is currently gracing their front page.
Secondly, the epic fail here is that the NZ government has pursued a market solution to the exclusion of all other policies, in the process dismantling effective, but non-market based policies. It has done this for fourteen years. As a result, we have had no policy, we still have no policy, and if the ETS is ever reactivated (having been suspended in the last gasp of the Deniers on National’s election), it will likely be so full of holes as to be incapable of producing the necessary reductions.
Meanwhile, I look overseas, and I see countries in Europe which have successfully reduced their emissions with a combination of market solutions (the Euro ETS or carbon taxes) and non-market solutions (planning restrictions, regulations, efficiency standards, mandated technologies). There is no question that a mixed approach works. There is no question that it provides backup against the special pleading for ETS permits. There is no question that it strongly complements market mechanisms. But those ideas are heresey in NZ policy circles, because adherence to the cult of the Pure Free Market (Douglas/Richardson subsect) is mandatory in NZ policy circles.
And how else do you plan on allocating the use of carbon dioxide generation. How about we try it first, for some reason it seems to be working in Europe.
Mark, say we took a more command-and-control approach to decarbonizing Australian (and/or world) society.
What would need to happen?
Along the way, we’d gradually need to shut down Australia’s coal-fired power stations or get them to use CCS, use energy more efficiently, either figure out a way to stop sheep and cattle emitting methane or breed radically fewer of them, massively ramp up production of some form of non-emitting electrical generation, and gradually switch to electrified ground transport. On a global scale, either CCS proves to work or our thermal coal exports go.
Let’s assume we pass specific laws for each of these sectors. What happens? They start squealing like stuck pigs about how they are incredibly important to Australia and how there should either be no change to the way they work, or they should be massively compensated for the change.
In other words, pretty much exactly the same as the debate surrounding the CPRS.
PeterC @ 5
Yes firetrucks and markets. In London and Melbourne (I think) you can see metal signs on walls that once indicated that the building owner had paid for fire protection. If you did not have one of those signs on your building and it caught fire the fire crew stood by and watched your building burn down.
This is called the free market.
Huggy.
Adults using children’s language: epic fail.
I’d start from the position that markets are not a natural phenomenon but a human artifact, so choosing the market solution is in fact a government intervention. If it doesn’t work that might be because the market was not properly designed or perhaps because there were no other complementary interventions.
I think that Idiot/savant @ 10 is spot on. The Europeans appear to be making some progress because of a multi-pronged approach. NZ, I know little about.
Australia’s problem seems to me two-fold. First, the CPRS is a badly designed artifact. Second, while the government is making other interventions, there is too much reliance on the market strategy in the early stages.
I think we should have started with an energy strategy paper, which mandated no expansion of coal-fired power, provided a framework for closing them down, banned the liquefaction of brown coal and set a framework for all government interventions, including energy efficiency, public transport strategy and the establishment of an ETS if we are going to have one. In fact the Government’s energy strategy paper is an afterthought, largely in the mind of Marn, which seems as though it is going to look for more of everything, including shale oil, for chrisssake (see section 5.2 on p.8).
We also need complementary strategy plans to cover non-energy emissions, including land-use (forestry etc) and agriculture.
It might be hard work, but everyone would have an idea where we are going, that the whole thing makes sense and that a rational climate change strategy is in fact important.
The problem with the ETS is logically it only makes sense if you either (a) don’t know what are the ways you are going to tackle the problem or (b) you do know, but they are too politically unpalatable to say out loud.
The problem is that the environment movement latched onto an ETS as a way of tricking the big polluters into allowing themselves to be put out of business. We thought it would be politically easier to achieve our goals through the back door than saying upfront what is needed to fix climate change.
Of course, the big polluters were smarter than that, saw (a real functioning) ETS for what it was, and poked so many holes in it as to make it pointless.
But in the process climate activists have been so bloody confused by the whole thing.
So instead of campaigning for something clearcut like ‘no new coal’ or ’100% renewables’, the campaign is on ‘less free permits’ or ‘fix additionality’.
I think you might be underrating this part of the problem, Ben.
It is apposite to recall Ross Garnaut’s words of 2008 at the The Melbourne Institute’s Economic and Social Outlook Conference, 27 March 2008:
And:
And Robert makes an important point at #12. The big polluters are essentially agnostic about the government’s choice of policy instruments: they will oppose anything which doesn’t leave their bottom line intact or which inconveniently requires them to change their ways.
“have little support even among those who are ideologically predisposed to them”
That’s because their ideological predisposition to free markets is trumped by their ideological predisposition to hate greenies and all their works, including a belief in the need to address the problem of climate change.
Why does the one trump the other? Because the belief in the efficacy of free markets is ruled by the head, but the hatred of greenies is ruled by the gut, and the gut will beat the head every time.
(Of course there are exceptions. Harry Clarke, an economist who believes in free markets and has no love for the Left, believes in the need to address climate change and that a carbon market is a good way to go about it.)
On the substantive issue, isn’t it a little early to proclaim the failure of the carbon market to achieve the objectives set down by the government, since the market hasn’t begun operations yet? Maybe it will work. Maybe it won’t. But only Nostradamus knows ahead of time, and he isn’t saying.
Of course as others have pointed out, you can quite validly point to weaknesses in government policy (the targeted reductions in emissions) and to the freebies that are proposed to be handed out to the polluters. But the freebies, far from being essential to the working of the market, are a corruption of it.
