Australia will set a price on carbon from July next year, Aussie PM Julia Gillard announced yesterday. Cost per tonne will be set at A$23, rising 2.5% per annum, and the initial tax will morph into an emissions trading scheme from 2015. A full list of the key points and links to comment and reaction below the fold (as they used to say at the News Of The World)…
Tag: carbon tax
China: ready to pay the price
ames Hansen was in China when the American midterm elections were held, and he reports that while the rest of us were feeling pessimistic he was becoming optimistic. Not because of what was happening in the US, but because of China. He found two reasons for optimism, the first of which he has explained in a poston his website. The second will follow, but there’s enough in the first to warrant notice here.
In the activist dimension of his life – which he always makes clear is an expression of personal opinion and in this respect differentiated from his scientific work – Hansen opposes cap and trade approaches to limiting carbon emissions as ineffective and instead advocates a steadily rising carbon fee collected from fossil fuel companies and returned to the public on a per capita basis to allow lifestyle adjustments and spur clean energy innovations.
He considers there are signs that China is ready to consider a rising carbon price as part of a clean energy transition. At the Beijing Forum he attended he was impressed by what he described as the focused rational approach to dealing with the challenges, epitomized by Dr. Jiang Kejun (pictured), the lead speaker in the session “Global Environmental Policies and National Strategies”.
“Jiang Kejun laid out sector-by-sector projections of transitions to low-carbon and no-carbon energies and improved energy efficiency that would allow CO2 emission growth to be slowed and then reversed over the next few decades. Technology development is supported, and, when lower carbon technology becomes available, efficiency standards are promptly ratcheted downward. Most encouragingly, there is recognition that this strategy requires a rising carbon price for most successful results. The Chinese authorities appear to grasp that rapid attainment of the tipping points at which clean energies quickly displace dirty energy requires an economic incentive.”
Hansen remarks the advantages of the scale of manufacturing in China. It is so great that the unit price of new technologies can be quickly brought down, putting China in a position to sell carbon-efficient technologies to the rest of the world.
He compares the prevention of effective legislation by vested interests in the US with his impression that China has the capacity to implement policy decisions rapidly. He notes that the leaders seem to seek the best technical information and do not brand as a hoax that which is inconvenient. The power of fossil fuel interests is not as strong as in the US.
Hansen’s earlier view was that global action to stem climate change required agreement between China and the United States for a rising carbon fee. He acknowledges this is not realistic as the dysfunctional Congress would not approve such a treaty.
However, he sees a way around that. He envisages China finding agreement with other nations such as the European Union to impose rising internal carbon fees. And here’s the crunch:
“Existing rules of the World Trade Organization would allow collection of a rising border duty on products from all nations that do not have an equivalent internal carbon fee or tax.”
And the consequence:
“The United States then would be forced to make a choice. It could either address its fossil fuel addiction with a rising carbon fee and supportive national investment policies or it could accept continual descent into second-rate and third-rate economic well-being. The United States has great potential for innovation, but it will not be unleashed as long as fossil fuel interests have a stranglehold on U.S. energy policies.”
Nicholas Stern doesn’t share Hansen’s impatience with emissions trading schemes, but it is worth noting that he sounded very similar trade warnings in Auckland in September where he was delivering the Douglas Robb lectures. The world is embarking on a “new industrial revolution” of renewable energy and cleaner innovation, he told the Herald. Countries which don’t embrace it will find other countries reluctant to trade with them. Ten or fifteen years from now, those that produce in dirty ways are likely to face trade barriers.
However it is obtained, a rising price on carbon is an essential element in the transition to clean energy, and trade concerns may well play a part in making it global. Hansen insists that only a tax can achieve it, but there are indications that China is also considering a cap-and-trade system. Either way contributes to the seriousness Hansen discerns in China’s planning towards the transformation of its currently carbon-dependent economy.
Climate Capitalism
Climate change science is clear and undeniable in its general thrust. Climate change politics by contrast are murky and uncertain. Peter Newell and Matthew Paterson have spent nearly two decades researching and writing about the politics, and their new book Climate Capitalism: Global Warming and the Transformation of the Global Economy reflects all the uncertainties and ambiguities.
They well understand the suspicions and anxieties felt in relation to the capitalist economy by many who take seriously the threat of climate change. The economy’s growth has been fed by increasing CO2 emissions and many of its actors seem heedless of the need to change that dependence. The early business response to climate change was automatic denial. More than that, positive attempts were made to discredit the scientific base on which the case for action was made and to give the impression of widespread public opposition to action. Some companies are still stuck in those responses and in some sectors of the economy they seem likely to remain vociferously opposed to the economic transformation required.