That’s one factor amongst one constituency. Another is that many of those who spruiked the case for “market-based” instruments as a “superior” alternative to regulation did so not because they were ideologically committed to market-based attempts to induce changes in polluter behaviour but because they were hostile, for self-interested reasons, to environmental regulation and at a certain time it was tactically smarter to muddy the waters by making an invidious comparison between theoretically ideal but untried market-based instruments, and actually existing, imperfect, regulation, rather than simply oppose environmental regulation outright.
I have in mind in particular the volte-face by Australia’s big business interests and associated media who, after spruiking the superiority of economic instruments over regulation throughout the Ecologically Sustainable Development process in the early 1990s, went ballistic when one such economic instrument – a carbon levy or tax – was actually considered for a time by the Keating government in 1992.
Ben, Robert is correct — markets are good because we *don’t* know how you’ll tackle the problem.
We don’t know what technological advances will happen, we don’t know what the supply and demand curves are of every product which produces GHGs, so we don’t know which things we’ll need to make less of.
So rather than picking winners (mandating technologies, handing out free permits) you’ll get grater reductions (or the same reductions for less money, take your pick) if you keep flexibility by just setting a price — either by an ETS or a carbon tax.
Much less insightful than Mark’s usual posts, I must say!
Big business blows hot and cold on this issue. Some, no doubt, supported a carbon market purely for tactical reasons. thinking that it would never happen. Some would happily pillage the environment for a dollar. Some people in big business genuinely care about the issue. (“Concern for the environment is not logically inconsistent with support of free market capitalism” Discuss.)
And some don’t feel strongly either way, but recognise that their customers care, and also their employees. The care factor has diminished with the GFC, but the GFC will go away sooner or later.
Sam #22, we should also note that certain business ectors stand to do well by doing good, notably the insurers, the renewables sector, sections of tourism, etc.
What Paul Norton said (both times).
Having spent far too much time digging around the history of cap and trade (US Sox and Nox Market) and baseline and credit (NSW GGAS) schemes, the point is a simple one: it doesn’t stimulate innovation in any sense meaningful to the structural challenges of climate change.
The main reason the US SO2/NOX trading scheme was successful against the highly dubious counterfactual calculations/lobbying efforts of the liable parties was the impact of rail deregulation on fuel switching and hence compliance costs. Those are quite simply the facts of the US scheme and are largely undisputed by the main players. Of course you have to sift through the nauseating backslapping http://scholar.google.com.au/scholar?cluster=13144096530030461420&hl=en to understand this point. But it’s a crucial one, because this ‘on paper’ success then led Richard Sandor and William Nordhaus, with the help of others, to eventually draw up the Clean Development Mechanism, and the rest is history.
I think it really pays to take long view on why these markets are so appealing for established players, which is what Paul Norton’s posts point to.
Paul #23, I don’t see how the insurers will do well out of this. Their risks will go up and they will charge higher premiums accordingly, but they will have bigger payouts too. It should all cancel out.
Sam, what I meant was that the insurers are perhaps the leading business sector calling for stronger action on climate change precisely because they fear bigger payouts and more frequent big payouts. Sorry for not making myself clearer.
Paul, it’s a good example of what Adam Smith was talking about when he wrote about people contributing to the social good even if they only care about themselves. (That is a deliberate provocation.)
Ben #16,
if what you are saying reflects broader understandings amongst parts of the environmental movement, then God help us all (I usually don’t call on deities because of their tendency to disappear in puffs of logic).
Just as simple opposition amongst those who oppose action in all its forms is so not helpful, simple solutions that cannot translate across society and the economy are equally not as helpful.
Do you mean this ETS, any ETS? Do you have anything sensible to say about covering the externalities of carbon costs? Tax, perhaps? A price on carbon in some way is neccessary but not sufficient to address market failure.
And because some markets fail some of the time, this does not mean all markets fail all of the time.
Part of the debate should collect around what should actually be driving the change – not a simple price mechanism but a broad set of policies. Price from the market is needed (in an ETS, or to minimise the cost of tax, or in some hybrid system), plus a mix of conservation policy, energy replacement policy, bottom-up mechanisms to drive down the cost curve within individual business/business groupings, opt-in schemes and compensation for low-income earners (e.g., the government bankrolls green power for healthcard holders). Markets can sit quite comfortably within such a mix as way of allowing profit-making enterprises minimise their costs.
While punishing the polluter through price is great psychology, it’s rotten economics.
Tom D @ 21, I think it was designed as a discussion starter. The best way of starting discussion is to fire up the emotions. Absent a trigger film an image and a pithy statement seems to have done the trick.
Of course there is no point in firing up the emotions unless the grey matter also comes into play. This is happening.
I think what can also be said is that virtually nobody who posts or comments at LP would seriously argue that markets, and market-based or market-mimicking policy instruments, don’t have a part to play as part of the total package of responses to AGW. What I think most of us would argue is (a) that markets and MBIs can at best be part of the solution; (b) what that part should be is an empirical rather than ideological question, and one which must prioritise the ecological imperative and also consider the social imperatives of equity and democracy; (c) a great deal of sloppy thinking and confusion has been created through a combination of the 1980s and 1990s intellectual vogue for markets and MBIs as a cure-all, and the tendentious use of arguments about the superiority of markets and MBIs over regulation which I referred to at #20.
This thread will make a good time capsule to revisit once we have our first carbon bubble recession.
The government is the one not taking any action, yet you blame “the worship of markets”.
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Well the govt is taking action Andrew. I don’t believe the action is the right action but it is action.
Note that the post doesn’t say that there should not be a market based solution to climate change. It says that the failure to propose or implement any such solution which would actually achieve anything will contribute to the discrediting of markets as a default public policy approach, and that the proponents of such solutions as are on the table appear to lack much confidence in it either.
Paul #29 and elsewhere.
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Your quote (from #18):
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An Emissions Trading Scheme is a new market, established by Government decree.
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Tends to emboss a contradiction. I’m not a market fundamnetalist. I agree with Václav Havel that markets are natural and, for that reason, should not form the basis of a belief system.
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However what I see with the trading scheme is the choice of a top-down control system at the expense of a self-organizing system which might bring better results. We can haggle, if we wish, over the details of the CPRS schtick. We can agree that the Greens might institute a purer system that doesn’t compensate large resource concenrs out our expense. Butr we should acknowledge that that does not matter. The Greens will not win power and the ALP and the Libs are in bed with Big Coal and rest. They will, in the absence of strong pressure, design systems that will let their mates off the hook. They’ve got those post-office consultancies to think about.
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The trouble with the CPRS is that such a complex system is hard to bring to account. Its measurements of success are difficult to judge. And the complexity of it inevitable breeds loophole seeking. For those reasons what will inevitably happen is that the slew of ‘expert’ opinion will line up along the usual (and irrellevant) ideological battle-lines and argue convincingly for mutually exclusive views of the policy’s veracity. Each side will be gifted with a million statistics to bolster their case and before long the collective eyes of the populace will glaze over and they’ll vote according to their prejudices.
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A simple carbon tax puts a price on the production of greenhouse gases. It is easy to monitor and applies universally. It should be, for that reason, diffiuclt to squirm out of. And the result will be that the efficient use of energy and non-polluting sources of energy will become more viable. I think this idea is not popular with a certain mindset because one has to rely on the self-organizing principles rather than a planned outcome.
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It’s not just the free marketeers who’re being ideological here.
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It’s not that markets will do the job by themselves. I don’t think they will. Neither does Arnold Schwarzanegger. But one thing that is required is technological innovation. Making people pay for the carbon they produce will give an incentive for businesses and private individuals to seek out such innovation. The cap n trade system creates incentives to hire lawyers.
#16 Ben seems to me to have a pretty good summary of the dubious reasons behind some of the support an ETS. It’s not just a “trick” to the companies, though, it’s a trick to the whole electorate (in the form of a disguise as to what is going on.)
Robert and others have commented in response to Ben that the problem is no one knows what will be the best technological way to reduce carbon, and letting “the market” work that out is a good thing.
Isn’t it more appropriate to say it is good to let “free enterprise” work out the solution, as they will be encouraged to do when they have the incentive of a carbon cost. That can be achieved by either an ETS or a carbon tax, the former being the more “market based” approach.
The desire to avoid the government “picking winners” does not necessarily point you towards an ETS.
discrediting of markets as a default public policy approach
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I think something else’s already managed to do that.
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I wish the idea of a default public policy approach aould be discredited.
Mark,
I think those are advocating market-led policy are unwilling to accept how pervasive are the failures that lead to high carbon consumption despite the harm we know it causes.
Some of the aspects that lead to Australia having high per capita emissions are failures in construction and transport – spread-out cities, construction leading to the waste of energy and the car culture. Entrenched positions in these industries where we have the leaders of these industries cosying up with state government at expensive dinners, suggest there will be no move to change the status quo any time soon. Recent discussions on LP and elsewhere are linking this to potential corruption – even without that, it entrenches failure.
I think these aspects should be considered separately to the mining/extraction industries and dependence on coal, which is always offered as an excuse.
I can’t see our current political make-up state and federal confronting this without being forced by internationally imposed targets – an overshoot at around 500 ppm CO2 equivalent, then reducing would force policies for all sectors.
Meanwhile, I think the best alternatives are coming from those who move independently of policy, providing bottom-up examples that can be explored, scaled up and and disseminated. As inefficient as it may seem, I think it offers more than top-down command and control, which many are advocating. No point in looking for leadership to spontaneously combust from our current crop leaders in power or major opposition.
There are a few steps omitted from the diagram above, which should go somewhere between “Make no plan” and “Do nothing”:
- Commission academic studies
- Release white paper
- Release green paper
- Cave in completely to vested interests
- Table hopelessly compromised legislation
- Legislation defeated by morally bankrupt opposition
- Do nothing
- Repeat until planet burns
carbonsink – Excellent strategy mate. You have a wonderful future in the backroom with the boys. It’s the way to go. By the time the plaent cooks it’ll be some other bastard’s problem and I’ve got a cushy deal with BastardoCorp’s Eat The World division.
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You could go a long way.
PDAA @ 30 – I will be more interested to see how the voters and Governments react once the power shortages kick in as coal fired power stations become uneconimic and un maintained and no new effective replacement, let alone new capacity, is in place.
Razor, the power stations are going to be showered with free emissions permits. They are trying it on, as you do, to get more by crying impending ruin, but everybody knows it’s a try on, and they know everybody knows.
I think the whole concept of CPRS and ETS is fundamentally flawed.
At this point we know that the major heat sink (the oceans) are indicating that heat content is static in recent years irrespective of atmospheric carbon dioxide increasing unabated.
A solution to the impact mankind is having on the planet including carbon dioxide, methane, particulate matter, land use changes etc etc is far more complex than a tax (or whatever you want to call it )on carbon based emmissions.
I wouldn’t be surprised if changing the atmospheric carbon dioxide levels( assumming it can be done) actually achieves nothing because we’ve ignored something much more critical.