However the authors see no likelihood of the abandonment of capitalism or its dependence on growth. For them the question has to be how capitalism can be configured to grow while gradually replacing coal, gas and oil. It’s a very difficult task but not a hopeless one. They point to those within the world of business and finance who have come to realise that the science will not be gainsaid and that the costs of action would not be disastrous. In a variety of ways those firms have begun to discern economic opportunities in a low-carbon economy. For sunrise industries, the nuclear industry and biotechnology companies the advantages are clear. For others reputation management and corporate social responsibility are to be considered. Overall there is a tendency to see failure to anticipate likely possibilities as a business risk — risk to reputation, risks of legal liabilities, risks of losing out on new market opportunities. It remains a mixed picture, but there is a policy momentum likely to keep the issue relatively high on the executive agenda.
Whether we like it or not, neoliberal capitalism has already shaped the character of our response to climate change. That is why emissions trading has become the preferred policy approach, ahead of environmental taxation measures. The authors comment that emissions trading became almost unstoppable once the dominant financial actors realised its potential as a new market, with its derivatives, options, swaps, insurance, and so on, and thus as a profitable enterprise.
The power of investors is to some extent being felt in driving an orientation to face climate change issues. One example is the Carbon Disclosure Project (CDP), effectively a consortium of investors who write annually to corporations listed on stock exchanges asking them to report on matters relating to CO2 emissions and their perception of risks from climate change. The uptake has been impressive and by 2008 the CDP was backed by $57 trillion worth of assets from over 3000 financial institutions. Investment growth in renewable energy has been considerable in recent years. The book recognises that, given the neoliberal context we live in, mobilising the money of large institutional investors like insurance companies and investment funds will be crucial to the transformation to a low-carbon economy.
The authors lead the reader patiently through the apparently bewildering variety of mechanisms by which the demands for a flexible carbon market are addressed. Of particular interest is their examination of the Kyoto Protocol’s Clean Development Mechanism and its emission credits whereby purchasers in the North can enable projects in the South. It has proved far more popular than expected, though in practice the book acknowledges that it has not yet delivered the benefits that many hoped for and expected, and critics continue to see it as a fraudulent mechanism that lets rich countries off the hook.
As the explanations proceed it becomes very clear that market governance is the key to whether a market-based approach to climate change will succeed in reducing emissions. The book tackles this squarely. A market requires more than a minimum of creating property rights and enforcing contracts. It needs rules by which trading can occur, elaborate accounting systems to measure emissions and make companies report on them, and complex methodologies to estimate whether a project has reduced emissions. The authors distinguish three basic sorts of governance. First, by quantity. Here rules are set which establish overall limits for carbon emissions, allocate them among different players, and enforce those limits. Second, by price. In emissions trading schemes so long as the targets produce scarcity a price is created for carbon emissions permits which exerts a governing effect on behaviour. Price can also be affected directly, through carbon taxes. Some governments have instituted such taxes and the authors consider they should remain a possibility if necessary. The third type of governance is by disclosure, where business and other actors are required to report on their emissions profile.
How good is all this governance at present? Not very, is the impression given. Targets set are often too weak. The flexibility allowed in meeting commitments means that carbon offsets are not sufficiently rigorous. The voluntary market is particularly prone to such problems. Can we learn and improve? The authors think the EU has made considerable improvements to its emissions trading scheme as time has progressed, tightening its allocations and data collection methods. The voluntary carbon market has also considerably strengthened its certification schemes.
In the very uncertain future for climate capitalism the authors have a preference for what they call climate Keynesianism, where strong governance directs the markets more closely towards the goal of decarbonisation and integrates them globally, including a green Marshall Plan-type global scheme. Their filling out of this vision is central to the positive view they have tried to achieve of the potential of a capitalist economy to successfully meet the climate challenge.
The book is sympathetic to those whose interest in climate change is driven not by the potential to make money but by the gravity the issue poses. But, say the authors, we have to understand how capitalism works if we’re going to have any chance of success in dealing with the threat in a humane way. It’s not easy, and it’s urgent. However there have been significant transformations of capitalist economies in the past. They instance the Bretton Woods system after the second world war which in a short space of time created a new global deal that produced an unprecedented period of smooth, rapid economic growth. On the technology side their analogy is the development of the railways in the mid-nineteenth century, a messy affair involving a number of entrepreneurial engineers acting competitively, and one which had far-reaching effects on daily life. They urge novel and probably uneasy alliances – environmentalists and venture capitalists for example – as we assemble the necessary coalitions to rewrite the rules of the global economy.
In the course of developing its major themes the book is valuably informative on many of the details of carbon markets and trading. The reader who wants a better picture of complicated systems within reasonably brief compass will be rewarded.
[Buy at Fishpond (NZ), Amazon.com, Book Depository (UK)]
Krugman on climate economics: uncertainty makes the case for action stronger
Lucidity in an economist is to be prized, and Nobel winner Paul Krugman writes with great clarity in a lengthy article this weekend in the New York Times Magazine headed Building a Green Economy. Is it possible, he asks, to make drastic cuts in greenhouse gases without destroying our economy? I’ll offer a summary of his reasoning here, but strongly recommend reading the whole article if you have the time. He clearly understands the import of climate science, and rightly lets that have full influence in his policy preferences. Economists who haven’t taken on board the seriousness of the prospect the science points to are hardly reliable guides.