John Michelmore (the new Galileo!!!!!111!1!eleven!!), please try to keep up.
1. You’re wrong: we’ve already added shitloads of extra CO2 to the atmosphere and, as a consequence, the earth (and particularly its oceans) are warming at an alarming rate.
2. This discussion is not about the (fundamentally) settled science, it’s about whether or not market-based mechanisms are the best (or even only) way to fix the problem.
Come back when you’ve learned to use Google well enough to educate yourself – there are plenty of resources on the intertubes.
David@46
A quote from google for you:- “These IPCC assessments have also not communicated the inability of the models to accurately forecast the spread of possibilities of future climate. The forecasts, therefore, do not provide any skill in quantifying the impact of different mitigation strategies on the actual climate response
that would occur.”
This market based mechanism isn’t going to work.
John M and your unattributed quote from google:
the models do forecast with sufficient accuracy the impacts of different mitigation strategies.
Mitigation strategies, whether market or not, are there to manage risk, not to provide certainty in a mechanistic system of action and response. The question within the mix of knowns and unknowns is whether there is sufficient knowledge to act, and what knew knowledge will improve those actions over time.
The cost of delay because of lack of full knowledge is higher than the benefit of being able to utilise that new knowledge, i.e. what we learn in the coming years about both science and policy risks will be worth more having acted than what it would be worth having not acted.
sorry, new knowledge, not knew knowledge
Roger, I have to say that more than just about anyone you see these issues in dynamic terms, which is how the world works.
Roger,
We will have to disaggree on the models predicting the impacts of different mitigation strategies. If the models can’t predict the last ten years accurately, how can they predict the impact of any single mitigation strategy like carbon dioxide control?
Therefore how can a market based approach work that considers primarily carbon dioxide?
The reference for the above quote is; Climate Science:- Roger Pielke Snr. Research Group News.
John, it’s a pity you still ahven’t learnt to use Google properly.
I fear you may be correct about the inability of market mechanisms to do much abot AGW, but I’m sure you know what they say about stopped clocks and broken records.
Thanks David,
You have to say it more than once for it to sink in sometimes!!
Can’t help but agree with Brian’s post 15 and idiot Savant. The ETS and non market solutions mixed approach seems to have logic and practicality on their side. Part of the point of the market approach is to reduce the heat on the government by invoking impersonal wholistic solutions/forcings, in the appropriate direction, that like the alchemy of finance invisibly determine economic outcomes. It would appear that the problem is too complicated for simpler command control solutions. But perhaps Chinese solutions if they ever appear may end up contradicting that hypothesis.
I have caught up with Pearse’s monthly essay on Coal and climate change,(essential and for me shocking reading) it does lead one to doubt any local sincerity on dealing with emissions. So I can agree to a large extent with Adrian post 34. Carbon tax would have benefit of simplicity, but suspect that if ETS more palatable to big end of town, its a compromise worth making to get things started. Sam 19 is entirely sensible to comment its too early to say ETS has failed before its implemented.
Ben Raue post 16, is also correct in that the very complexity of ETS undercuts essential need to mobilise from the bottom up. Reliance on ETS won’t work if popular support not there, as loopholes will be expanded. That’s the problem now, there is not sufficient public pressure on the big polluters to reign in their ambit claims. Non market solutions and mobilisation are becoming ever more obvious by their absence. UK campaigns like COIN (John Marshal et al) provide ready made programmes already tested that are overdue for application here.
Ta Brian #47,
still wrestling with how to turn this understanding into workable policy options and simple language.
I suspect that the policy in detail will always be complex, which is one reason why the CPRS is disappointing because it’s complex in its detail, but simplistic in its intent. For mine, it’s set up to limit financial risk, and is likely to fail on managing climate risk, which is left to static target setting (there is little evidence that the cap-setting mechanism will be flexible enough to do what it needs to).
The need to work with dynamic environments under large uncertainty is also something that the public and policymakers need to understand. It is much easier to identify with a particular tribe and its set of ideologically-based solutions and argue with other tribes(see recent posts on Faith-based Communities and The Rules). This cuts both to the left and right, to individualistic profit-seekers and to community-minded environmentalists. I’m not saying every advocate is tribal, but it’s useful to remember that “certainty on price” and “safe climates” are both impossible outcomes when managing climate risk.
So a better understanding of risk and how to manage uncertainty in complex systems is obligatory. Those who have had to deal with the GFC are beginning to understand this (On SBS last night, it was shown how close to the brink the world’s financial system was last year – if tribal solutions were used it would have gone over).
The big question is whether our institutions can work better with dynamic change rather than focus on policies designed to minimise political risk by offering some kind of illusory “certainty”.
Nabokov @9, that was a GREAT video clip!
Boils the argument down to its underlying drivers.
I reckon the problem for most of us now, is WHAT action to take…
That guy should do a new video, on comparing actions.
Roger
Interesting posts, but I think you are focusing too much on the short-term aspects of the CPRS rather than the long-term. There are a bunch of regulatory features that will drop out after a few years.
For a start, the targets will not be static. That is the whole point of the gateways. Targets will be set a number of years ahead, but beyond that the regulatory body will identify a range for future targets, not an absolute target, to give flexibility to alter the trajectory of emissions as new information becomes available.
As for price certainty, beyond the short-term there will be little certainty as the cap on prices is designed to disappear by the middle of next decade. Beyond that, firms will need to manage their carbon risk. Indeed, the secondary market for permits is one of the features that enables risk to be dealt with by firms.
If you read the literature surrounding various strategies to deal with climate change, designing policy under uncertainty has been a feature of that debate for at least 35 years, going back to Weitzman’s 1974 paper. McKibbon has built his whole hybrid scheme around the principle as well…
I can understand the concern about the caps, and the compromises built into the short-term (price caps, free permits, etc), but to say that uncertainty in the context of dynamic change hasn’t been factored in is not quite right….
Perhaps another way of putting your concern is that the dynamics of climate change itself haven’t been factored into the design enough….
While that point is fair, I think people are underestimating the value of getting this thing up and running and demonstrating that it won’t have the economic consequences the opposition says it will….
John M #48,
it’s hard to fit a consistent internal logic to R Pielke Sr’s views, but obviously I disagree on what the models can and can’t do and what we can take from that.
Within their general ability to produce 20th century climate, the models as a group produce the multi-decadal variations fairly well. The average model of all the IPCC AR4 archived runs produces a better simulation than any of the individual models. What has happened over the past 12 years is not a show-stopper.
Climate sensitivity is still a big issue, is uncertain and irreducible within the time period required to act. Every five years’ delay adds about 60 ppm CO2 equivalent to the atmosphere – that may be enough to lose Greenland if we haven’t lost at least part of it already. It makes overshooting to more tolerable concentrations that much more difficult. What we do know is that the difference between a non-policy and policy scenario can be measured within an individual model and between groups of models, irrespective of their internal climate sensitivity. The marginal improvements in model dynamics required to produce better 20th century wiggles will not change this finding.
The likelihood of gaining a benefit from acting so far outweighs the benefits of waiting I think using the accuracy of the models to delay decision-making is irresponsible at best.
ETS by its nature has to be a mix of regulation and markets. It depends on regulation to set caps control the permit market etc. It depends on markets to control the price of carbon permits etc. It is also all about market distortion because it depends on artificial increases in the price of the dirty alternative and artificial caps on the production of emissions.
Part of the problem is that ETS is using a flawed, indirect market strategy that makes it very price inefficient. If you want to grow capacity to produce clean alternatives what counts is the price and market for the clean altenative. It doesn’t matter a stuff what the price of the dirty alternative is as long as the price of the clean alternative is high enough to make it worthwhile producing and regulations ensure that priority is given to fully utilizing clean alternative capacity.
Some of the problems with ETS have nothing to do with markets. For example, ETS use an “exclude by exception” approach because it starts out by aiming to do something about all emissions. The result will be some will be included in the scheme even though it makes comercial sense to put up with the permit pain and do nothing about the emissions. At this stage it makes more sense to use a converse approach where opportunities are only included in the action plan if it makes sense to do something about them. Emissions from power generation and transport account for over 60% of current emissions. We could stay on target for years without doing anything except drive down emissions from these sources.
Having said all this the imprtant thing is consider all the alternatives, not just those that are part of a narrow economic orthodoxy.
LO,
That’s exactly what I’m concerned about. I take your other points on board and agree with them – a moving cap and changing carbon price are part of the design, but I think the concentration on managing financial risk has compromised that design.
On the science side, the fixation on climate stabilisation and targets to achieve that also does not account for the dynamics of what we will learn about risk in the short term. The point of overshoot – as low and as soon as possible should be the key target.
The potential for China to come in as a major player and force through greater attention on per capita emissions is also something we should be aware of – anaemic targets for Australia will not swing in that regard. So I want to see a design that can react quickly to new information and that will reward the innovators in preference to subsidising old inefficient technologies. I would prefer to see money being spent on regional adjustment to new industry and energy sources, rather than compensating the old.
You’re right, the learning from just opereating a scheme will be valuable and is one of the reasons for wanting to act quickly.
The costs of adaptation also need to be viewed as the other side of any market mechanism or tax. It’s going to be much more expensive to manage the public good side of that equation than most people assume.
Does anyone know, is it possible for the Senate to recommend that climate change is important enough for a proper review process of some months, rather than a snap vote? The review could include side-by-side comparison of 2 or 3 alternative proposals by the Treasury and ABARE, for example?
Also, can we not find a proposal that involves less CHURN and less government sponsored HANDOUTS than the current Rudd government ETS? The proposed ETS system looks very much like a big-government, centralised control, bureaucratic nightmare which encourages an extensive handout mentality.
Further to my last comment “The proposed ETS system looks very much like a big-government, centralised control, bureaucratic nightmare which encourages an extensive handout mentality.”
Isn’t this the exact OPPOSITE of how a market-based system operates?
Since the government is smack bang in the middle of it all, isn’t Wong’s claim of “market-based” a giant smokescreen? Along with their giant CCS smokescreen for the coal lobby?
Elise, the government’s green and white papers were released last year, as was the Garnaut Review. Before that you had the Prime Minister’s Task Group and the National Emissions Trading Task Force that the states commissioned. Garnaut considered the pros and cons of different proposals. They all came to the conclusion that on balance, if designed properly a cap and trade was superior to the alternatives. We can debate their conclusions but IMHO this issue has been done to death and the problems now are primarily political. Besides which, given that Treasury has been intimately involved in the design of the CPRS there is no chance that the governemnt will allow them to produce analysis that suggested that was a superior altenative, even if they reached that conclusion internally. The Australian bureaucracy just isn’t independent enough. The Productivity Commission could be given the task, but only the government can commission them, not the Senate. IMHO, this is one of the reasons why we need a CBO type institution in Australia (they are doing a great job of analysing differnet health care proposals in the US) – we just have very little genuinely independent high quality analysis of public policies in Australia.