“Negative externalities”, says Krugman, are the costs that economic activities impose on others without paying a price for their actions. The market economy does many things well, but left to its own devices it won’t face up to those externalities. The emission of greenhouse gases is a classic negative externality – the “biggest market failure the world has ever seen,” in the words of Nicholas Stern.
What should we do about it?
“Textbook economics and real-world experience tell us that we should have policies to discourage activities that generate negative externalities and that it is generally best to rely on a market-based approach.”
The three approaches Krugman discusses are regulation, pollution taxes and market based emission controls (cap and trade). Each has benefits. Krugman allows that there are times when regulation is a sensible path, but it does not leave the scope for flexibility and creativity provided by the other two. The very scale and complexity of the situation requires a market-based solution, whether cap and trade or an emissions tax.
“After all, greenhouse gases are a direct or indirect byproduct of almost everything produced in a modern economy, from the houses we live in to the cars we drive. Reducing emissions of those gases will require getting people to change their behavior in many different ways, some of them impossible to identify until we have a much better grasp of green technology. So can we really make meaningful progress by telling people specifically what will or will not be permitted? Econ 101 tells us — probably correctly — that the only way to get people to change their behavior appropriately is to put a price on emissions so this cost in turn gets incorporated into everything else in a way that reflects ultimate environmental impacts.
“…A market-based system would create decentralized incentives to do the right thing, and that’s the only way it can be done.”
However he is impressed enough by James Hansen’s arguments that we must stop burning coal to advocate supplementing market-based disincentives with direct controls on coal burning.
He favours cap and trade over emission taxes, pointing out how well the former worked to achieve a significant mitigation of acid rain in the US and at a much lower cost than even the optimists expected. He also considers it politically more feasible because in doling out licensing to industry it offers a way to partly compensate some of the groups whose interests will suffer if a serious climate-change policy is adopted. A tax, on the other hand, imposes costs on the private sector while generating revenue for the government. Which is not to say that there can’t be hybrid solutions.
Part way through his discussions Krugman pauses to make it clear that the science of climate change is for real. He makes three points. First, the planet is warming. Second, climate models predicted this well in advance. Third, models indicate that if we continue adding greenhouse gases to the atmosphere as we have we will eventually face drastic changes in the climate and massively disruptive events. There is still tremendous uncertainty in long-term forecasts, but that makes the case for action stronger, not weaker.
Can we afford what needs to be done?
Economic modelers have reached a rough consensus that restricting emissions would slow economic growth – but not by much. The Congressional Budget Office, relying on a survey of models, concludes that strong climate-change policy would leave the American economy between 1.1 percent and 3.4 percent smaller in 2050 than it would be otherwise. On a global level the estimates are somewhat lower because of the efficiency gains in energy use possible to emerging economies – between 1 percent and 3 percent.
Krugman acknowledges that there are a number of ways in which the modeling could be wrong. Nobody really knows, for instance, what solar power will cost once it finally becomes a large-scale proposition. But while it’s unlikely that the models get everything right, it’s a good bet that they overstate rather than understate the economic costs of climate-change action. That was the experience with the acid rain scheme. He particularly notes that models do not and cannot take into account creativity. Surely the private sector will come up with ways to limit emissions that are not yet in any model.
Yet conservative opponents of climate-change policy claim that any attempt to limit emissions would be economically devastating. What has happened to their belief in the dynamism of capitalism? He thinks they are reacting against the idea of government intervention and indulging in political ploys rather than reasoned economic judgment. Hence their strong tendency to argue in bad faith, willfully misreading the figures.
“The truth is that there is no credible research suggesting that taking strong action on climate change is beyond the economy’s capacity.”
To the objection that the emerging economies won’t participate and therefore there’s no point in limiting emissions in the US, he argues for positive inducements and, if they fail, for carbon tariffs. He certainly doesn’t see the problem as intractable. If the US and Europe decide to move they almost certainly would be able to cajole and chivvy the rest of the world into joining the effort.
The costs of inaction are difficult to estimate. Krugman has a lively sense of the drastic changes which could accompany higher temperatures. We’re reaching levels of carbon dioxide in the atmosphere not seen in millions of years. Nobody really knows how much damage would result from the level of temperatures now considered likely. This uncertainty strengthens the case for action. He agrees with Martin Weitzman that if there is a chance of utter catastrophe, that chance should dominate cost-benefit calculations. Utter catastrophe does look like a realistic possibility. It would be irresponsible not to turn back from what may be the edge of a cliff.
There has been debate as to whether we act with some decisiveness now or build gradually over the century, the big bang or the ramp. Krugman leans toward the big-bang view, represented most notably by Nicholas Stern. Again, it’s the nonnegligible probability of utter disaster that argues for aggressive moves to curb emissions, soon.
On the US political front he’s not sanguine, but thinks there’s some chance that political support for action on climate change will revive. If it does the economic analysis will be ready.
“We know how to limit greenhouse-gas emissions. We have a good sense of the costs – and they’re manageable. All we need now is the political will.”