I’d ignore anything ABARE did – they are not a credible source.
Labor Outsider @60, agree that there has been a green and white paper and a couple of task forces, and Garnaut’s work. Wong clearly considers that the case is closed and no further correspondence can be entered into.
Perhaps I should have been more switched-on, but I foolishly waited for more info to be discussed publicly? Perhaps many others in Australia are in a similar situation, of only just realising the general shape of this ETS scheme?
I have always been in favour of action sooner, rather than later, in terms of risk mitigation. Foolishly I thus tended to trust the Rudd government, since they were making all the right symbolic gestures at the start.
Now waking up to realise that their proposed scheme is a dog’s breakfast, I would like Wong to stop playing chinese hardball politics and explain why this particular ETS is the only way forward.
Elise, as soon as the white and green papers were released it was clear that from a policy perspective the scheme was far from optimal. Wong’s repeated assertions that Garnaut’s review was just one “input” into the process should also have been a warning sign that large compromises were on the way. I guess we all have to think about how much compromise we are prepared to accept to get this thing started. If you think it is too much, then support those that want to vote down the bill.
Roger, did you read Paul Kelly’s piece the other day? I thought he made the quite sensible point that if the US and China reach any sort of deal that both find acceptable, then Australia will almost certainly be forced to follow through on its committment to cut emissions by 25% on 2005 levels by 2020. That would be at least 40% below BAU.
While I can see yours and others points about the need to pay more attention to the science and the desirability of reducing emissions as much and as quickly as possible, realistically, given the political constraints, it is most unlikely that governments will follow such a path. The incentives simply aren’t there to be that forward looking.
LO,
have stopped reading the OO until they cease their war on science. The US-China link is one that colleagues and I are aware of, and we will be analysing various policy pathways and their impact on temperature over the next couple of weeks. I was referring to that in part when mentioning China earlier. The Chinese are also working on a range of levels and many in MSM may have been slow to pick up on this. Still expect them, India, Brasil etc to play hardball in negotiations though.
David Irving (no relation), I want to come to ABARE’s defence this time! Since 2007, they have played with a much straighter bat. They do rely on equilibrium economic modelling, whereas the world behaves in a dynamic and non-linear fashion, but Treasury uses the same tools. FWIW, I think abatement will be much less expensive than assumed in those models (this is somewhat different to the carbon price, though they are linked).
I’m in the rare position of being in furious agreement with Labor Outsider.
What’s disappointing about the much of the commentary about Turnbull’s Frontier proposal/distraction is the idea that Garnaut didn’t study a broad range of options – that this idea is a bolt from the blue and any government that wasn’t rigid and blinkered would drop everything to consider it.
But on us needing a CBO, I have my doubts. People already treat Treasury figures as some kind of sacred text, it’s not hard to see how they would treat figures from a CBO-like outfit here. Obama’s health care plan is already running into trouble due to CBO figures – some have made the point that LBJ would never have got Medicare (for the elderly) passed if there had been a CBO at the time. I’m not convinced it’s not a reactionary idea (the CBO was created in the ’70s at the beginning of the reactionary period that we are hopefully now emerging from).
The CO2 clock continues its relentless climb upwards
http://co2now.org/
it has just incremented upwards .39 parts per million. This months increase in a recession.
One thing that occurs to me about demands for massive compensation by the coal-fired power generation sector is that surely when they invested in these massive plants they did so on the basis of a business plan that included a service life. Sure they could be kept in operation indefinitely, just like steam locomotives, but handling such huge investment sums they would have to assume (due diligence and all that) that technological advances, plus the rising maintenance cost curve, would make their shiny new coal-burners cost-ineffective at some point. Higher maintenance costs (eg replacement of major turbine parts, reconstruction of combustion containment systems etc) make generators more expensive to run and new technology out-competes it. So in structuring their investments, planners and operators of power stations would factor in amortisation of debt and depreciation of capital to a notional end point.
These calculations would necessarily be available to governments, in most cases in high detail given that the power stations were built by government owned corporations (or indeed at the time actual agencies). In the case of privately constructed stations, planning approvals and other regulations would furnish the information.
So it’s possible surely to determine with some accuracy the remaining life of these assets, and know that this is a point at which everyone with a financial interest in the asset will have received a payout on their investment, at a rate that was considered attractive enough to justify the original investment. It’s also possible to know with equal accuracy the point at which investment in new plant is prudent.
I’m not any kind of expert on the subject, but as far as I know most of Australia’s coal-fired generators were installed in decades past. Toorong and Swanbank went in in the 1970s and 1980s and they still supply most of south east Queensland’s power. They must be well advanced along their projected lifespans. New generation capacity will have to be installed to replace them before too much longer. Would any financier able to stump up the necessary couple of billion dollars to build this new generating capacity be prepared to invest in coal-fired technology? Surely not.
Of course, renewable power generation options are a technological advance unlike previous advances, in that they have higher (rather than lower) construction costs per unit of electricity produced, only partially offset extremely cheap fuel (with the exception of biomass).
No-one in the ‘investment community’ would harbour doubtts that major new power generation investments are going to be in renewables. Meanwhile the cost of producing electricity from our aging stations is inexorably rising, but profit margins can be kept healthy while these can be passed along to consumers. So we end up paying more and more for the privilege of polluting from plants built around the time Steve Jobs was tinkering with transistors in his dad’s garage, and keeping the polluters’ established supply chains profitable.
So it appears what we’re haggling over is the rights of polluters to extract profits from consumers beyond the point at which their business plans indicated their plant should be retired and new investments undertaken. Faced with the ‘moral challenge of our times’ we have – complacency. The military geniuses who figured Singapore could be defended by shore-based naval guns on the ground and Brewster Buffaloes in the air would surely feel gratified their teachings still inform our public policy processes.
Hal9000, great post! You make a lot of excellent points.
We could only wish that our fearful leaders would take these points into consideration.
I would really like to see some debate about using gas combined-cycle for high efficiency baseload capacity, together with some gas open-cycle turbines for swing capacity, dovetailed with solar and wind renewable energy.
Has anyone seen such a study done for Australian conditions?
Elise, there was an article in the AFR yesterday by David Knox, CEO of Santos and Grant King, CEO of Origin Energy. These guys have an obvious interest in what they were spruiking, but that doesn’t make what they were saying wrong.
They reckon that 80% of our stationery power is from coal-fired power stations. They are suggesting that conversion to gas would reduce emissions to 40% of present, or achieve 80% of the saving we’d get from retrofitting CCS if that were available. Of the US they say:
They also see a role for gas as complementary to renewables, saying:
What they are whingeing about is that the CPRS increases the price of gas exports, providing less than 60% compensation for the extra cost “when the transition to gas is at the absolute core of addressing the global challenge.”
IMO, on the information available, the Government with a winner staring them in the face should just pick it, and stuff around organising carbon markets a bit later when there is a prospect of a transparent and reliable international market covering all the major emitters, and that includes the BRIC countries. Then the market can work its magic and help decide where it is most logical to locate various functions like aluminium smelters and such.
Hal9000 @ 67, I don’t think there is anyone in the house that has a adequate perspective on the structure and history of the Australian power industry as well as an appreciation of the history of public knowledge about climate change to tell the story accurately. I certainly don’t, but here’s a rough idea of how I think things developed.
We were told at the Senate hearings in Brisbane (on climate change policy) that no major coal-fired power decision has been taken since 2001. When I did this post on the claimed prospect of systemic failure of the power industry, I understood that 60% of coal-fired power was still owned by state governments. I’m not sure that any were developed by private industry and I can’t remember when the big privatisation push was on, but I think it was the 1990s in Victoria.
In commentary I was told that owners of these facilities should stop whining and just suck it up, that old industries were always being overrun by new technologies. That was how capitalism worked. DD reckoned
Well I looked up the sunk-cost fallacy and it seems to me that the guts of it is throwing good money after bad.
The fallacy in this is that coal-fired power wasn’t a bad investment at the time it was made, rater it was an excellent investment, giving Australia a comparative advantage because of its plentiful cheap coal.
For me personally it wasn’t until 2003 that I started to realise that global warming and climate change was very serious indeed. One of the things that convinced me was this article by James Hansen in 2003 where he certainly fingered coal. Back then he was saying that we had 10 years to get or act together and that we should start phasing out existing coal-fired power stations after 2020. As late as 2007 (see Iowa testimony Fig. 33 – pdf) he was talking about phasing out coal from 2025.
The game has changed significantly from about 2006, when we had the Gore film, the Stern Review, followed by the IPCC 4th Assessment Report from Feb 2007.
So since investing in these monsters we have become climate-wise. But right now the problem is with the banks and the way they are going to factor in risk post-GFC and because of the CPRS and whatever else climate change mitigation policy is going to throw up.
The situation is quite unforeseeable and I have some sympathy for them.
Last I heard the Govt had commissioned a study by one of the merchant banks on the financial situation of the power producers. It should have reported by now, but I’ve not heard of anything.
Brian: Power industry privatization was indeed Kennett-era.
While the extent of the problem wasn’t clear back then, the fact that there was a problem with greenhouse emissions was quite public knowledge. The UNFCCC was established in 1990. Fightback contained a promise to cut greenhouse gases.
If somebody investing billions of dollars in coal-fired generation back in 1996 wasn’t aware that they might have an issue with greenhouse emissions, they were fools.
RM:’If somebody investing billions of dollars in coal-fired generation back in 1996 wasn’t aware that they might have an issue with greenhouse emissions, they were fools.’ …. what’s that make the banks and super funds that ponied up up the money?
Robert Gottliebson and Alan Kohler have had a series off articles and interviews over the last couple of months
….exploring the issue in some detail with the cheery real politik take home:
Capitalism meet seeds of own destruction?
RM and Danny -
I think your contributions show that the failure of the political system to deliver a cost for emissions in fact puts us in danger of ongoing brown outs. Big investments in low emission generation ain’t gonna happen while there is no cost for coal burning, and it won’t happen with coal burners because they (or at least their financiers and insurers) know that within the next fifteen years those costs will be imposed. So the free ride regimes on offer from both the government and the official opposition in fact militate against the investment that can secure future supplies.
Given the scale of this necessary investment, the arguments for a tax as opposed to a market system look good – the certainty of future costs must surely be attractive to investors, given that the ETS market will likely be volatile (as markets invariably are).
The irresponsibility of dithering and pandering to owners of obsolescent generating plant in terms of securing future supplies is surely a stronger debating point than much of what has passed for discussion on these issues.
One solution that has apparently been ruled out on ideological grounds is for the necessary investment to be made by the public sector (as indeed the vast majority of existing plant was). The only sensible suggestion along these lines that I’ve heard was made by – gasp – Wilson Tuckey, who suggested the megabucks being put into the NBN should be diverted to remewable power generation. Sadly, because Tuckey suggested it, it won’t happen.
Danny I think is close to the money. The world changed with the GFC and all previous business plans became irrelevant. There may have been a rational and acceptable commercial path through for coal-fired power generation companies, some of which are also investing now in renewables.
I’d like to ask Robert what these “fools” should have invested in back in the 1990s given that nuclear was not an option. Perchance we were a bit lucky these fools did what they did or we would already be in brownout territory.
The world here in Australia must have seemed very much BAU in Howard’s Australia. Even now we have people in Germany and the US building coal-fired power stations. In Australia there must have been a very reasonable prospect that such facilities would be able to trade until their natural cycle was complete.
I understand that the Government is making, or trying to, a clear distinction between financial stress caused by the GFC, to which they are entirely sympathetic, and stress caused by the price of carbon, to which they are entirely unsympathetic, assuming that a useful distinction can be made. That might be why we haven’t heard yet from the report they commissioned.
My bottom line is that I don’t have enough information to have an attitude one way or another on whether these companies are wankers or in genuine distress. On the evidence so far I don’t think anyone else commenting here does either.
But let me repeat again as I did in the other post that these are different companies from the usual coal mafia, most of them are foreign and can find other places in the world to make a buck.
The real mafia in this case are the state governments who still want to build new coal and/or flog off existing dirty assets. They are the ones with the biggest interest in continuing pollution.
So in other words the market and governments have failed us in securing the energy needs of our nation.
What confidence can we have that they will dig us out of this dilemma? I mean just in technical terms how quick can these gas plants (Elise + Brian) be brought in line. How should we finance the new infrastructure to avoid falling into the same trap again?
All the way with RFK!
Elise 69,
Gas is very much a part of the future solution, but at a level that a stable environment can cope with. CSP uses gas in the hybride format to provide baseload. Gas is also virtually essential to cope with flash power demand or for balancing systems with a high content of wind power where fluctuating supply can be very sudden as is being experienced in the Portland Oregon area. (refer to recent posts at The Oil Drum).
Ootz 76,
Gas palnts can be built with in a matter of weeks where required. Brown Baveri (now ABB) have been building containerised gas turbine power plants since at least the 60′s (1960′s), and were building gas turbines for electricity generation before the second world war (if my reading was correct). These plants can be powered by a broad variety of fuels, including biomass.
Ootz, I think that you will find this interesting.
http://campfire.theoildrum.com/node/5661
As with all things American I think that it is way over the top, What do you think?
BilB @ 80,
Trust the bloody Swiss.
Re Survival homestead @ http://campfire.theoildrum.com/node/5661
Make a living doing exactly that and business looks good. I hang around on this site to find handy information, like yours on gas above, thanks.
PS. What is the easiest way to format text on this site, I seem to struggle with my formating, cheers.
Further on the perfidy of state governments, the Bligh government’s likely approval of the mine at Fenton SW of Toowoomba is not only going to rip up prime agricultural land, there is to be “a petrochemical plant to convert the coal into liquid fuel and a power station.”
There should be a law against it, and I mean that literally.
Dammit, BillB! That means my paddock isn’t going to be ready ’til I’m about 75.
Brian,
Shutting your eyes, putting your fingers in ears, and repeating rrhubarb,rhubarb, rhubarb,…..won’t help. Unless we all do it at the same time…that might stop the madness.
BilB, in South America, I believe there is a habit of banging saucepans otherwise known as cacerolazo.
My memory is that it happened in Bolivia a few years ago until the president resigned. Googling reveals that it happened ages ago in Chile and recently, with more success in Iceland.
I reckon if 100,000 of us sat down in the centre of each of Melbourne, Sydney and Brisbane and refused to get up “they” would have to do something. But I’m dreaming again.
There, apparently I wasn’t logged in and this dumb computer thought I was Mark, who has occasionally used it. I could delete it and re-enter but that would be more trouble! But be assured the comment @ 85 was mine!
[Brian, we admins can edit comments - I edited your previous so that it reflects you as the author now ~ tigtog]
[tigtog, thanks for that. I was just too lazy
. Actually my computer, mysteriously and for no known reason, sometimes offers me Kim's email. Kim, where are you!? - Brian]
Brian what a good idea, suggest we use empty oil drums instead, for better effect and to stay with the theme. And nevermind the City center, I’d shame the gutless bastards at home and at work.
I’m up for it!!
BilB @84: “Shutting your eyes, putting your fingers in ears, and repeating rrhubarb,rhubarb, rhubarb,…..won’t help.”
I do believe that Plimer and his mates are already working on this technique…
Danny @73 and @77: “Whatever the slick campaign financed by the powerful coal barons might claim, coal is neither cheap nor clean….”
I reckon our old coal-fired power stations are dirty cash cows.
In some cases, it appears that they are not even Australian-owned cows (Danny @73).
People don’t like to send their cash cows to the slaughter, however dirty they may be…
The fact that they have stopped all long-term maintenance should be a serious wakeup call. They are essentially running these assets into the ground, as most companies do with old cash cows that are nearing their use-by.
Meanwhile our pollies have their eyes tightly shut, fingers wedged in ears, and shouting rhubarb, rhubarb to each other. Good job we elected these guys to steer our ship, hey?
Well I’m ready to go to the streets with a 20 L oil drum over shoulder and a piece of coal on the end of a clean white stick to drum up some awareness, right beside Ootz.